What Happens if You Fail to Pay an ACA Penalty?
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Have you ever wondered what would happen if your organization failed to pay penalties assessed by the IRS under the ACA? In this post, Trusaic explains what you need to know about the IRS’ enforcement powers under the ACA, namely, the powers to levy and lien.
As an initial matter, it’s important to understand where the IRS gets its ACA enforcement authority from. Under the ACA’s “Employer Mandate,” Applicable Large Employers (ALEs), which are employers with 50 or more full-time and full-time equivalent employees, 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. Failure to comply with the Employer Mandate results in penalties under Internal Revenue Code (IRC) section 4980H (a) or (b):
- The “A” penalty, also known as the “sledgehammer penalty’ is triggered when an ALE fails to offer Minimum Essential Coverage (MEC) to at least 95% of its full-time workforce and their dependents and had at least one full-time employee receive a Premium Tax Credit (PTC) from a state or federal health exchange.
- The “B” penalty is triggered if the healthcare coverage does not meet Minimum Value and/or is not affordable. The “B” penalty is triggered by each full-time employee who receives a PTC from a state or federal health exchange. Unlike the “A” penalty, the “B” is calculated on a per-employee basis.
Notice of 4980H(a) and/or (b) penalties typically arrive in the form of IRS Letter 226J. The IRS is currently issuing Letter 226J penalty assessments to employees identified as having failed to comply with ACA for the 2018 tax year.
Employers that ignore or otherwise disregard 4980H penalties enter the IRS’ collection process. Within the process, the IRS uses a range of tools and communications to enforce compliance with the Employer Mandate. At Trusaic, we have supported clients in dealing with situations where the IRS withheld overpaid taxes (such as payroll or income) or otherwise utilized the overpayment to satisfy an outstanding Employer Mandate penalty. Yet, perhaps the most operationally disruptive IRS enforcement actions are the levy and federal tax lien. The IRS defines these actions as follows:
“A levy is a legal seizure of your property to satisfy a tax debt. Levies are different from liens. A lien is a legal claim against your property to secure payment of your tax debt, while a levy actually takes the property to satisfy the tax debt.”
“A federal tax lien comes into being when the IRS assesses a tax against you and sends you a bill that you neglect or refuse to pay.”
The IRS utilizes the term “seizure” interchangeably with levy. Practically, there is no difference as far as the agency is concerned. The bottom line is that the IRS may seize your organization’s property and force a sale to pay for your ACA liability. Funds within corporate bank accounts may also be levied and applied to the liability. A federal tax lien can likewise have devastating effects on business operations. Among other things, a lien gives public notice to creditors concerning the ACA liability. The lien may also be reported to credit reporting agencies, creating obstacles to accessing credit, securing capital, and impact commercial tenant/landlord relations. Organizations interested in learning more about the IRS collection process should review IRS Publication 594.
While organizations do have certain rights within the IRS collection process (such as the right to appeal IRS determinations), there can be no denying that, when it comes to the ACA, an ounce of prevention is worth a pound of cure. Last summer, the IRS made it known that 4980H penalties are not subject to a statute of limitations, meaning prior ACA reporting years are fair game for the IRS collection process as well.
If your business needs assistance classifying workers correctly, calculating ALE status, and complying with the ACA, download the 2021 ACA Essential Guide for Employers to learn best practices for minimizing IRS penalty risk.
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.
