Monthly ACA Compliance Can Help Employers Avoid IRS Penalties
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As the IRS rolls out Letter 226J penalty notices for the 2017 tax year, those of you who have a monthly compliance process in place to address your organization’s responsibilities under the Affordable Care Act should be glad you took the time to put such a process in place. It is likely that those organizations with a monthly process in place will not be receiving IRS penalty notices. At the very least, they will be better prepared to respond.
If your organization is administering a monthly ACA compliance process, you have likely already identified and corrected any potential issues with your ACA compliance, such as missing offers of coverage.
For example, if a full-time employee missed an offer of coverage for February, that employee would theoretically pose a risk for ACA penalty exposure for every month thereafter until an offer of coverage was made to that employee. If your organization doesn’t look at its ACA data until the end of the year, it’s something you might not catch. Failing to catch this error could result in significant ACA penalties being assessed by the IRS.
Now, if your organization is administering a monthly ACA compliance process, you probably addressed the situation by making the offer of coverage as soon as possible, preventing further penalty exposure after February. While the penalty exposure for February remains, you can confidently assert that the error for this employee ends in February. (There also may be penalty exposure for any preceding months that was a limited non-assessment period, e.g., an introductory period of no more than 90 days in which the employee was not eligible for an offer.)
As you can see from the above example, the monthly ACA compliance process allows your organization to track employees who may become eligible for health benefits, putting your organization in the ideal position to make timely offers of coverage in order to comply with the requirements of the ACA’s Employer Mandate.
If you for some reason you do receive a Letter 226J penalty notice from the IRS, having a monthly process in place puts you at an advantage because the IRS determines penalty assessments the Letter 226J notices on a monthly basis. The agency also identifies which employees received a Premium Tax Credit (PTC) and for which months they were received, which can impact the type and size of an IRC Section 4980H penalty.
By incorporating a monthly ACA compliance process, you are in a better position to cross-reference the information contained in Letter 226J with your own records. With the agency having recently reduced the amount of time an organization has to respond to Letter 226J, time will be of the essence.
For those of you who don’t have a monthly process in place, if you decide to set one up, you should take into account these three critical areas: (1) regulatory knowledge, (2) documentation and record-keeping, and (3) data quality management.
Regulatory Knowledge: When addressing ACA compliance needs on a monthly basis, a complete understanding of the mechanics of the law is required. If employers do not have employees who have this deep level of understanding of the ACA, consider hiring third-party consultants who have intimate knowledge of ACA regulations, and understand how to interpret and take action in accordance with the requirements of the law. Mastery of ACA regulatory concepts, such as IRS Approved Measurement Methods, affordability Safe Harbors, and Limited Non-Assessment Periods, can come in handy as you navigate the law, particularly if you want to minimize or eliminate penalties.
Documentation and Record-Keeping: Monthly ACA compliance relies heavily upon supporting documentation in order to be “audit ready” in case you receive a penalty assessment from the IRS. Documentation should include items such as a Summary of Benefits and Coverage, rate contribution sheets, offers of coverage to employees, medical invoices, enrollment forms, waiver forms, and acknowledgment of offers to employees for the relevant reporting year. The IRS is currently issuing Letters 226J and separate penalties under IRC 6721/6722. Some employers have received penalty notices in the hundreds of thousands to millions of dollars. Your organization wants records close at hand if it becomes necessary to respond to ACA penalty assessments.
Data Quality Management: This relates to the management of your workforce (HR) data. The raw inputs matter here. Data fields, such as census information, time & attendance, employment type, wage and rate information, as well as contribution structure, must be accurately tracked in order to comply with the ACA. For some employers who also use paper files, unstructured HR data is another factor to consider. In the end, the analytical data outputs are only as good as the quality of the raw data inputs that feed the calculations required to meet ACA regulations to avoid IRS penalties. This is particularly true if you use do-it-yourself software packages which will automatically complete IRS forms without checking if the data being used is accurate. This is a significant trigger of ACA penalties issued by the IRS.
The IRS has issued more than $4.5 billion in penalties to employers that failed to comply with the Affordable Care Act’s Employer Mandate for the 2015 tax year alone. By the year 2026, the amount of ACA penalties issued by the IRS is expected to reach $228 billion. If you haven’t received a penalty notice from the IRS, one may still be in the offing.
The IRS is becoming more proficient at identifying and assessing penalties against those employers who are not complying with the ACA. Undertaking a monthly ACA compliance process will have you that much better prepared to address any penalty assessments issued to your organization, or, better yet, avoid receiving them.
To learn more about ACA compliance for the 2019 tax year, click here.
For ACA reporting deadlines in 2020 for the 2019 tax year, organizations should review this link for important dates and requirements.
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