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Without the right resources, managing ACA compliance responsibilities can be time-consuming and difficult. There are many issues that can arise during the course of the year that can make employers’ annual IRS filings more challenging than necessary.
Whenever we come across organizations that were unsuccessful in managing their ACA compliance process, we typically see the same mistakes repeated.
Below are the five common ACA compliance errors we see employers make again and again:
Mistake 1: Fail 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 Applicable Large Employer (ALE) in their individual capacity, but when grouped together at the conclusion of an Aggregated Employer Group Analysis, they form one, and thus must comply with the responsibilities of the ACA’s Employer Mandate.
Organizations that fail to recognize this end up missing several reporting years worth of ACA responsibilities and in turn, end up getting penalized by the IRS for failure to furnish and file under IRC Sections 6721/6722.
Performing an Aggregated Employer Group Analysis on your own can be difficult. Best practices encourage outsourcing to an ACA compliance vendor, like Trusaic to assist with this undertaking.
Mistake 2: Don’t apply the correct IRS-approved measurement method
There are two different IRS-approved measurement methods, the Look-Back Measurement Method and the Monthly Measurement Method. Certain workforces will benefit dramatically from one or the other. Organizations that employ high variable-hour workers, such as quick-service restaurants and construction firms, are better suited to use the Look-Back Measurement Method as it measures workers’ hours over time to determine full-time status.
Conversely, the organizations that employ predominately full-time employees, who work regular schedules, benefit from the Monthly Measurement Method as it captures an employee’s hours and designation at face value.
Furthermore, failing to apply the correct measurement method for your organization could result in inaccurate, and potentially overstated full-time counts. Filing this type of information with the IRS could result in significant ACA penalties, such as Letter 226J.
Mistake 3: Misclassify 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.
Oftentimes, employers’ databases contain outdated or inconsistent employee information. The consequences of inaccurately documenting employee classification can result in missing offers of coverage to employees who are eligible and require one.
To prevent this issue, assess your employee worker data on a monthly basis and ensure consistency across all data platforms. Payroll, time and attendance, and benefits databases should have updated, accurate information. Performing this exercise monthly will also lend itself to easier ACA reporting each year.
Mistake 4: Health benefits not considered
Perhaps one of the most obvious things to be mindful of when complying with the ACA is the details regarding the health plans your organization offers to its employees.
Ensure documentation is available for 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 health reimbursement arrangements.
Mistake 5: 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, termination dates, and any breaks in service, are critical for calculating ACA full-time status. Track this information accurately.
ACA penalties issued by the IRS
Any or all of these mistakes above can lead to ACA penalties from the IRS. Below are the different ACA penalty notices currently being issued:
Letter 226J
The IRS issues Letter 226J penalty notices to employers it believes failed to comply with the ACA’s Employer Mandate. The agency is currently issuing these penalties for 2019, but previous tax years are fair game since there is no statute of limitations.
Letter 5005-A
If an employer neglects to distribute the annual 1095-C forms to employees and or fails to file Forms 1094-C and 1095-C with the federal tax agency by required deadlines, the IRS will issue a Letter 5005-A for violating IRC Section 6721/6722.
Letter 972CG
The IRS issues Letter 972CG when an organization fails to meet the annual furnishing and filing deadlines of Forms 1094-C and 1095-C. Letter 972CG is essentially a late penalty.
Letter 5699
Letter 5699 does not contain a penalty amount, it’s more of a warning notice than an actual penalty amount. The IRS issues Letter 5699 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.
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.
Under the ACA’s Employer Mandate, ALEs, or employers with 50 or more full-time employees and full-time equivalent employees must:
- Offer Minimum Essential Coverage to at least 95% of their full-time employees (and their dependents) whereby such coverage meets the Minimum Value
- Ensure that the coverage for the full-time employee is affordable based on one of the IRS-approved methods for calculating affordability
ACA penalties range from thousands to millions of dollars. So far, Trusaic has helped clients prevent over $1 billion in penalty assessments from the IRS.
With IRS enforcement receiving 87,000 new tax examiners, additional funding from the Biden administration, and enforcement ramping up, now is the time to verify your processes.
Organizations unsure of their ACA compliance status should get their ACA Vitals score to better understand their areas of risk.
If your organization has received IRS Letter 226J, download our white paper on Letter 226J to learn best practices for responding to the penalty notice.
