An ACA Penalty Risk Assessment May Help School Districts Avoid IRS Penalties
4 minute read:
The Affordable Care Act is complex and complying with the law’s Employer Mandate can be challenging for school districts. We had that confirmed in recent conversations at the 2019 Annual Conference & California School Business Expo organized by the California Association of School Business Officers.
Because most school districts employ 50 or more full-time employees and full-time equivalent employees, under the ACA Employer Mandate, they are considered Applicable Large Employers (ALEs) and are subject to complying with the ACA like any other employer. Under the healthcare law, ALEs are required to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is Affordable for the employee or be subject to IRS 4980H penalties.
This poses some particular challenges to employers like school districts that must regularly deal with union contracts, fluctuating hours of service, and complex benefits structures, all of which complicates ACA compliance and thereby puts them at a higher risk of receiving ACA penalty assessments from the IRS.
Some school districts are already feeling the pain of ACA non-compliance. The IRS already has issued multi-million-dollar 4980H penalty assessments to some school districts using Letter 226J. One school district we spoke to had received a Letter 226Jamounting to over $8 million for the 2015 tax year. To make matters worse, the same school district got another $8 million-dollar assessment for the 2016 tax year. They were clearly making the same ACA compliance mistakes year after year. We were able to work with them to reduce their penalty to almost $0 for both reporting years. However, the school district officials would have been much happier to not have gone through the experience in the first instance.
That’s why we urge school districts to confirm that their regulatory process is keeping them in ACA compliance by undertaking an ACA Penalty Risk Assessment. By undertaking a Penalty Risk Assessment school districts can identify their potential penalty exposure with the IRS and take action to avoid being assessed penalties.
Here’s what a Penalty Risk Assessment usually entails:
Calculate Potential Risk Exposure
A Penalty Risk Assessment requires a methodology that will calculate a total penalty exposure amount in the same way the IRS should. For instance, analyzing the previous years’ ACA 1094-C and 1095-Cs will help verify the accuracy of full-time counts over a 12-month period. A review of IRS code combinations on the 1095-Cs can be assessed to identify which employees pose a 4980H penalty risk. In addition, the potential 6721/6722 penalty exposure also can be determined. If, for example, the code combinations on a particular 1095-C are nonsensical, a $260 penalty per schedule can be assessed for submitting “non-accurate” filings. An example would be if there is a code 1H (No Offer) on Line 14 for all 12 months and a 2G (FPL Safe Harbor) on Line 16. Not only does this not make sense because a Safe Harbor cannot be claimed when no offer of coverage is extended (subjecting your school district to a 6721/6722 penalty for inaccurate filing), but it also subjects your school district to potential 4980H (a) penalty for failing to offer coverage to a full-time employee.
Identify Errors in Previous ACAFilings
Reviewing the data submitted in your ACA filings will help to identify errors in the submission. Errors, such as a disconnect between the total number of 1095-Cs and the count listed on 1094-C , incorrect EINs, and incorrect 4980H Transition Relief and Minimum Essential Coverage indicators should be checked. In the event these types of mistakes are present, they can be corrected.
Correct Previous Years filings
A well-done Penalty Risk Assessment will allow your school district to make corrections to previous years’ filings before being issued a Letter 226J by the IRS. Making changes to identified errors in your 1095-C filings, such as offer of coverage coding, relevant dependent listing, affordability coding, and full-time count, can be submitted to the IRS as part of a corrected filing. Corrected filings sent before receiving a Letter 226J mean less penalty exposure for your school district.
Creating a Process for Better ACA Compliance
This comes with the territory of identifying your previous ACA compliance mistakes. Once you have identified and fixed previous mistakes, review your current ACA compliance process to determine if there is a need to implement new procedures, educate old and new staff on their ACA compliance responsibilities, and create a better, more efficient process moving forward. Procedures such as extending offers of coverage, benefits structure, proper implementation of the right IRS approved measurement method, affordability determination, and tracking offers of coverage are just a few things to consider. Making improvements to your current process will reduce the risk of receiving Letter 226J in the future.
By correcting the full-time count, coding on the 1095-C schedules, and implementing a better process for ACA compliance, there is less risk for your school district, more savings, and peace of mind knowing that your ACAprocess has been handled effectively.
If you are not confident in conducting a Penalty Risk Assessment on your own, consider working with an outside expert with experience in conducting these assessments. School districts can still benefit from our special offer on the Penalty Risk Assessment by clicking here.
With the IRS issuing Letter 226J penalty assessments totaling $4.5 billion to employers identified as not complying with ACA for the 2015 reporting year alone, and with new ACA penalties notices being issued to employers on an ongoing basis, it seems to be prudent for school districts to use a free service to ensure they can avoid receiving an ACA penalty from the IRS.
To learn more about ACA compliance for the 2019 tax year, click here.
For ACA reporting deadlines in 2020 for the 2019 tax year, organizations should review this link for important dates and requirements.
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