The Internal Revenue Service (IRS) has intensified its enforcement of the Affordable Care Act’s (ACA) Employer Mandate, signaling a shift in its approach toward suspected non-compliance. Recent reports indicate that the IRS requests more detailed information from employers undergoing audits. Specifically, the agency seeks comprehensive calculations for determining ACA full-time and full-time equivalent counts. Here we take a look at the key points surrounding the IRS’s increased focus on obtaining detailed information in ACA audits and provide best practices for employers to navigate these challenges.
Cross-Referencing Filings and Full-Time Employee Counts
The IRS is now cross-referencing employers’ previous years’ ACA filings to validate claims of potential non-compliance in the new penalty assessment notices. For instance, if an employer filed three Forms 1095-C for the 2018 tax year but had previously reported a higher number of full-time employees in their 2017 filings, the IRS would request detailed full-time employee calculations to explain the discrepancy. This is a change from previous penalty issuance practices and places the burden on employers to prove their full-time and equivalent employee counts.
Challenges Faced by Employers
This new development poses significant challenges for employers that have relied on self-serve ACA tools within their payroll or benefits administration systems. Substantiating full-time employee counts becomes particularly challenging without a robust approach to accurately track and document employee details. It’s critical for employers to take prompt action when receiving these notices from the IRS.
Calculating Full-Time and Full-Time Equivalent Employees
To ensure accurate calculations, employers must understand the definitions of ACA full-time and full-time equivalent employees. ACA full-time employees are those who average at least 30 hours each week or 130 hours each month. Full-time equivalent employees are a combination of part-time employees whose total hours, when aggregated, are equal to a full-time employee.
Employers should calculate and document their full-time and full-time equivalent employees for each month of the prior year to determine their Applicable Large Employer (ALE) status. These counts are also critical for filing and furnishing Forms 1095-C annually. It’s important to note that full-time equivalent employees do not require a 1095-C form.
Best Practices for Documentation and Defense
In light of the IRS’s increased scrutiny, employers should adopt best practices for documenting their ACA calculations and defending their determinations. These best practices include:
- Accurate Employee Classification: Ensure accurate coding of employees in payroll and human capital management platforms. Detailed information such as hours worked, job title, location, hire dates, designation, and worker classification is crucial for determining full-time employee status.
- Digital Storage of Employee Details: Store ACA-related employee information digitally for easy retrieval and efficient defense. Review and synchronize data across all platforms regularly to prevent discrepancies during ACA filing season.
- Monthly Monitoring: Establish a routine process to monitor ACA compliance monthly. Review new hires, verify employee hours worked, and ensure accurate entry of employee information. This proactive approach prevents a last-minute scramble and ensures timely offers of coverage to avoid penalties.
- Partner with an ACA Compliance Expert: Given the complexities of ACA compliance and the increased focus by the IRS, partnering with an ACA compliance vendor can alleviate the burden on internal staff, minimize penalty risks, and maximize compliance. Expert solutions can handle tasks such as monthly monitoring, data cleanup, annual filing, offer tracking, and health plan alignment with IRS requirements.
The IRS’s heightened focus on obtaining detailed information in ACA audits reflects a shift in their enforcement strategy. Employers must be prepared to substantiate their full-time and full-time equivalent employee counts during audits. By adhering to best practices and partnering with ACA compliance experts, organizations can navigate the complexities of ACA compliance and minimize penalty risks.
To gain invaluable insights on penalty amounts, affordability percentages, filing deadlines, expert tips for responding to penalty notices, and proven strategies for minimizing IRS penalty risk, download the ACA 101 Toolkit.