Avoid These Compliance Triggers to Minimize ACA Penalty Risk
It’s become abundantly clear that the IRS is ramping its enforcement of tax compliance. With Biden requesting additional funding for the agency, employers should note that as part of increased enforcement efforts, IRS penalties under the ACA’s Employer Mandate will be increasing as well.
Under the ACA’s Employer Mandate, employers with 50 or more full-time employees and full-time equivalent employees, known as Applicable Large Employers (ALEs) must:
- Offer Minimum Essential Coverage (MEC) to at least 95% of their full-time employees (and their dependents)
- Ensure that the coverage for the full-time employee is deemed affordable based on one of the IRS-approved methods for calculating affordability and meets Minimum Value (MV)
Failure to adhere to these two requirements could subject ALEs to Internal Revenue Code (IRC) Section 4980H penalties.
With Biden requesting an additional nearly $1 billion more for FY22 for the IRS, organizations should understand the implications of the additional monetary resources. With more funding, the IRS will be able to employ more agents and examiners, which will likely lead to more audits, as there will be more physical bodies reviewing triggers for tax non-compliance.
Employers should proceed with caution and ensure their ACA compliance processes are in order. Below we’ve identified the various triggers that prompt an ACA penalty notice for ACA non-compliance.
Letter 226J: The Letter 226J ACA penalty notice is issued to employers that the IRS believes did not comply with the ACA’s Employer Mandate for a specific tax year. Notably, as part of the increased enforcement activity, the IRS may begin issuing these types of penalties to employers that did comply but failed to report the information accurately.
The current trigger for Letter 226J involves Premium Tax Credits (PTCs). If any full-time employee from your workforce receives a PTC from a state or federal health exchange, it will prompt the IRS to issue a Letter 226J penalty notice. The ACA’s Employer Mandate dictates that ACA full-time employees must receive timely, sufficient health coverage from their employer.
Sometimes the IRS penalty notices will be preceded by warning notices. Letter 226J for example may sometimes follow a Letter 5699 warning notice. Letter 5699 communicates to an employer that the IRS believes they failed to comply with the ACA’s Employer Mandate for a specific tax year. The tax agency is currently issuing Letter 5699s for the 2019 tax year, which means Letter 226Js should start being issued shortly.
It’s worth noting that a non-full-time employee could also receive a PTC and that too could trigger the IRS to issue a Letter 226J to your organization. The issuance of the penalty notice would be erroneous because the employer was not required to offer coverage to the employee.
In both scenarios, the onus falls on employers to prove whether the employee received the subsidy erroneously and subsequently if the Letter 226J was issued in error.
Letter 5005-A: The Letter 5005-A ACA penalty notice is issued to employers that fail to file the applicable ACA Forms 1094-C and 1095-C with the IRS or fail to furnish the 1095-Cs to applicable ACA full-time employees, as required under IRC Sections 6721 and 6722.
To avoid this penalty notice, employers need to ensure they adhere to the appropriate ACA reporting and furnishing deadlines for the applicable tax year. Generally speaking, the furnishing deadline is January 31 annually. The general filing deadline for paper ACA submissions is February 28 (if under 250 forms), and the filing deadline for electronic filing ACA submissions is March 31.
Employers may need to also comply with individual state reporting deadlines in addition to the federal IRS ones. States such as California, Vermont, New Jersey, Rhode Island, and the District of Columbia all have additional reporting deadlines.
Letter 972CG: The 972CG ACA penalty letter is similar in nature to Letter 5005-A, with the main difference being whether an employer fails to file/furnish altogether. The IRS issues Letter 972CG to employers that file and furnish the applicable ACA Forms 1094-C and 1095-C after mandated deadlines.
Letter 972CG is essentially a late penalty notice whereas Letter 5005-A is a penalty letter issued for failing to meet the ACA reporting requirements altogether.
Again, to avoid the 972CG penalty notice, employers must submit their ACA filings to the IRS by the mandate deadlines. Many employers elect to file with the IRS electronically as it reduces the risk regarding late filings.
If you’ve received any one of these penalty notices, time is of the essence. Contact us to learn about your options for responding. We’ve helped our clients abate over $1 billion in ACA penalties.
ACA compliance is growing in complexity and the IRS has demonstrated it’s not letting up with its enforcement. Avoid the aforementioned triggers and your organization shouldn’t receive any subsequent penalty notices. If you need assistance meeting deadlines and or improving your ACA compliance process, contact us to learn about our full-service ACA Complete solution.
If your organization has received IRS Letter 226J, download our white paper on Letter 226J to learn best practices for responding to the penalty notice.
