ACA Employer Mandate Poses IRS and US GAAP Complications
You would think it would go without saying, but let’s say it. The Affordable Care Act (ACA) and its employer mandate have tax and financial implications.
And that means it’s as much a problem for Chief Financial Officers and their CPAs as the HR folks who typically are tasked with ensuring organizations comply with the ACA.
Organizations with 50 or more full-time or full-time equivalent employees must comply with the ACA’s employer mandate. The employer mandate requires these called Applicable Large Employers (ALE’s) to either offer minimum essential coverage to their full-time employees and their dependents and make the coverage “affordable” and provide “minimum value” to the full-time employees, or potentially make an employer shared responsibility payment (ESRP) to the IRS. Employees who work a minimum of 30 hours per week are considered to be “full time” under the ACA.
Annual reporting of healthcare benefits offered by ALE’s must be furnished to full-time employees and be reported to the IRS using Form 1095-C.
Failure to offer ACA-mandated healthcare benefits to at least 95% of all full-time employees and their dependents may result in significant ESRP assessments. Many organizations are now facing notices that propose ESRP’s in the millions of dollars, penalties assessed by the IRS for their failing to comply with the ACA. These IRS notices, Letter 226J, have been issued to organizations that the IRS asserts failed to comply with the ACA in their information filings to the IRS for the 2015 tax year. (To learn how to respond to Letter 226J, click here.)
As a result, CFOs at ALEs should be taking into consideration the requirements of US GAAP – ASC 450 Contingencies (formerly FAS 5). If ESRPs are a possibility, probable and reasonably estimable loss contingencies, they should be recognized and disclosed in financial statements. If not, ALEs must demonstrate that they have internal controls in place to mitigate any such potential excise tax liability.
If ERSPs are imposed, these IRS penalties may need to be disclosed in the MD&A section in SEC filings. Employer Mandate penalties must be disclosed on a partnership’s Schedule M-1.
These ESRP penalties may result in effective tax rate increase and are not tax deductible.
Here are some steps you can take to help prepare for possible implications on your organization’s financial statements.
• Corporate Organization: Analyze corporate structure to determine which entities are part of a control group in determining ALE status.
• Data Consolidation and Systems Controls: Examine systems and data consolidation process to identify any gaps that may impact ability to generate accurate IRS 6055/6056 reporting.
• Workforce Analytics: Provide comprehensive analysis of potentially healthcare eligible employees (i.e., part-time, seasonal, independent contractors, etc.) and company readiness and capability to measure variable hour workers. This should be done on a monthly basis.
• Benefits Offering Analysis: Verify minimum value of offered healthcare plans. According to Healthcare.gov, A health plan meets the minimum value standard if its designed to pay at least 60% of the total cost of medical services for a standard population and its benefits include substantial coverage of physician and inpatient hospital services.
• Affordability Analysis: Determine affordability that accounts for HRAs, opt-out arrangements, flex credits and other programs that impact affordability of healthcare offerings as determined by the ACA. Employer Mandate guidelines state that coverage is affordable when an employee has to pay no more than 9.5% of their household income (9.56% for 2018 as annually adjusted.)
• IRC Sections 6055 and 6056 Reporting: Assess current processes and systems to be used to timely prepare, distribute and file ACA information returns.
• Potential Excise Tax Liabilities: Estimate Section 4980H(a) and (b) excise tax liabilities. Penalties for Section 4980H include two types of ESRPs for ALEs. The “A” penalty for 2017 is $2,260, multiplied by the total number of full-time employees. The “B” penalty applied to ALEs who for the 2017 tax year is $3,390, multiplied by the number of full time employees who receives a tax subsidy for purchasing coverage through the government healthcare marketplace.
• Implement Healthcare Marketplace Exchange appeal processes to refute any notices that claim your organization is not in compliance with ACA requirements.
• Employee Notifications: Assess and implement communication and documentation controls for ACA-related employee notifications that you may receive from the Healthcare Marketplace or the IRS.
Keeping in mind that the ACA employer mandate has both financial and tax implications to prevent your organization from having issues with auditors and help you plan ahead so that any ESRPs will not have an adverse impact on your organization’s operations and financial statements.
If it’s a bit daunting, consider seeking assistance from a third-party vendor expert in both regulatory compliance and tax regulations. And ask if that vendor will stand with your organization if it receives an ESRP in a Letter 226J or is audited by the IRS. It may be worth the cost for the peace of mind it will provide.
To learn more about ACA compliance in 2021, click here.
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