These Common Mistakes Can Result in ACA Penalties
3 min read
ACA compliance can be time-consuming and complex. There is a myriad of issues that can arise during the course of the year that can make employers’ annual IRS filings more difficult than necessary.
Below are the five common ACA compliance errors we see employers make again and again:
Failure to perform an Aggregated Employer Group Analysis: Failure to accurately group related entities under the ACA can result in significant IRS penalty assessments. In many instances, organizations may not be an ALE in their individual capacity, but when they are grouped together at the conclusion of an Aggregated Employer Group Analysis, they form one, and thus the responsibilities of the ACA’s Employer Mandate may apply.
Failure to apply the appropriate IRS-approved measurement methodology: There are two different IRS-approved measurement methods and certain workforces will benefit dramatically from one or the other. Failure to apply the measurement method correctly for your organization could result in inaccurate full-time counts and significant ACA penalties.
Misclassification of employees: Organizations need to ensure that they are classifying their employees with the appropriate classifications. Full-time, part-time, variable-hour, and seasonal classifications all have different meanings in an ACA context. Classify them correctly!
Health benefits not considered: Perhaps one of the most obvious things to be mindful of when complying with the ACA are the details about the health plans your organization is offering to your employees. Ensure documentation is available substantiating the quality of the health plan, the cost, who it was offered to and for what time frames, and who elected to enroll. Also account for special plan arrangements such as flex credits, opt-out payments, and HRAs.
Inaccurate tracking of employment periods: The time frames in which your employees provide hours of services are incredibly important when determining ACA full-time status. Hire, rehire, and termination dates in addition to any breaks in service, are critical for calculating ACA full-time status. Track this information accurately.
Any or all of these mistakes can lead to ACA penalties from the IRS. Below are the different ACA penalty notices currently being issued:
Letter 226J penalty notices are being sent to employers the agency believes failed to comply with the ACA, probably the most discussed penalty notice.
Letter 5005A penalty notices are being sent to employers that have failed to distribute 1095-C forms to employees and to file Forms 1094-C and 1095-C with the federal tax agency by required deadlines, in violation of IRC Section 6721/6722.
Letter 972CG is being issued to employers who filed their ACA information but did so after the IRS deadlines established in IRC Section 6721.
Letter 5699 is being sent to employers with specific information requests that could lead to employers being issued ACA penalties. Essentially, Letter 5699 is a warning notice sent to employers that the IRS identifies as having failed to file/furnish Forms 1094-C and 1095-C for an applicable tax year. Responding promptly and accurately to Letter 5699 is essential for preventing further inquiries.
ACA penalties are ranging from thousands to millions of dollars. So far, Trusaic has helped clients abate over $500 million in penalty assessments from the IRS.
If your organization employs 50 or more full-time employees and full-time equivalent employees, you are considered by the IRS to be an Applicable Large Employer (ALE) under the ACA’s Employer Mandate. This requires you, as an ALE, 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 Internal Revenue Code (IRC) Section 4980H penalties.
If you haven’t received a penalty notice from the IRS, you may still get one if you haven’t complied with the requirements of the ACA’s Employer Mandate. This is especially true now that the IRS has said there is no statute of limitations for ACA penalties.
Organizations unsure of their ACA compliance status should download the 2021 ACA Essential Guide for Employers to learn about what is expected of them.
For information on ACA penalty amounts, affordability percentages, important filing deadlines, steps for responding to penalty notices, and best practices for minimizing IRS penalty risk, download the ACA 101 Toolkit.
