One of the silver linings of the COVID-19 pandemic and all of the illness, death, and economic upheaval it created is the fact that the pandemic led to millions more Americans acquiring health insurance through ACA enrollment. While that’s great news for the newly insured and for the overall health of America’s healthcare system, it has also created the potential for severe IRS penalties for some employers.
The link between health insurance and IRS audits may not be obvious at first blush, but in this post we’ll explain how expanded ACA enrollment among employees can trigger an IRS audit. More importantly, we’ll discuss how employers can avoid this ACA penalty risk.
The Affordable Care Act, often referred to as Obamacare, created a healthcare exchange—a marketplace available in every state to make it easier (and less expensive) for individuals to purchase healthcare insurance coverage.
Last year, the Department of Health and Human Services announced that 35 million Americans had enrolled in health insurance related to the ACA.
Americans have been signing up for ACA-related insurance coverage since the law’s passage during the Obama Administration. However, enrollment picked up under the Biden Administration, due to the administration’s efforts to shore up coverage during the COVID-19 pandemic and a number of special enrollment periods that allowed Americans to sign up for ACA-related insurance outside of standard enrollment periods.
Eligible individuals and families also are eligible for PTC subsidies—refundable credits to help cover health insurance premiums purchased through the healthcare exchange or marketplace.
These efforts have helped millions more Americans gain ACA-related coverage in recent years, shoring up the overall stability of the broader health-insurance system, but also triggering the potential for audit exposure for the employers of those Americans.
Triggering Penalty Notifications
Why the audit exposure? It all boils down to the ACA employer mandate called the Employer Shared Responsibility Payment (ESRP). As the IRS website explains, “Under the Affordable Care Act’s employer shared responsibility provisions, certain employers (called applicable large employers or ALEs) must either offer minimum essential coverage that is ‘affordable’ and that provides ‘minimum value’ to their full-time employees (and their dependents), or potentially make an employer shared responsibility payment to the IRS.”
When an eligible taxpayer opts to take out an ACA-related insurance policy, that taxpayer can apply for a premium tax credit (PTC) through their federal income tax filing. When employees tell the IRS they’re opting for ACA healthcare coverage, that effectively tells the IRS that the taxpayer’s employer (if any) may not be complying with the employer mandate to provide minimum essential coverage that’s both affordable and provides minimum value. If the employer were providing such coverage, they may be required to make an ESRP to the IRS, essentially an employer-paid ACA subsidy.
When the IRS thinks an employer may have violated their mandate, the first notice that employer will receive is a 226J letter, and it can be a sign of costly things to come.
Further, if organizations fail to file Forms 1094-C and 1095-C by the corresponding deadlines for a specific tax year under IRC section 6721, Letter 972CG will be generated. The IRS is currently issuing these late penalty assessments. Clearly it’s critical for employers to be on top of these requirements and to meet ACA IRS deadlines.
Penalties for employers that fail to meet the employer mandate are not trivial. Even a single case of noncompliance can cost thousands of dollars. Large employers with large numbers of employees have tremendous potential exposure.
For 2023, the per-employee penalty if at least one full-time employee purchases tax-subsidized ACA-related insurance on the marketplace exchange is $2,880, not counting the first 30 employees, for an employer that fails to offer minimum essential coverage to at least 95 percent of its full-time employees, plus their dependents.
For example, consider an employer with 200 employees. If that employer does not offer health insurance to any of its full-time staff and just one of those employees opts for ACA insurance, the employer’s liability is (200 – 30) x $2,880 = $489,600.
That’s a lot of money for a company with just 200 employees.
Penalties for employer ACA noncompliance isn’t just a theoretical possibility. The IRS routinely audits employers and issues fines related to ACA compliance. Employee participation in the ACA marketplace is an easy trigger for the IRS, meaning companies that disregard their mandate have substantial ACA penalty risk.
Fortunately, there are some fairly basic steps employers can take to boost their ACA compliance and reduce their ACA penalty risk.
- Know how many full-time employees your business employs. This isn’t as simple as adding up everyone who works at least 40 hours per week. As far as the IRS is concerned, 30 hours a week counts as full time, and two employees individually working 15 hours per week is considered the equivalent of a single full time employee, so it’s important not to leave out part-timers.
- Review the benefits being provided to these employees. Minimum essential coverage that is affordable and provides minimum value must be made available to at least 95 percent of full-time employees. Employers can refer to IRS guidelines to help determine whether their programs are affordable and/or offer minimum value.
- Review the waiting period for employees to receive insurance benefits. This should be no more than 90 days.
The Affordable Care Act has helped tens of millions more Americans obtain health insurance since its passage during the Obama Administration. That’s great news for the newly insured, but it can cause real problems for their employers if those employers aren’t fulfilling their ACA obligations. To ensure you are compliant and not subject to penalties, contact Trusaic who can help you navigate ACA compliance. We have saved our clients over a billion in potential and actual penalties.
Undertaking an ACA Penalty Risk Assessment can tell you if your organization is at risk of receiving ACA penalties from the IRS.