It’s no secret the IRS is ramping up ACA enforcement. With additional funding for improving its tax correspondence processing infrastructure, more staff than ever, and a renewed focus on compliance, employers should prepare for greater scrutiny with regard to their Employer Mandate responsibilities.
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) whereby such coverage meets Minimum Value (MV); and
- Ensure that the coverage for the full-time employee is affordable based on one of the IRS-approved methods for calculating affordability
Failure to adhere to these two requirements could subject ALEs to Internal Revenue Code (IRC) Section 4980H penalties, which the IRS issues via Letter 226J.
As we recently noted, there has also been an uptick in Premium Tax Credit (PTC) distributions, namely due to the Inflation Reduction Act extending reduced requirements for obtaining subsidies through 2025. Greater PTC distribution can result in more ACA penalty assessments from the IRS.
This information, in combination with increased IRS enforcement resources, could mean employers will see more ACA non-compliance penalties over the next several months. As such, organizations should proceed with caution and carefully review their ACA compliance processes.
Below we identify the most common ACA penalty notices, as well as the various triggers that prompt them. Keep reading to learn about them or calculate your current ACA compliance score now with ACA Vitals.
The IRS issues Letter 226J ACA penalty notices to employers it believed 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 trigger for receiving a Letter 226J involves 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. As mentioned earlier, the Employer Mandate dictates that ACA full-time employees receive timely, sufficient health coverage from their employer.
Sometimes the Letter 226J penalties are preceded by warning notices. Take, for example, an exchange notice, which signals to the employer that an employee obtained a PTC from a state health exchange. Employers that receive an exchange notice can appeal it and if they do so quickly enough, can prevent a Letter 226J from following, assuming the PTC was wrongfully allocated to the employee.
The tax agency is currently issuing Letter 226J penalty notices for the 2020 tax year. But, since there is no statute of limitations on ACA penalties, previous years are fair game as well.
It’s worth noting that non-full-time employees can also receive a PTC and that too could trigger a Letter 226J for your organization. The issuance of the penalty notice would be erroneous because the employer was not required to offer coverage to the non-full-time employee.
However, regardless of if the PTC was issued incorrectly, the onus falls on employers to prove whether the employee received the subsidy erroneously and subsequently if the Letter 226J was issued in error.
The IRS issues Letter 5005-A ACA penalty notices 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.
Before receiving a non-filing penalty, the IRS may issue the warning notice Letter 5699, which communicates to an employer that the IRS believes it needed to comply with the reporting requirements of the ACA’s Employer Mandate for a specific tax year, but has no record of their filings.
To avoid this penalty notice, employers must adhere to the appropriate ACA filing and furnishing deadlines for the applicable tax year.
Employers have until March 1 each year to furnish the required 1095-C forms to their full-time staff. Initially January 31, new IRS regulations issued last year created an automatic 30-day extension for furnishing, which gives employers until March 2 or thereabouts each year.
The filing deadline for paper ACA submissions is February 28, if filling under 10 forms, previously 250. The electronic filing deadline for ACA submissions is March 31.
Employers may need to also comply with individual state reporting deadlines in addition to the federal IRS ones. State ACA reporting is required in California, New Jersey, Rhode Island, Washington D.C., and Massachusetts, and each has its own additional reporting deadlines. Failing to comply with state filing and furnishing deadlines could result in separate penalties.
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 mandated deadlines. Many employers elect to file with the IRS electronically as it reduces the risk of late filings.
Responding to IRS penalties
ACA compliance continues to grow in complexity and the IRS has demonstrated it’s not letting up with enforcement efforts. 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 avoid over $1 billion in ACA penalties.
Avoiding the aforementioned triggers on your own can be difficult. Our new research report conducted in partnership with HR.com and Creelman Research finds 73% of surveyed organizations find managing ACA compliance somewhat or overly burdensome.
If you need assistance meeting deadlines and or improving your ACA compliance process, contact us to learn about our full-service ACA Complete solution.
For more information on Letter 226J, including best practices for responding to the penalty notice, download our white paper.