Employers Hit with 2016 ACA Penalties; Democrats Secure House
By Marshall Slaybod
This week, two important events took place in the world of the Affordable Care Act (ACA):
- Employers began receiving Letter 226J Employer Shared Responsibility Payment (ESRP) proposals from the IRS for noncompliance with the employer mandate of the Affordable Care Act (ACA) in tax year 2016. This information has been confirmed thanks to our partnership with third-party legal counsel.
- After tallying sufficient votes in Tuesday’s midterm elections, Democrats secured control of the United States House of Representatives by flipping enough Republican seats to take the majority.
The IRS has begun enforcing the employer mandate for 2016, and Democratic control of the House makes any effort to repeal the mandate unlikely to succeed.
The wheels of enforcement are turning, and they do not appear to be stopping anytime soon. Now, as much as ever, is not the time to risk liability for noncompliance.
The IRS uses Letter 226J to notify employers of potential liability for an ESRP for failing to comply with the ACA’s employer mandate. Per ACA regulations, to avoid compliance risk under Internal Revenue Code sections 4980H(a) and (b), an Applicable Large Employer (ALE) — and each ALE Member of an Aggregated ALE Group — must offer each full-time employee Minimum Essential Coverage (MEC) that provides Minimum Value (MV) and is affordable. If an ALE fails to offer appropriate coverage to eligible employees and one or more of those employees receives a Premium Tax Credit from the ACA Health Insurance Marketplace (or “Healthcare Exchange”), then the employer may be assessed an ESRP.
On Tuesday, November 6, Democrats unseated Republicans and secured a majority of seats in the U.S. House of Representatives.
Employer Mandate Remains the Law of the Land
After a number of stalled ACA repeal efforts, and even after the successful repeal of the ACA’s individual mandate starting in 2019, the ACA’s employer mandate is still the law of the land. ALEs are expected to comply or pay a penalty. With ESRP letters rolling out for tax year 2016, it’s as important now as ever to ensure you are properly managing your organization’s ACA compliance.
Potential Financial Impact
For tax year 2016:
- 4980H(a): The adjusted section 4980H(a) penalty amount is $180 per month per full-time employee (minus up to 30 employees).
- 4980H(b): The adjusted section 4980H(b) penalty amount is $270 per month per full-time employee who received a PTC.
Fines have the potential to reach millions of dollars for an employer in a single tax year. It depends on the size of the employer’s full-time employee population subject to penalty. A financial blow of such magnitude could be crippling to business operations. Please do your organization a favor and stay on top of employees’ eligibility determinations and offers of health coverage.
We Received Letter 226J. What Do We Do?
Understand the Process
After receiving Letter 226J, employers have an opportunity to respond prior to official assessment of liability and demand for payment. The letter provides instructions on how an employer should respond to either acknowledge the ESRP or dispute liability for the payment. Responses are due back to the IRS by the “response date” noted on the letter. Typically that is 30 days from the date of the letter itself.
Depending on how an employer replies to Letter 226J, the IRS will respond with a corresponding version of Letter 227 that will provide further instructions on how to proceed. At this stage, if an employer still disagrees with the proposed payment, the employer may request a pre-assessment conference with the IRS Office of Appeals to protest. Requests for conferences are also due by the response date noted on Letter 227, 30 days from the date of the letter.
With only 30 days to respond to dispute the penalties, it is extremely important to take action immediately:
- Assemble a team to own the response process
- Gather relevant data
- Engage with your legal and tax counsel as appropriate
- Request an extension
- Check out Worxtime’s ACA Fine Management Services
No matter what, get organized and ready to respond before it’s too late.
Build Your Case and Respond by the Deadline
If you wish to dispute an ESRP proposal, arm yourself with as much supporting evidence as possible. The IRS sent you Letter 226J because its records show that one or more eligible, full-time employees were not offered appropriate healthcare coverage. To avoid penalties — for each listed infraction — you must demonstrate that:
- (a) the employee was not full-time
- (b) the employee was offered appropriate coverage
- Or (c) another safe harbor applies to protect your organization from compliance risk in that situation. This may require a lengthy, thorough review of payroll and benefits data, but it very well may be worth it.
Many employers avoided significant undue fines for 2015 by promptly correcting issues with the data reported to the IRS.
Congressional Landscape After Midterm Elections
While Republicans solidified their control of the Senate, Democrats have secured a majority of seats in the U.S. House of Representatives. Effective January 2019, Democrats will control the House. Recent history speaks volumes about party alignment and the fate of the Affordable Care Act. Here is how we at Equifax anticipate the elections will impact ACA:
The newly elected Democrats will not take their seats until the next calendar year. At this time, House Republicans could attempt one final push to repeal and replace ACA. However, it’s very unlikely that such efforts would gain traction. That’s due to strong Democratic resistance and no clear legislative path for the Senate to consider such a bill before end of year.
New Year, New House Majority
Even though they have held the House majority since 2010, and even though repeal was highlighted as a primary Republican objective, they have not been able to rally the support necessary to dismantle ACA, including the employer mandate. While Democrats may work across party lines to refine the current structure of ACA, it appears very unlikely that they would consider repealing any significant portion of the law.
As far as we can tell, all signs point to the ACA’s employer mandate remaining in effect. We strongly encourage all ALEs to accurately and thoroughly comply to avoid liability for penalties.
Now is not the time for ALEs to risk non-compliance. If your organization needs support in managing ACA reporting or fine assessments for prior, current, or future years, contact the specialized ACA team at Equifax today.