Reduce IRS Penalty Risk With Monthly ACA Compliance
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At this point, if your organization has achieved success in complying with the Affordable Care Act, you understand that it’s no simple undertaking. Chances are, your organization has incorporated a monthly review of related workforce data necessary for your organization’s annual filing of ACA information with the IRS. If you haven’t, you may want to consider doing so.
The ACA’s Employer Mandate requires Applicable Large Employers (ALEs), employers with 50 or more full-time employees 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 or be subject to IRS 4980H penalties.
In order to comply with the ACA’s Employer Mandate and reduce your risk of receiving financial penalties from the IRS, best practices suggest incorporating a monthly process for optimizing your ACA compliance. Not always understood is that the ACA requires that ALEs offer these health plans to 95% of its employees each month. Failure to do this can trigger ACA penalties under IRC 4980(H). This can get particularly confusing for ALEs with a significant mix of full-time and part-time employees with different hire and termination dates over the course of 12 months.
When setting up your monthly ACA process, there are three critical areas to address: regulatory knowledge, documentation and record-keeping, and 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.
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.
To date, the IRS has issued over $4.5 billion in penalty assessments to ALEs identified as having failed to comply with the ACA for the 2015 tax year alone. Penalty assessments are now being issued for the 2016 tax year. You can expect the IRS enforcement effort and penalty assessments to continue for future tax years as long as the ACA remains the law of the land.
Bottom line, employers looking to reduce their risk of receiving financial penalty assessments from the IRS should incorporate a monthly ACA process. Employers not confident in their ACA compliance process may want to consider undertaking a Penalty Risk Assessment to learn that potential penalty exposure with the IRS. Usually, this assessment is offered free by third-party experts. For the price, it’s a worthwhile investment to ensure that you do not receive a penalty notice from the IRS.
To learn more about ACA compliance for the 2018 tax year, click here.
For ACA reporting in 2019, organizations should review this link for important dates and requirements.
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