Post election, in December of 2016, the Internal Revenue Service (IRS) began to issue out notices to employers who may have failed to comply with the ACA. These notices appear to be the first salvo in the IRS ACA audit process. Failure to successfully defend this audit could mean significant ACA related penalties. These penalties, which include the Section 4980H penalties and Section 6721 and 6722 penalties, may be imposed on Applicable large employers (ALEs), namely, those employers with 50 or more full time or full time equivalent employees.
The Section 4980H penalties are comprised of “A” penalties for ALEs who fail to offer minimum essential coverage to 95% of their full time employees at an annualized rate of $2,080 (for 2015, and adjusted upwards annually) multiplied by the total number of full time employees and “B” penalties at a rate of $3,120 (for 2015, and adjusted upwards annually) multiplied by the number of full time employees who obtain a tax subsidy for ALEs who offered such coverage but such coverage failed to meet “minimum value” and/or such coverage was not “affordable.”
The Section 6721/6722 penalties include a failure to accurately and completely file returns to the IRS and a failure to accurately and completely furnish statements to the applicable employees, i.e., the IRS 1094/1095 Schedules. These penalties can reach $260 per return (which is on an employee basis), adding up to more than $6 million for combined filing and employee statement distribution failures. Moreover, the employer penalties are double for a willful failure, which the employer bears the burden to show that any failure to comply was despite reasonable diligence.
So what must an ALE do to defend against an IRS audit? Here are some of the key areas to show compliance.
During an IRS audit, the ALE has the burden to prove that the ALE offered minimum essential coverage to 95% of its full time employees. Unless the ALE is going to concede that all of its employees are full time, this can be challenging for the ALE to prove that some or all of its employees should not be counted as full time. To do so, the ALE must be able to prove that it has correctly identified its full time employees. This often involves conducting the look-back measurement method sanctioned by the IRS.
The ALE will also need to show that it made the offers of coverage to all applicable employees in a time manner. Unless the ALE is going to concede that each applicable employee should have been offered coverage for every month of the reporting year, the ALE must prove that, for the months that the applicable employee was not offered coverage, there was an applicable exclusion under the IRS regulations. This could include the hiring of the employee and the applicability of various limited non-assessment periods.
How does the ALE go about proving the above? Documentation is key. Regardless of whether the monthly measurement method or the look-back measurement method was used to determine full time status of employees, the ALE will need to provide documentation of how the used method was applied and that it was applied correctly under the IRS regulations, including the timing of the offer of coverage. Moreover, the ALE will need to provide documentation justifying the application of any limited non-assessment periods.
ALEs are strongly encouraged to utilize a platform that will document the full time employee status tracking and the timing of the offer of coverage along with all of the various human resources and/or payroll data that are relevant to the offer of coverage, including hire and rehire dates, termination dates, leaves of absences, etc.
Trusaic offers its Humanefits WISE platform, which provides the full time tracking and benefits tracking needed to document ACA compliance in the face of an IRS ACA audit.
For information on addressing the ACA audit, visit these free resources:
