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With the IRS making significant progress on its historic backlog, employers should prepare for increased enforcement of the ACA Employer Mandates.
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.
As we recently noted, there has also been an uptick in Premium Tax Credit (PTC) allocations, which can result in ACA penalty assessments from the IRS. This information, in combination with increased IRS enforcement, suggests penalties for ACA non-compliance could increase over the next several months.
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. Keep reading to learn about them or calculate your current ACA compliance score now with ACA Vitals.
Letter 226J
The IRS issues Letter 226J ACA penalty notices to employers that it 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 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 IRS penalty notices are preceded by warning notices. Take, for example, the warning notice Letter 5699 which communicates to an employer that the IRS believes they failed to comply with the ACA’s Employer Mandate for a specific tax year. Oftentimes, Letter 226J will be issued following a Letter 5699.
The tax agency is currently issuing Letter 5699s and Letter 226J penalty notices for the 2019 tax year. Since there is no statute of limitations on ACA penalties, however, previous years are fair game as well.
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.
Regardless of if the PTC was issued correctly, 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 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.
To avoid this penalty notice, employers need to ensure they adhere to the appropriate ACA filing and furnishing deadlines for the applicable tax year.
Generally speaking, the furnishing deadline is March 1 annually. The original deadline was January 31, but the IRS extended this every year since reporting was first required. As a result, the agency issued new regulations that created an automatic 30-day extension for furnishing, which gives employers until March 2 or thereabouts each year.
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. Failing to comply with state filing and furnishing deadlines could result in separate penalties.
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 mandated deadlines. Many employers elect to file with the IRS electronically as it reduces the risk of late filings.
Responding to IRS penalties
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.
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 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.
