Businesswomen Using Digital Tablet

Employers who receive IRS Letter 226-J will need to take prompt action to avoid substantial ACA penalties due to mistakes on Forms 1094 and 1095.

Navigating health reform

Employers Could Face Steep Penalties Due to ACA Reporting Errors

  • Karlye Broten
  • 1/16/2019

Starting in 2018, the Internal Revenue Service (IRS) began assessing employers with Affordable Care Act (ACA) penalties for the 2015, 2016, and 2017 reporting years. Since then, many employers have received Letter 226-J from the IRS, which provides a preliminary calculation of the employer shared responsibility payment (ESRP).

The assessment amount is determined by the IRS based on information reported by the employer on Forms 1094 and 1095. This applies to any or all of the annual filing years, and ranges widely in amount — some may even be in excess of a million dollars. Employers who receive IRS Letter 226-J will need to take prompt action to avoid substantial ACA penalties due to reporting mistakes.

Forms 1094 and 1095

As of 2015, the ACA requires applicable large employers (ALEs) to offer affordable minimum essential coverage to full-time employees and their dependents. Under Internal Revenue Code Section 6056, ALEs must report information about their health insurance coverage annually to their employees and the IRS using Forms 1094 and 1095. Annual ACA reporting is required regardless of whether or not an ALE offered health insurance coverage.

It should be noted that the Tax Cuts and Jobs Act of 2017 impacted the individual mandate under the ACA by reducing the individual penalty to $0 starting January 1, 2019. The employer mandate and the ACA reporting requirements remain unchanged, and employers are still required to comply.

Made some mistakes? IRS allows corrections

To minimize or eliminate penalties under Section 4980H(a) and Section 4980H(b), the IRS has been allowing employers to make substantive corrections to their ACA reporting. Section 4980H(a) requires employers to provide minimum essential coverage. Section 4980H(b) requires employers to provide coverage that meets minimum value and is affordable.

If an employer receives an ACA reporting letter and wishes to make corrections to Forms 1094 and 1095, they can submit their response and supporting documentation to the IRS for consideration. CLA has worked with clients in these situations, and has seen how a response to the IRS can often result in significantly reduced penalties, and in some cases, a complete waiver of assessed penalties.

Keep watch for IRS correspondence

In addition to Letter 226-J, the IRS has been sending employers Letter 5699, for failure to report coverage as required. Recipients must provide the reason for not reporting, or they must process their ACA reporting for the applicable tax year(s). Employers may also receive Letter 1865C, which notifies them that the information in Forms 1094 or 1095 is incomplete or incorrectly formatted. In these cases, the employer should resubmit these forms.

Employers should keep an eye out for any IRS correspondence, as the response timeline for IRS Letters 226-J, 5699, and 1865C is tight. Failure to respond in a timely manner could result in the proposed penalty becoming subject to IRS lien and levy enforcement actions. Quickly reporting and responding with the corrected information is critical to minimize or eliminate penalties.

How we can help

CLA offers a customizable approach to ACA reporting, including preparation of the annual Forms 1094 and 1095, tracking employee status, and coverage offerings.

Our employee benefit plan professionals are well-versed in ACA reporting and compliance. We can help you review any ACA filings that are questionable, evaluate penalty calculations, assist with preparing form corrections, and prepare your response to the IRS should you receive an ACA reporting letter.