United States: Watch Out For IRS Letters: IRS Begins Enforcing Employer Mandate

The IRS has recently begun enforcing the "employer shared responsibility" (ESR) provisions of the Affordable Care Act (the "Act"), which require employers having 50 or more full-time employees (or full-time equivalent employees) to offer health insurance coverage to eligible employees and their dependents. Failure to offer qualifying coverage as required by the Act results in the employer being subject to a penalty, known as the "employer shared responsibility payment" (ESRP), which can be substantial. Notices of ESRPs for 2015 coverage – the first year for which the ESR requirements were effective – are being received by some employers now. The notices are not actual assessments, but the penalty will be assessed if appropriate action is not taken promptly.

The notice – known as Letter 226J – is being issued when the reports filed under the Act (Forms 1094-C and 1095-C), and the employees' tax returns, indicate that, for at least one month in 2015, (i) at least one of your full-time employees was enrolled in a qualified health plan (through the Marketplace), (ii) he or she received a premium tax credit (PTC) with respect to that coverage, and (iii) you did not qualify for one of the affordability safe harbors available under the Act. Whether or not you have offered the required level of coverage to a sufficient percentage of your employees (and their dependents) determines which of the two penalties would apply – the "(a)" penalty, which for 2015 was $173.33 per month multiplied by the number of full-time employees in excess of 80, and which applies if you fail to offer "minimum essential coverage" to at least a prescribed percentage (70 percent for 2015; 95 percent currently) of your eligible full-time employees and their dependents and at least one full-time employee was allowed the PTC, or the "(b)" penalty, which for 2015 was $260 per month for each full-time employee who received the PTC for that month, and which applies if you do offer the required minimum essential coverage to the requisite number of employees, but at least one full-time employee receives the PTC because either he or she was not offered coverage, or the coverage otherwise was not ACA-compliant. Since the penalties can be triggered by a single employee having Marketplace coverage and receiving the PTC for even a single month, the "(a)" penalty, which applies with respect to all full-time employees (over the minimum allowance, which is now 50), can become extremely high very quickly. A company with only 200 full-time employees could be liable for a 2015 "(a)" penalty in the amount of $250,000, even after the 80-employee allowance.

Some notices have been issued based on incorrectly reported information, so it is important that you check the reports that were filed with the IRS to see whether the information you provided was correct. There have also been notices received apparently because an item was left blank. In Part III of the Form 1094-C, column (a) asks whether minimum essential coverage was offered to the requisite number of employees (70 percent for 2015), and requires that you check "yes" or "no" boxes for each month, or, alternatively, for "all 12 months." Leaving the boxes blank, however, is processed as a "no," and could trigger an ESRP notice if the other conditions are met.

The notice gives you 30 days to respond, using a furnished "ESRP Response" (Form 14764), and provides detailed instructions as to what to do if you agree and if you disagree with the IRS' determination that you owe an ESRP. If you do nothing before the deadline, then the IRS will proceed with assessing the penalty, and normal IRS penalty procedures will apply.

If you submit a timely ESRP Response disagreeing with the IRS' determination (in whole or in part), the IRS will consider your information and will respond with another form letter (Letter 227) either affirming or changing its original ESRP determination. The Letter 227 will also give you a date by which, if you still disagree with the revised determination, you may make a written request for a conference with the IRS Office of Appeals. If you do not make a request by that date, then the revised (or affirmed) ESRP will be assessed and penalty procedures will apply. If you do make a request, then a conference will be scheduled.

Given the potential size of the ESRPs, receipt of a Letter 226J should be taken seriously, especially if you believe it to be in error. Incurring a penalty for something that you have done is never good, but at least there is a reason. But there is no reason for incurring a penalty for something that you didn't do – especially if it is the result of a mistake that can be remedied. Even with special rules that applied for 2015, some of which had the effect of reducing the calculated payments, the ESRP can be a significant amount of money.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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