The IRS is at the moment issuing Letters 226J assessing penalties for the 2019 reporting 12 months to employers it believes didn’t adjust to Reasonably priced Care Act reporting necessities.
The IRS has been issuing these letters since 2017 when it started reviewing ACA reporting varieties, which have been first filed in 2015. Over the following years, many employers have been tasked with understanding the problems concerned and the way to reply to the Letters 226J.
Letter 226J
The Letter 226J is how the IRS informs employers they’re topic to both the A or B penalty below the Employer Shared Duty Fee (ESRP) provisions of the ACA. The A penalty is assessed if an employer fails to supply minimal important protection to at the least 95% of its full-time staff and the B penalty is assessed if the employer fails to supply inexpensive protection that gives minimal worth. If a person enrolls in a well being care plan by way of the federal or state well being care market and receives a Premium Tax Credit score (PTC), the IRS makes use of the knowledge on Types 1094 and 1095 to verify that the employer met its obligation to supply protection below the ACA laws. If the coding on these varieties signifies the employer didn’t fulfill each necessities, the IRS assesses an A or B penalty, and points a Letter 226J. Each penalties can’t be assessed on an employer in the identical month.
Latest IRS focus
The IRS has develop into extra centered on figuring out whether or not the supply of protection was inexpensive by evaluating the lowest-cost plan premium, which is recorded on Line 15, with the affordability protected harbor, which is recorded on Line 16. If these two values don’t align, the IRS is now figuring out a attainable B penalty.
We’ve got not but seen the IRS conduct formal audits of employer-form submissions, however this isn’t past the realm of risk.
Doable results of the COVID-19 pandemic
Other than some delays in issuing Letters 226J, as a result of IRS workplaces have been closed at first of the pandemic, we haven’t actually seen any modifications. Nonetheless, the IRS has not but issued Letters 226J for 2020 and 2021, the years most importantly affected by the pandemic. The IRS is simply now issuing letters for 2019, so we mission that we’re a number of months away from seeing 2020 Letters 226J.
The IRS has begun to ship the ESRP work to completely different places, which can be a results of the pandemic. For the primary few years, all letters and processing have been dealt with by the IRS unit in Ogden, UT. We are actually seeing different workplaces used for explicit industries. For instance, for well being programs employers, the IRS has assigned people in varied New York workplaces to work with particular employers and has included a selected agent’s identify and direct cellphone quantity. That is useful as a result of when there are questions, employers can name and converse immediately with the agent who’s acquainted with their state of affairs.
New ACA challenges
Though circuitously associated to the ESRP course of, some pandemic-related modifications have impacted ACA reporting. For instance, the American Rescue Plan Act (ARPA) sponsored COBRA protection for people who have been involuntarily terminated or had their work hours diminished. ARPA diminished to $Zero the quantity a person would pay for COBRA between April and September 2021. The Kind 1095-C displays the lowest-cost medical health insurance plan out there to a person so it must be up to date for these people to mirror $Zero on Line 15 for months they have been eligible for the subsidy. That could be a change that employers are having to cope with when producing tax 12 months 2021 Types 1095-C. We don’t know if the IRS will likely be actively on the lookout for these $Zero charges or what impact this may have on the ESRP course of and Letters 226J.
From an ESRP-process perspective, ARPA additionally modified the thresholds for PTC eligibility. The ARPA didn’t change the affordability protected harbors utilized by employers however did have an effect on the earnings ranges for who qualifies for a PTC. This might end in extra people qualifying for a PTC, which might then improve the variety of people for whom an employer is being assessed an ESRP.
Employer actions
The perfect factor an employer can do is examine that their benefits-eligibility guidelines and administration processes are aligned with ACA laws. For instance, be sure that people who’re thought-about full-time below ACA laws are being provided the required medical health insurance. Additionally, it could be a few years earlier than employers obtain the Letter 226J, so be sure that they’ve available the information used to supply the Types 1094 and 1095 from prior years and copies of these prior-year varieties.
If buying an entity, employers ought to understand that the surviving entity will likely be accountable for penalties, even those who occurred earlier than the acquisition. It’s finest to gather and save the ACA reporting data and underlying information for the previous entity so employers that do obtain a Letter 226J for these years have the supporting data obligatory to reply.
Lastly, don’t wait till it’s time to supply the varieties earlier than reviewing ACA data. Reviewing the knowledge and figuring out information corrections through the 12 months will enable extra time to overview these modifications and make sure the varieties are as correct as attainable earlier than furnishing them to staff.
The tip of “good religion” reduction for reporting errors
The IRS at all times supposed that good-faith reduction from accuracy-related penalties can be non permanent. Due to the complexities of compiling obligatory information from varied programs, the IRS supplied reduction from penalties for inaccurate varieties whereas distributors and employers labored to develop ACA reporting programs and processes. With a number of years of expertise and minimal modifications being made to the reporting laws, the IRS has ended that non permanent reduction.
The IRS has not supplied particular steering on the way it plans to determine inaccurate varieties going ahead. Letters 226J for tax 12 months 2018 recognized invalid affordability protected harbor codes. Would varieties with these invalid codes now be thought-about inaccurate? If employers right the codes to resolve an ESRP, will the IRS then assess an accuracy-related penalty based mostly on the inaccurate codes initially despatched on the shape? It’s not clear how the IRS will react to those conditions.
One other query revolves across the transmission of worker data. Annually, after transmitting Types 1094 and 1095 to the IRS, many employers obtain Title-TIN mismatch reviews as a part of the transmission acknowledgement course of. Will these varieties now be thought-about inaccurate and end in penalties? Employers who haven’t already accomplished so ought to embody worker validation of the names, Social Safety numbers and birthdates for them and their dependents as a part of the advantages enrollment course of. This will resolve a few of these discrepancies or can be utilized in a proof to the IRS in response to accuracy-related penalties.
Proposal to completely prolong the Kind 1095-C furnishing deadline
In 2021, the IRS proposed to completely prolong the ACA reporting deadline for relevant massive employers to furnish Kind 1095-C to staff to 30 days after January 31, which might give employers extra time to supply full information. Earlier than tax 12 months 2019 when there was a person mandate penalty, federal earnings tax returns required affirmation that a person had medical health insurance all 12 months. The Kind 1095 was supposed to supply people with that data. Simply as with Kind W-2, having varieties issued by January 31 supplied time for people to finish and file their federal tax returns by April 15. With the person mandate penalty dropping to $0, federal earnings tax returns now not ask if a person had medical health insurance protection all 12 months, so there isn’t the sense of urgency to get that kind to the person as early as earlier than.
The 30-day extension addresses the problem that many employers confronted: to supply and mail Types 1095 by January 31, information recordsdata needed to be compiled by early January, which didn’t at all times enable employers sufficient time to make use of essentially the most correct information from the prior 12 months. For instance, somebody who’s employed and eligible for advantages in December might not enroll within the employer’s well being plan till late December or early January. This data is probably not within the system by early January when the Types 1095 are being compiled.
The 30-day extension additionally may impression state reporting. California, Washington, D.C., New Jersey and Rhode Island all have particular person mandates and reporting necessities that leverage the federal Types 1095-C. Whereas the IRS has prolonged the furnishing deadline past January 31, a few of these states should require varieties to be mailed to their residents by January 31.