The IRS is informing more and more employers that they are facing Affordable Care Act penalties for failing to meet the employer mandate. Planning and executing an informed, researched, yet rapid response can help organizations avoid or minimize these fines.
What is the Affordable Care Act’s employer mandate?
This mandate of the Affordable Care Act (ACA) requires applicable large employers (ALEs) with 50 or more full-time employees (FTEs) to offer health insurance to their employees. The health insurance must provide minimum essential coverage and minimum value. It also must be affordable for all the organization’s employees and available to at least 95% of the FTEs.
What if the IRS thinks my company Isn’t compliant?
The IRS is stepping up enforcement of this mandate, and the penalties involved can easily reach millions of dollars for an employer. For example, a 100-employee company that did not file the relevant ACA forms in 2018 could face fines of $540 per employee or $54,000. If this same company’s insurance were deemed “unaffordable,” the company would face additional penalties of $3,480 per employee or $348,000. That’s over $500,000 in fines for one year alone, without any interest factored in. The IRS estimates it sent notices for over $12 billion in employer mandate penalties by the end of 2018.
Letters the IRS sends for non-compliance and penalties
Each of these is related to the employer mandate but covers a different aspect of compliance:
- Letter 5699 – the IRS believes you are an ALE but has not received your ACA forms (form 1094-C and forms 1095-C)
- Letter 5005-A – the IRS thinks your organization, as an ALE, failed to give 1095-C forms to your employees or did not file schedules 1094-C and 1095-C. This correspondence includes a penalty notice
- Letter 226J – according to IRS records, your firm has not provided insurance that complies with the employer mandate. This also includes a penalty notice. You can get this letter if just one employee in your company understated income and filed for a tax credit for health insurance in the marketplace
More and more ALEs (and potential ALEs) are getting letters 5699, 5005A, or 226J from the IRS. The turnaround time for these letters is only 30 days from the original mailing date, and not responding to these letters quickly and correctly can result in substantial penalties.
Planning a potential response
As a preventative measure, LaPorte CPAs & Business Advisors recommends getting a response strategy in place through the following activities:
- Identify a single point of contact in your company to coordinate the response
- Make sure that whoever receives your mail knows that these IRS letters are critical and should be given to the right person immediately
- Identify an ACA response team with participants (as applicable) from human resources, finance, and accounting, your accounting services/software vendor, and an accounting firm – such as LaPorte CPAs & Business Advisors – who is experienced with ACA issues
- If appropriate, gather evidence to show that you are not an ALE for any or all tax years from 2015 onwards
- Check now to see if your accounting services/software vendor filed form 1094-C and forms 1095-C from 2015 onwards as appropriate
- If you should have filed forms 1094-C and 1095-C and did not, prepare and file the forms now for 2015 forwards
- Have your forms reviewed now to determine if you are at risk for a penalty due to reporting errors
- Discuss now how you have calculated (or will calculate) affordability for your employees and gather the necessary data
If that IRS letter comes…
We recommend starting with these steps:
- Alert your ACA team that you have received a letter
- Engage outside help if you do not have ACA expertise in-house
- Ask for a 30-day extension to respond
- Develop a response plan with activities, responsibilities, and deadlines