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The report from the Treasury Inspector General for Tax Administration always has some interesting information. The recently issued report on the Affordable Care Act (ACA) from March 21, 2018, is no exception, and it will be a disappointment for those organizations that continue to ignore the regulatory requirements of the healthcare law.
As part of this report, TIGTA reported on an audit that was initiated as part of its coverage of the IRS’s implementation of key ACA tax provisions. This audit evaluated the IRS’s implementation of processes to ensure compliance with the Employer Shared Responsibility Provision (ESRP) and related information reporting requirements.
Under the ACA ESRP, also known as the employer mandate, applicable large employers (ALEs), organizations with 50 or more full-time employees and full-time equivalent employees, are required to offer minimum essential coverage to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets minimum value and is affordable for the employee or be subject to IRS 4980H penalties.
The IRS began to issue ACA penalty assessments in its Letter 226J penalty notice in November. Since then, the IRS has issued more than 30,000 of these notices containing penalty assessments of about $4.4 billion to employers for failing to comply with the employer mandate. According to the latest TIGTA report, the IRS identified 318,296 organizations that qualified as ALEs for 2015. Of that amount, TIGTA reports that 49,259 are at risk for compliance action by the IRS. Employers who have not yet received a 2015 ESRP penalty notice should not breathe a sigh of relief yet. There are still more Letter 226J penalty notices to be issued for 2015.
TIGTA also reports that the IRS now has the data to begin the analysis to calculate the potential ESRPs for tax year 2016 to be issued to those ALEs determined not to be in compliance with the ACA. TIGTA reports that the IRS has spent over $2.8 million to improve the process for identifying, calculating, and processing ALEs that are not in compliance with the ESRP.
For some ALEs, this is not good news. ALEs should anticipate that the IRS will be more prepared now to identify more of those organizations that are not complying with the ACA.
For instance, for tax year 2015, the IRS indicated that once potentially liable employers were identified, a computer program would select at random particular organizations to investigate with no regard to the dollar value of the potential ESRP amount. TIGTA indicates that going forward, the IRS will not be selecting employers at random. Instead, the IRS will begin to audit non-compliant organizations, on a “highest value of work” basis using their automated Affordable Care Act Compliance Validation (ACV) System, as well as other data points.
ALEs also should anticipate a greater regulatory burden to demonstrate ACA compliance. For example, for 2015, ALEs had to offer minimum essential coverage to at least 70% of their full-time workforce (and their dependents) whereby such coverage meets minimum value and is affordable for the employee or be subject to IRS 4980H penalties. That coverage threshold increased to 95% for 2016 and beyond.
Two other “highlights” in the TIGTA report:
- The report identifies the need for the IRS to improve on the process for identifying ALEs who are out of compliance with the ACA. TIGTA conducted an audit and identified 840 employers that the IRS missed as being non-compliant with the ACA. The total ESRP of those 840 employers represented penalty assessments of more than $113 million.
- Another area of improvement that the TIGTA report identified was the IRS processing of paper submissions. Only 4.8% of the 119.6 million 1095-C forms filed with the IRS in 2015 were in paper format, but the TIGTA analysis sample found that roughly 25% of the sampled 1094-Cs, and 43% of the 1095-Cs contained errors or missing data. The system for processing paper filings is called SCRIPs and has not been accurate in processing paper forms. The IRS has acknowledged the need for improvement and will begin reviewing the procedure during processing for tax year 2017. The agency recently issued proposed regulations to encourage more electronic filing of information returns.
What this boils down to is this: If you thought your employer was getting a pass for not complying with the ACA’s employer mandate because it had not received a Letter 226J from the IRS, you may want to rethink that position.
From what we can tell, the enforcement process for 2015 was a “test run.” We can expect the IRS processes for identifying ACA non-compliance are only going to become more robust, not less. While checking certain boxes as a corrective to receiving an ACA penalty assessment may have worked for the 2015 tax year reporting, those easy fixes are not going to be there for ACA non-compliance for tax years 2016 and onward. Requirements for complying with the ACA are more stringent for those tax years.
And the IRS is getting better at ACA enforcement. According to the TIGTA report, IRS management has been using the new ESRP case selection methodology to gather data to analyze all segments of the population to assist in future case analysis, selection, and assignment. TIGTA said this will allow the IRS to use the data gathered from working the tax year 2015 cases to further refine case selection methodologies and increase the probability for subsequent tax year case selections to include those with the highest compliance impact.
As you prepare for what’s to come, assess your potential risk of receiving IRS penalties for not complying with the ACA. Consider undertaking a spot audit of your IRS information filings for 2015, 2016 and 2017. Many outside vendors will provide such as service at no cost.
Click here to learn about Letter 226J to be prepared in case the IRS may send one to your organization.
Despite all the bluster from some in Washington, D.C., the ACA is not going away and neither are your responsibilities as an employer to comply with the healthcare law.
We’re committed to helping companies reduce risk, avoid penalties, and achieve 100% ACA compliance. For questions about the ACA contact us here.