ACA News & Publications

ACA Pathways: IRS Issues Pay or Play Enforcement Guidance

November 10, 2017

The Internal Revenue Service (IRS) recently updated its Questions and Answers (Q&As) on the employer shared responsibility rules under the Affordable Care Act (ACA) to include information on enforcement. Specifically, these Q&As include guidance on:

  • How an employer will know that it owes an employer shared responsibility penalty;
  • Appealing a penalty assessment; and
  • Procedures for paying any penalties owed.

These Q&As indicate that, for the 2015 calendar year, the IRS plans to issue letters informing employers of their potential liability for an employer shared responsibility penalty, if any, in late 2017. The initial letter that will be issued to notify applicable large employers (ALEs) of a potential penalty is referred to as Letter226J (available here ). ALEs are employers with, on average, at least 50 full-time employees, including full-time equivalent employees, during the preceding calendar year.

Background

The employer shared responsibility rules generally took effect for most ALEs beginning on January 1, 2015. However, some ALEs may have had additional time to comply with these requirements. An ALE may be subject to a penalty only if one or more full-time employees obtain a subsidy from the Healthcare Marketplace, either because the ALE did not offer minimum essential health coverage, or the ALE offered minimum essential health coverage but that coverage was unaffordable or did not provide minimum value.

Prior to 2017, the IRS was unable to identify the employers potentially subject to an employer shared responsibility penalty or to assess any penalties. The IRS previously indicated that it expected to begin sending letters in early 2017 informing ALEs that filed Forms 1094-C and 1095-C of their potential liability for an employer shared responsibility penalty for the 2015 calendar year (with reporting in 2016). This has now been deferred to late 2017. As of this time, no letters have been sent to any ALEs.

Letter 226J

The general procedures the IRS will use to propose and assess the employer shared responsibility penalties are described in Letter 226J. The IRS plans to issue Letter 226J to an ALE if it determines that, for at least one month in the year, one or more of the ALE's full-time employees was enrolled in a qualified health plan for which a premium tax credit was allowed (and the ALE did not qualify for an affordability safe harbor or other relief for the employee). For purposes of Letter 226J, the IRS determination of whether an ALE may be liable for an employer shared responsibility penalty and the amount of the potential penalty will be based on information reported to the IRS on Forms 1094-C and 1095-C and information about full-time employees of the ALE that were allowed the premium tax credit.

Letter 226J will include:

  • A brief explanation of Internal Revenue Code (Code) Section 4980H, the Code provision containing the employer shared responsibility penalty provisions;
  • An employer shared responsibility penalty summary table itemizing the proposed penalty by month and indicating for each month if the liability is under Code Section 4980H(a) or Section 4980H(b) (or neither);
  • An explanation of the employer shared responsibility penalty summary table;
  • Form 14764, Employer Shared Responsibility Payment (ESRP) Response, an employer shared responsibility response form;
  • Form 14765, Employee Premium Tax Credit (PTC) List, which lists, by month, the ALE's assessable full-time employees (individuals who for at least one month in the year were full-time employees allowed a premium tax credit and for whom the ALE did not qualify for an affordability safe harbor or other relief-see instructions for Forms 1094-C and 1095-C, line 16), and the indicator codes, if any, the ALE reported on lines 14 and 16 of each assessable full-time employee's Form 1095-C;
  • A description of the actions the ALE should take if it agrees or disagrees with the proposed employer shared responsibility penalty in Letter 226J; and
  • A description of the actions the IRS will take if the ALE does not respond to Letter 226J on time.

The response to Letter 226J will be due by the response date shown on Letter 226J, which generally will be 30 days from the date of Letter 226J. Letter 226J will also contain the name and contact information of a specific IRS employee that the ALE should contact if the ALE has questions about the letter.

Appeals

ALEs will have an opportunity to respond to Letter 226J before any employer shared responsibility liability is assessed and notice and demand for payment is made. Letter 226J will provide instructions for how the ALE should respond in writing, either agreeing with the proposed employer shared responsibility penalty or disagreeing with part or all or the proposed amount. If the ALE responds to Letter 226J:

  • The IRS will acknowledge the ALE's response with an appropriate version of Letter 227 (a series of five different letters that, in general, acknowledge the ALE's response to Letter 226J and describe further actions the ALE may need to take).
  • If, after receipt of Letter 227, the ALE disagrees with the proposed or revised employer shared responsibility penalty, the ALE may request a pre-assessment conference with the IRS Office of Appeals.

The ALE should follow the instructions provided in Letter 227 and Publication 5, Your Appeal Rights and How To Prepare a Protest if You Don't Agree, for requesting a conference with the IRS Office of Appeals. A conference should be requested in writing by the response date shown on Letter 227, which generally will be 30 days from the date of Letter 227.

If the ALE does not respond to either Letter 226J or Letter 227, the IRS will assess the amount of the proposed employer shared responsibility penalty and issue a notice and demand for payment (Notice CP 220J).

Paying A Penalty

If, after correspondence between the ALE and the IRS (or a conference with the IRS Office of Appeals), the IRS or IRS Office of Appeals determines that an ALE is liable for an employer shared responsibility penalty, the IRS will assess the employer shared responsibility penalty and issue a notice and demand for payment (Notice CP 220J). Notice CP 220J will:

  • Include a summary of the employer shared responsibility penalty and reflect any payments made, credits applied and the balance due, if any; and
  • Instruct the ALE how to make a payment, if any.

ALEs will not be required to include the employer shared responsibility penalty on any tax return that they file or make a payment before notice and demand for payment. For payment options, such as entering into an installment agreement, refer to Publication 594, The IRS Collection Process.

Further Information

The IRS also maintains a website to better understand the Letter 226J and next steps at https://www.irs.gov/individuals/understanding-your-letter-226-j.

For More Information
For more information about this ACA Pathways or about any other health care reform-related provisions, please contact your Burnham Benefits consultant or Burnham Benefits at:

Burnham Benefits
949.833.2983
inquiries@burnhambenefits.com


Burnham Benefits does not engage in the practice of law and this publication should not be construed as the providing of legal advice or a legal opinion of any kind. The consulting advice we provide is intended solely to assist in assessing its compliance with the Patient Protection and Affordable Care Act and other applicable federal and state law requirements, and is based on Burnham Benefit’s interpretation of federal guidance in effect as of the date of this publication. To the best of our knowledge, the information provided herein, and assumptions relied on, are reasonable and accurate as of the date of this publication. Furthermore, to ensure compliance with IRS Circular 230, any tax advice contained in this publication is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.

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