Small Business Owner Reviewing Paperwork

Mistakes made by employers in the complex coding of Form 1095-C can result in large penalties, costing up to $3,120 per full-time employee.

Navigating health reform

ACA Penalties Could Bring Hefty Fines to Many Employers

  • Mike Brazzale
  • 12/13/2017

The IRS is assessing penalties based on employers’ 2015 Affordable Care Act (ACA) filings of Forms 1094-C and 1095-C. Penalties are assessed for:

  • Not offering coverage to enough full-time employees, or
  • Not offering affordable coverage to one or more full-time employees

These penalties could potentially affect any employer required to comply with ACA for 2015.

Understanding your organization’s penalties

In order for your organization to be assessed ACA penalties, two criteria must be met:

  • Your organization must be considered an “applicable large employer” (often defined as having more than 50 full-time equivalent employees).
  • One or more full-time employees must be enrolled in an ACA exchange plan.

If your organization fits both of these criteria, the IRS can assess either the no offer penalty under Section 4980H(a), or the unaffordable penalty under Section 4980H(b).

No offer penalty

The no offer penalty is assessed on organizations that fail to offer insurance coverage to all full-time employees. For 2015, organizations were required to offer coverage to at least 70 percent of full-time employees to meet the IRS threshold of “all employees.” The penalty for not offering this coverage is $173.33 per month for each full-time employee above a baseline of 80 employees. For example, if an organization with 200 full-time employees offered none of its employees insurance in 2015, the organization would pay a penalty on 120 employees, totaling $249,600.

Unaffordable penalty

Even if your organization is not subject to the no offer penalty, it may still be assessed the unaffordable penalty. Organizations will receive this penalty for either not offering a full-time employee coverage, offering a full-time employee unaffordable coverage, or offering a full-time employee coverage that did not provide minimal value and the employee then enrolled in coverage through the exchange.

The unaffordable penalty for 2015 is $260 per month and is applied on a case-by-case basis, rather than to all full-time employees. For example, if an organization of 200 full-time employees offered 190 employees insurance coverage for 2015, the organization would pay a penalty on the 10 full-time employees who were not offered coverage, totaling $31,200.

Form errors and employee mistakes result in large fines

In many cases, employees mistakenly took subsidies from ACA while being offered employer coverage. This means that the IRS may issue you a penalty even though you are not at fault. Most ACA exchanges did not send employers notifications when an employee enrolled in a subsidized plan, so this penalty will likely be the first notification you receive if your employees made this costly mistake.

We have also seen a high error rate in forms, especially improper coding for lines 14 – 16 on Form 1095-C. Most often, these errors occurred because preparers lacked a process to review the forms for penalty triggers.

ACA-compliant organizations should be prepared to dispute penalties

Impacted employers will soon be receiving IRS Letter 226J. Upon receiving this letter, you will need to decide if it is in agreement with the penalties listed. A basic overview of the steps your organization will generally take, depending on if it agrees or disagrees with the penalties, can be found below.

If you agree with what is stated in IRS Letter 226J:

  • Complete the Form 14764 enclosed with your letter and send it to the IRS with your payment.

If you disagree with what is stated in IRS Letter 226J:

  1. Respond in writing to the IRS within 30 days of the 226J date and dispute the penalty
  2. The IRS will send your organization Letter 227, confirming dispute of penalty and describing further required actions
  3. If your organization disagrees with the revised penalty, you will have 30 days from the 227 date to request a meeting with the IRS Office of Appeals
  4. The IRS will either grant an appeal or deny it and issue your organization Notice CP 220J demanding payment for penalties

Agree or disagree with penalties using Form 14764

Form 14764 is used to record your organization’s contact information, whether you agree or disagree with the proposed IRS penalty, and a payment method for resolving any fines. The form also provides instructions for calling the IRS should your organization wish to request additional time to respond to the assessed penalty. However, it is currently unclear what the IRS considers “additional time.” As with most IRS communications, the more timely the response your organization can provide to the IRS, the better.

Form 14764 also gives your organization the option to provide the IRS with a secondary contact. If your organization is disputing the penalties being assessed by the IRS and has a third party assisting, this third-party contact may be listed here. Due to the complex nature of ACA reporting, it is likely your organization will want to provide third party information in an effort to help streamline the filing process.

Dispute penalties using Form 14765

There are three conditions that an employee will need to satisfy to be listed on your organization’s Form 14765:

  • Your organization filed a Form 1095-C for the full-time employee.
  • The employee received a premium tax credit for one or more months for the tax year being challenged.
  • Your organization did not report (on Form 1095-C) an affordability safe harbor or other relief provision from the employer mandate penalties for one or more of the months the employee received a premium tax credit.

Form 14765 only lists 10 employees per page, so you will likely receive numerous pages of reporting to review. Similar to Form 1095-C, Form 14765 includes record of insurance coverage for all 12 months of the year. The IRS will highlight months for which employees are not triggering any penalties, so your organization will only be assessed a penalty for the months that are not highlighted.

Form 14765 will include the employee code originally entered by your organization on Form 1095, and each employee will have two rows associated with them to document information. If your organization disagrees with the 1095-C code listed by the IRS, it should list the code it feels is correct on the bottom row of Form 14765. If you feel an employee listed on Form 14765 could have more than one code, those code combinations must be submitted in a signed statement for each applicable month. There is a box to check on Form 14765 if your organization needs to include additional information.

How we can help

While these forms and letters are meant to assist your organization in completing its ACA corrections, very little about the ACA rules are straightforward. Accurate and timely responses to the IRS are critical to reduce or eliminate penalties and avoid further issues. CLA’s employee benefit plan professionals are well-versed in ACA reporting and compliance. We can help you review any ACA filings that are in question, calculate any penalties due, and help you prepare a response to the IRS.