As we’ve previously noted, IRS enforcement of the ACA’s Employer Mandate is ramping up.
Most recently, the agency began requesting more detailed information from employers being audited for suspected non-compliance issues.
We’ve heard from our partners, brokers, and new clients that the IRS is specifically asking employers to provide detailed calculations for determining ACA full-time and full-time equivalent counts.
Currently, the IRS appears to be cross-referencing previous years’ ACA filings to substantiate claims of potential non-compliance in the new penalty assessment notices, specifically relating to full-time employee counts.
For example, a recent IRS penalty letter makes mention of receiving filings for 2017, but only received three Forms 1095-C for the 2018 tax year. The letter then states, “Please submit the detailed full-time employee calculation to substantiate the number of forms received for 2018… or submit the appropriate number of forms…”
This language indicates that the agency has identified a disconnect between the employer’s ACA filings for separate years. As such, the IRS is requesting proof of full-time and full-time equivalent employee counts as they directly correlate to the number of Forms 1095-C required for filing.
This is a significant development and a departure from how the IRS issued penalties in the past. Substantiating the full-time counts could be very challenging for employers that have been relying on their self-serve ACA tools in their payroll or ben-admin systems.
If you receive a notice like this, it’s important to take action quickly. Below we cover how to calculate full-time and full-time equivalents, as well as outline best practices for documenting these important details in the event of an ACA audit.
What is ACA full-time?
ACA full-time is an employee who averages 30 hours of service a week or 130 hours a month. Here’s an example of what that looks like.
Hospice Health, a home healthcare company based out of California employs 80 workers and 45 of them are employees who work at least 30 hours a week or 130 hours a month. The 45 workers who average 30 hours a week or 130 hours a month are considered full-time employees.
Each one of these employees requires a completed 1095-C form for the respective tax year. Hospice Health needs to file the 1095-C form with the IRS and furnish a copy to each employee.
What is ACA full-time equivalent?
A full-time equivalent employee is a combination of employees, each of whom individually is not a full-time employee, but who, in combination, are equivalent to a full-time employee.
Take for example, two employees who each work an average of 15 hours per week. On their own, they are part-time, but together, they amount to the equivalent of one full-time employee. In other words, full-time equivalent employees are the sum of hours of employees who aren’t designated as full-time but in combination are treated as one full-time equivalent employee.
To determine if an organization is an Applicable Large Employer for a year, in general, the organization counts its full-time employees and full-time equivalent employees for each month of the prior year and calculates the average number of full-time and full-time employees during the year.
Additionally, these counts are critical for filing and furnishing Forms 1095-C each year, so it’s important to get it right and to document your calculations. To be clear, however, full-time equivalent employees do not require a 1095-C form.
Reinforcing ACA calculations
The recent IRS enforcement activity demonstrates that the agency is asking employers to prove their methods for calculating ACA full-time and full-time equivalents.
Now that you know how to perform the calculations, here’s how you should go about defending your determinations.
- Classify employees correctly. First and foremost, make sure you’re accurately coding employees in your payroll and related HCM platforms. Proving ACA calculations is a lot simpler when there is accurate and current information about each employee. Details such as hours worked, job title, location, hire dates, designation, and worker classification are incredibly important for determining whether an employee is a designated full-time employee.
- Store employee details digitally. Best practices encourage storing your ACA information digitally. This will allow for easy retrieval of information in the future and will make defending your ACA calculations more efficient. As you store this information, be sure to periodically review the data in each platform, if you have more than one. Employees receive promotions, get married, move, terminate, and change positions. When a change occurs, the data must be made across all platforms, otherwise, you can create discrepancies come ACA filing season.
- Monitor monthly. ACA compliance becomes significantly more manageable when you develop a routine process each month. During this time, review new hires, verify employee hours worked, and ensure all necessary employee information has been entered correctly. Taking these actions in small amounts each month can prevent a monumental task at the end of the year as well as give you the opportunity to ensure timely offers of coverage that are required to avoid ACA penalties. Additionally, monthly monitoring provides you with an opportunity to stay organized. And remember, the previous year’s employee counts are used for determining ALE status. Addressing employee details each month, when the information is fresh, will ensure greater accuracy.
- Partner with an ACA compliance expert. As recent IRS enforcement activity proves, maintaining sound ACA compliance can be challenging. Now that the agency is requesting more detailed information, partnering with a vendor in ACA compliance can reduce the burden on your staff, minimize penalty risk, and maximize compliance. So far, our ACA Complete solution has helped prevent over $1 billion in ACA penalties. Furthermore, ACA Complete handles all of the ACA responsibilities for you, including monthly monitoring, data cleanup, annual filing, tracking of offers, and establishment of health plans to align with IRS requirements.
If you haven’t received an ACA penalty notice from the IRS, you may soon. To get ahead of any risk the agency might identify, get your ACA Vitals score. This will help you uncover key risk areas within your organization and allow you to take proactive steps toward improving compliance, building better processes, and mastering ACA compliance.
For more information on Letter 226J, including best practices for responding to the penalty notice, download our white paper.