On July 29, the IRS issued proposed regulations under Section 6055 that seek to clarify a number of issues raised by commenters in response to the original proposed regulations under Section 6055 and Notice 2015-68. Filers may rely on the proposed regulations for calendar years ending after December 31, 2013, making them applicable at the option of filers for all years during which Forms 1095-B and Forms 1095-C were required to be filed. In addition to the clarifications contained in the regulations themselves, the IRS's comments in the preamble to the regulations provide additional helpful guidance to filers. Ultimately, the proposed regulations are helpful but continue to overlook some areas where further binding guidance in regulations would be helpful. Specific changes are discussed below:
Catastrophic Coverage. Unlike other coverage purchased through an exchange, the proposed regulations implement the change announced in Notice 2015-68, requiring that insurers providing the coverage report it. This change is effective for catastrophic coverage provided in 2017 and required to be reported in 2018. Insurers are not required to report catastrophic coverage provided in 2016 (and otherwise required to be reported in 2017), although they are encouraged to do so on a voluntary basis. A filer who voluntarily reports catastrophic coverage provided in 2016 is not subject to penalties on those returns.
Supplemental or Duplicative Coverage. Consistent with Notice 2015-68, the proposed regulations simplify the rule contained in the final regulations relating to supplemental coverage. Under the proposed regulations, a reporting entity that during a month provides minimum essential coverage under more than one plan that it provides (such as an HRA and a high-deductible health plan) need only report coverage under one plan.
Truncated TINs. Consistent with Notice 2015-68, the proposed regulations clarify that a filer may use a truncated TIN in place of the TIN of each covered individual, the responsible individual, and if applicable, the sponsoring employer's EIN.
TIN Solicitation. Responding to comments from Section 6055 filers, the proposed regulations clarify how the reasonable cause rules relating to TIN solicitation under Section 6724 apply to Section 6055. The IRS acknowledged in the preamble, that the existing rules were difficult to apply outside of the financial context for which they were written. The clarifications include:
- Under Section 6724, a filer is required to make an initial TIN solicitation at the time an account is opened. Commenters had requested clarification regarding when an account is opened for purposes of applying the TIN solicitation rules to Section 6055. The proposed regulations specify that the account is "opened" when the filer receives a substantially completed application for coverage, including an application to add an individual to existing coverage. The application may be submitted either by the individual or on the individual's behalf (for example, by an employer). As a result, providers of minimum essential coverage who are required to report under Section 6055 should strongly consider changing their applications forms to include a request for TINs, if they have not already done so. (See the discussion of transition relief below for the treatment of coverage in effect before July 29, 2016.)
- If the initial solicitation does not result in the receipt of a TIN for each covered individual and the responsible individual, the filer must make the first annual TIN solicitation within 75 days of such date, or in the case of retroactive coverage, within 75 days after the determination of retroactive coverage is made. The second annual solicitation must be made by December 31 of the following year. (See the discussion of transition relief below for the treatment of coverage in effect before July 29, 2016.)
- Under Section 6724, initial and first annual solicitations relate to failures on returns for the year in which the account is opened. In other words, to demonstrate reasonable cause for the year in which the account was opened, a filer must generally show that it made the initial and first annual solicitations. In contrast, the second annual solicitation relates to failures on returns for all succeeding years. Because the first return required under Section 6055 will often be required for a year after the year in which the account is "opened" (as described above), the proposed regulations provide that the initial and first annual solicitations relate to the first effective date of coverage for an individual. The second annual solicitation relates to subsequent years. The IRS did not discuss how these rules related to an individual who has been covered continuously since a date prior to the requirement to solicit a TIN from an individual. Presumably, the initial and first annual solicitations will relate to the first year for which a Form 1095-B or Form 1095-C would have been required to be filed by the filer. These changes generally relate only to the solicitation process for missing TINs and not the process for erroneous TINs.
- An open question was whether a separate TIN solicitation was required to each covered individual on Form 1095-B or Form 1095-C. The proposed regulations provide that a filer may satisfy the TIN solicitation rules with respect to all covered individuals by sending a single TIN solicitation to the responsible individual. This is welcome news and alleviates the concern about sending separate solicitations to children and other covered individuals. However, the proposed regulations do not adopt commenters' suggestion that if an individual is later added to existing coverage that prior annual TIN solicitations, if those solicitations were unsuccessful, made to the same responsible individual would satisfy the annual TIN solicitation requirement with respect to the new covered individual. Instead, even though a filer may have made an initial and two annual solicitations to the responsible person, the addition of a new covered individual will require the filer to make a new series of solicitations with respect to the new individual's TIN.
- Although not addressed in the regulations, the preamble indicates that a filer may solicit TINs electronically consistent with the requirements in Publication 1586. The guidelines for electronic solicitations generally require an electronic system to (1) ensure the information received is the information sent, and document all occasions of user access that result in submission; (2) make it reasonably certain the person accessing the system and submitting the form is the person identified on the Form W-9; (3) provide the same information as the paper Form W-9; (4) require as the final entry in the submission, an electronic signature by the payee whose name is on the Form W-9 that authenticates and verifies the submission; and (5) be able to provide a hard copy of the electronic Form W-9 to the IRS if requested. Although it is helpful to know that the IRS believes filers may make use of an electronic system for TIN solicitations like filers under other provisions of the Code, it would have been helpful for the IRS to update its outdated regulations under Section 6724 to specifically permit electronic TIN solicitations. Ultimately, because Forms 1095-B and 1095-C do not report income that an individual may seek to avoid having reported by using an erroneous name/TIN combination, a less complicated means of electronic solicitation would have been appropriate in this case.
The preamble declines to make four changes requested by commenters:
- First, the preamble declines to amend the regulations to clarify that a renewal application satisfies the requirements for annual solicitation. Instead, the preamble states that the provision of a renewal application that requests TINs for all covered individuals "satisfies the annual solicitation provisions" if it is sent by the deadline for those annual solicitations. Although the rule stated in the preamble would be helpful, it is not the rule contained in the regulations. The regulations under Section 6724 include detailed requirements for annual solicitations including that they include certain statements, a return envelope, and a Form W-9. Accordingly, a renewal application is unlikely, on its own, to satisfy the annual solicitation requirements as stated in the preamble. Commenters had requested some changes to these rules, but as discussed below, the IRS declined to adopt such changes in the proposed regulations.
- Second, the proposed regulations do not remove the requirement to include a Form W-9 or substitute form in a mailed annual solicitation. The preamble indicates that this change was not needed because filers are already permitted to include a substitute Form W-9 with a TIN solicitation. Although this is true, it sidesteps the concerns raised by commenters relating to the inappropriateness of a Form W-9. The preamble indicates that an application or renewal application would be an acceptable substitute. However, the IRS drafters do not seem to understand what constitutes a substitute Form W-9 because an application under the new proposed rule would have to meet several requirements that such documents are unlikely to meet. For example, a substitute Form W-9 must include a statement under penalties of perjury that the payee is not subject to backup withholding due to a failure to report interest and dividend income and the FATCA code entered on the form indicating that the payee is exempt from FATCA reporting is correct. Neither of these certifications is relevant to Section 6055 reporting. Moreover, the references to a "payee" is confusing in the context of Section 6055 reporting, which does not involve a payee (and to the extent there is a payee at all, it would be the filer). The reference to FATCA exemptions is also not relevant, especially given that only individuals would be completing the form and no U.S. person is exempt from FATCA reporting even if it were relevant. Moreover, because an application would likely require the applicant to agree to provisions unrelated to these required certifications (such as their age being correct, gender being correct, and other information on the application being correct), a separate signature block or conspicuous statement that the IRS requires only that they consent to the certifications required to avoid backup withholding would have to be included on the form. It seems doubtful that any applications would satisfy these requirements currently. Given the misleading nature of the statements and the simple fact that the discussion of backup withholding is completely irrelevant to Section 6055 reporting, it even seems doubtful that many filers will redesign their application forms to satisfy the substitute form requirements even though the drafters of the proposed regulations seem to believe that such forms would be acceptable substitutes.
- Third, the proposed regulations do not remove the requirement that a mailed TIN solicitation include a return envelope. While retaining the rule in the existing Section 6724 regulations, the preamble does, however, clarify that only a single envelope is required to be sent consistent with the decision to allow a single TIN solicitation to the responsible individual to satisfy the TIN solicitation requirement for all covered individuals.
- Fourth, commenters had requested that the IRS adopt rules specifically permitting filers to rely on the sponsors of insured group health plans to solicit TINs from their employees on the filer's behalf. Although the IRS indicated that a filer may use an employer as an agent for TIN solicitation, it declined to provide a distinct ground for reasonable cause when the filer contracted with the employer-sponsor to perform the TIN solicitations. As a result, the employer's failure to satisfy the TIN solicitation requirements will leave a filer subject to potential penalties.
Transition Relief. The preamble provides that if an individual was enrolled in coverage on any day before July 29, 2016, the account is considered opened on July 29, 2016. Accordingly, reporting entities have satisfied the requirement for the initial solicitation with respect to already enrolled individuals so long as they requested enrollee TINs at any time before July 29, 2016.
As discussed above, the deadlines for the first and second annual solicitations are set by reference to the date the account is opened. Accordingly, the first annual solicitation with respect to an individual enrolled in coverage before July 29, 2016, should be made at a reasonable time after that date (the date on which such account is considered open) consistent with Notice 2015-68. Accordingly, a filer that makes the first annual solicitation within 75 days of July 29, 2016 (by October 12, 2016), will be treated as having made such solicitation within a reasonable time.
The preamble states that filers that have not made the initial solicitation before July 29, 2016, should comply with the first annual solicitation requirement by making a solicitation within a reasonable time of July 29, 2016. The preamble reiterates that as provided in Notice 2015-68, a filer is deemed to have satisfied the initial, first annual, and second annual solicitations for an individual whose coverage was terminated prior to September 17, 2015, and taxpayers may continue to rely on this rule as well. Because a filer is not required to make an annual solicitation under Section 6724 during a year for which it is not required to report coverage, presumably, a filer need not make any solicitations with respect to an individual for whom coverage was terminated at any time in 2015.
AIR System Messages. The preamble to the proposed regulations formalizes the position of the IRS with respect to TIN mismatch messages generated by the ACA Information Returns (AIR) filing system. In a footnote, the preamble states that such error messages are "neither a Notice 972CG, Notice of Proposed Civil Penalty, nor a requirement that the filer must solicit a TIN in response to the error message." However, given the IRS's stated position that error correction is a necessary part of demonstrating "good faith" required for penalty relief, it is unclear what, if anything, a filer should do in response to these error messages. In any event, filers may wish to demonstrate good faith by making an effort to obtain correct TINs from responsible individuals and head-off future errors by working to do so now, rather than later, when such efforts will likely be required.
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