The IRS is currently issuing Letters 226J assessing penalties for the 2019 reporting year to employers it believes did not comply with Affordable Care Act reporting requirements.
The IRS has been issuing these letters since 2017 when it began reviewing ACA reporting forms, which were first filed in 2015. Over the ensuing years, many employers have been tasked with understanding the issues involved and how to respond to the Letters 226J.
Letter 226J
The Letter 226J is how the IRS informs employers they are subject to either the A or B penalty under the Employer Shared Responsibility Payment (ESRP) provisions of the ACA. The A penalty is assessed if an employer fails to offer minimum essential coverage to at least 95% of its full-time employees and the B penalty is assessed if the employer fails to offer affordable coverage that provides minimum value. If an individual enrolls in a health care plan through the federal or state health care marketplace and receives a Premium Tax Credit (PTC), the IRS uses the information on Forms 1094 and 1095 to confirm that the employer met its obligation to provide coverage under the ACA regulations. If the coding on these forms indicates the employer did not satisfy both requirements, the IRS assesses an A or B penalty, and issues a Letter 226J. Both penalties cannot be assessed on an employer in the same month.
Recent IRS focus
The IRS has become more focused on determining whether the offer of coverage was affordable by comparing the lowest-cost plan premium, which is recorded on Line 15, with the affordability safe harbor, which is recorded on Line 16. If these two values don’t align, the IRS is now identifying a possible B penalty.
We have not yet seen the IRS conduct formal audits of employer-form submissions, but this is not beyond the realm of possibility.
Possible effects of the COVID-19 pandemic
Aside from some delays in issuing Letters 226J, because IRS offices were closed at the beginning of the pandemic, we haven’t really seen any changes. However, the IRS has not yet issued Letters 226J for 2020 and 2021, the years most significantly affected by the pandemic. The IRS is just now issuing letters for 2019, so we project that we are several months away from seeing 2020 Letters 226J.
The IRS has begun to send the ESRP work to different locations, which may be a result of the pandemic. For the first few years, all letters and processing were handled by the IRS unit in Ogden, UT. We are now seeing other offices used for particular industries. For example, for health systems employers, the IRS has assigned individuals in various New York offices to work with specific employers and has included a specific agent’s name and direct phone number. This is helpful because when there are questions, employers can call and speak directly with the agent who is familiar with their situation.
New ACA challenges
Although not directly related to the ESRP process, some pandemic-related changes have impacted ACA reporting. For example, the American Rescue Plan Act (ARPA) subsidized COBRA coverage for individuals who were involuntarily terminated or had their work hours reduced. ARPA reduced to $0 the amount an individual would pay for COBRA between April and September 2021. The Form 1095-C reflects the lowest-cost health insurance plan available to an individual so it should be updated for those individuals to reflect $0 on Line 15 for months they were eligible for the subsidy. That is a change that employers are having to deal with when producing tax year 2021 Forms 1095-C. We don’t know if the IRS will be actively looking for these $0 rates or what effect this will have on the ESRP process and Letters 226J.
From an ESRP-process perspective, ARPA also modified the thresholds for PTC eligibility. The ARPA did not change the affordability safe harbors used by employers but did affect the income levels for who qualifies for a PTC. This could result in more individuals qualifying for a PTC, which could then increase the number of individuals for whom an employer is being assessed an ESRP.
Employer actions
The best thing an employer can do is check that their benefits-eligibility rules and administration processes are aligned with ACA regulations. For example, make sure individuals who are considered full-time under ACA regulations are being offered the required health insurance. Also, it may be a couple of years before employers receive the Letter 226J, so make sure they have readily available the data used to produce the Forms 1094 and 1095 from prior years and copies of those prior-year forms.
If acquiring an entity, employers should realize that the surviving entity will be responsible for penalties, even those that occurred before the acquisition. It’s best to collect and save the ACA reporting information and underlying data for the former entity so employers that do receive a Letter 226J for those years have the supporting information necessary to respond.
Finally, don’t wait until it’s time to produce the forms before reviewing ACA information. Reviewing the information and identifying data corrections during the year will allow more time to review those changes and ensure the forms are as accurate as possible before furnishing them to employees.
The end of “good faith” relief for reporting errors
The IRS always intended that good-faith relief from accuracy-related penalties would be temporary. Because of the complexities of compiling necessary data from various systems, the IRS provided relief from penalties for inaccurate forms while vendors and employers worked to develop ACA reporting systems and processes. With several years of experience and minimal changes being made to the reporting regulations, the IRS has ended that temporary relief.
The IRS has not provided specific guidance on how it plans to identify inaccurate forms going forward. Letters 226J for tax year 2018 identified invalid affordability safe harbor codes. Would forms with those invalid codes now be considered inaccurate? If employers correct the codes to resolve an ESRP, will the IRS then assess an accuracy-related penalty based on the incorrect codes initially sent on the form? It’s not clear how the IRS will react to these situations.
Another question revolves around the transmission of employee information. Each year, after transmitting Forms 1094 and 1095 to the IRS, many employers receive Name-TIN mismatch reports as part of the transmission acknowledgement process. Will those forms now be considered inaccurate and result in penalties? Employers who have not already done so should include employee validation of the names, Social Security numbers and birthdates for them and their dependents as part of the benefits enrollment process. This may resolve some of those discrepancies or can be used in an explanation to the IRS in response to accuracy-related penalties.
Proposal to permanently extend the Form 1095-C furnishing deadline
In 2021, the IRS proposed to permanently extend the ACA reporting deadline for applicable large employers to furnish Form 1095-C to employees to 30 days after January 31, which would give employers more time to provide complete data. Before tax year 2019 when there was an individual mandate penalty, federal income tax returns required confirmation that an individual had health insurance all year. The Form 1095 was intended to provide individuals with that information. Just as with Form W-2, having forms issued by January 31 provided time for individuals to complete and file their federal tax returns by April 15. With the individual mandate penalty dropping to $0, federal income tax returns no longer ask if an individual had health insurance coverage all year, so there isn’t the sense of urgency to get that form to the individual as early as before.
The 30-day extension addresses the issue that many employers faced: to produce and mail Forms 1095 by January 31, data files had to be compiled by early January, which didn’t always allow employers enough time to use the most accurate data from the prior year. For example, someone who is hired and eligible for benefits in December may not enroll in the employer’s health plan until late December or early January. This information may not be in the system by early January when the Forms 1095 are being compiled.
The 30-day extension also might impact state reporting. California, Washington, D.C., New Jersey and Rhode Island all have individual mandates and reporting requirements that leverage the federal Forms 1095-C. While the IRS has extended the furnishing deadline beyond January 31, some of those states may still require forms to be mailed to their residents by January 31.
