Affordable Care Act Mistakes Can Result in Costly IRS Penalties to Employers

September 02, 2021

By Miri Forster and Kristen De Noia 

In 2010, the Affordable Care Act (ACA) was enacted. Under the ACA, certain employers are required to offer affordable minimum essential health coverage providing minimum value to at least 95% of their full-time employees and their dependents. An employer can be subject to a very large employer shared responsibility payment (ESRP) under IRC Sec. 4980H(a) if it fails to offer sufficient health coverage, causing a full-time employee to qualify for a premium tax credit (PTC) toward their purchase of health coverage on the ACA Marketplace. The PTC is available to eligible individuals who enroll, or enroll a family member, in coverage through a Health Insurance Marketplace, under Sec. 36B of the Act. If the employee’s required contribution to the insurance plan’s premiums is not affordable, the employer may be subject to a lesser, but still significant, ESRP under IRC Sec. 4980H(b).

Employers are also required to timely report information on health coverage on Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, under Sec. 6056. Failure to comply with the timely furnishing and filing rules contained in Sec. 6056 may also result in IRS penalties.

Currently, the IRS is issuing ESRP and information reporting penalty notices to employers that relate back to the 2017 and 2018 tax years.

Who Is Required to Provide Health Coverage:

The ACA mandate applies to applicable large employers (ALE). An ALE is an employer that employed, on average, at least 50 full-time employees during the preceding calendar year. There are exceptions for employers who (1) exceeded more than 50 full-time employees for 120 or fewer days during the prior calendar year, or (2) had an excess of 50 full-time employees as seasonal workers. Therefore, a start-up company that kept its employee count low during the majority of the year, but later increased to over 50 full-time employees during the last three months, would not be considered an ALE for that year. Likewise, a summer sleep-away camp that has a limited number of year-round full-time employees, but hires 100 college students as full-time counselors in the summers, would not be considered an ALE.

Consequences for Failing To Provide Sufficient Health Coverage:

An ALE’s failure to offer sufficient health coverage causing a full-time employee to receive a PTC can subject an employer to a substantial ESRP under Sec. 4980H(a). If the employee’s required contribution to the insurance plan’s premiums is not affordable, the employer may be subject to a lesser, but still significant, ESRP under Sec. 4980H(b). Where ESRPs apply under both provisions, only the larger ESRP under Sec. 4980H(a) will be assessed.

A. ESRP Under Sec. 4980H(a)

An ALE must make an offer of minimum essential health coverage providing minimum value to at least 95% of its employees and their dependents as defined below.

Offer

An ALE’s employees must be given an effective opportunity to elect to enroll in coverage at least once in respect to the plan year. Whether an employee has an effective opportunity to enroll is determined based on all the relevant facts and circumstances, including: (1) adequacy of the notice of the availability of the offer of coverage, (2) period of time during which acceptance of the offer of coverage may be made, and (3) any other conditions on the offer.

Minimum Essential Health Coverage

The majority of commercially available group health insurance plans would be minimum essential coverage. Examples of plans that would not fulfill this criteria include (1) offers of only dental and/or vision plans, (2) coverage available solely under workers compensation, and (3) plans that only offer discounts on medical services.

Providing Minimum Value

A plan provides minimum value if it covers at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan and provides substantial coverage of inpatient hospitalization services and physician services.

ESRP Calculation

ALEs that do not comply with the above requirements will be subject to a hefty ESRP from the IRS under Sec. 4980H(a). The ESRP is calculated on a month-by-month basis. An ESRP under Sec. 4980H(a) is calculated by multiplying the total number of full-time employees for that month (less 30) by a factor called the applicable payment amount. The applicable payment amount is indexed annually for inflation. For 2021, it is 1/12 of $2700.

Therefore, if an ALE had 130 employees for every month of the year, and did not offer coverage at all during the year, the ESRP under Sec. 4980H(a) would be $270,000.

B. ESRP Under Sec. 4980H(b)

Assuming an ALE offers sufficient health coverage to its full-time employees and their dependents, the offer must be affordable to each employee. If the coverage is not affordable, that may trigger an ESRP under Sec. 4980H(b). The ESRP is only assessed under Sec. 4980H(b) where the employer does not also have an ESRP under Sec. 4980H(a). Coverage is considered affordable when an employee’s required contributions to the least expensive self-only coverage policy offered are less than the affordability percentage (9.83% for plans beginning in 2021, and indexed annually for inflation) of their household income. Because employers often do not know the household income of their employees, they can rely on one of three safe harbor methods for determining affordability.

W-2 Safe Harbor

Coverage will be affordable if an employee’s required contribution does not exceed 9.83% of wages paid to the employee, as reported in box 1 of the employee’s Form W-2.

For example, assume an employee receives $30,000 in wages, as reported in box 1 of his 2020 Form W-2. His contribution cannot exceed $2,949 for the year, or $245.75 per month.

Rate of Pay Safe Harbor

Coverage will be affordable if an employee’s required contribution does not exceed 9.83% of his monthly rate of pay, assuming 130 monthly hours worked.

For example, assume an employee receives $15/hr in a given month. His contribution cannot exceed $191.69 for that month ($15/hr x 130 hours x 9.83%).

Federal Poverty Level Safe Harbor

Coverage will be affordable if the employee required contribution does not exceed 9.83% of the federal poverty line for a single individual. The 2021 federal poverty guideline for a single individual is $12,880. Therefore, coverage will be affordable under this safe harbor if the employee’s contribution does not exceed $1,266 for the year, or $105.50 per month.

ESRP Calculation

The ESRP under Sec. 4980H(b) is calculated by multiplying the number of full-time employees that received a PTC on their individual income tax returns by the applicable payment amount (1/12 of $4,060, indexed annually for inflation).

Therefore, if an employer had 4 employees receiving a PTC, the ESRP under 4980H(b) would be $16,240.

Consequences for Not Timely Satisfying ACA Information Reporting Requirements:

As a general rule, ALEs are required to furnish and file Form 1094-C and Form 1095-C to report information about offers of health coverage under Sec. 6056. The IRS uses the information reported on Forms 1094-C and 1095-C to determine whether an ALE is subject to one of the above described ESRPs under Sec. 4980H(a) or (b). Form 1095-C is also used by the IRS to determine the eligibility of an employee (and his family) to the premium tax credit under Sec. 36B.

The IRS may impose penalties for failure to timely file Forms 1094-C and 1095-C with the IRS and for failure to timely furnish these forms to employees under Secs. 6721(a) and 6722(a). Currently, penalties are up to $280 per failure or $560 if the failure is due to intentional disregard. No penalty is imposed if the failure was due to reasonable cause and not willful neglect, per Sec. 6724. These same penalties apply to late or incomplete Form W-2, Form 1099 or Form 1042-S filings.

For the 2020 tax year, ALEs were required to furnish and file Forms 1094-C and 1095-C by the following due dates:

  • Forms 1095-C furnished to employees by March 2, 2021 (as extended by Notice 2020-76 (irs.gov))
  • Paper filed Forms 1094-C/1095-C filed with the IRS by Feb 28, 2021
  • Electronically filed Forms 1094-C/1095-C with the IRS by March 31, 2021

Penalties may also imposed for failure to electronically file when certain thresholds are met.


Tax Controversy and Dispute Resolution - Q3 2021

About Kristen De Noia

Kristen De Noia is a Tax Manager with tax compliance and planning experience focusing on personal and fiduciary income taxation, gift taxation and trusts and estates including high net worth families and closely held business owners.

About Miri Forster

Miri Forster, Co-Leader of the Tax Controversy practice, has over 20 years of experience providing tax dispute resolution services to public and private corporations, partnerships and high net worth individuals on a wide range of technical and procedural issues.

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