IRS Begins Enforcing Affordable Care Act Penalties against Employers

By Lehr Middlebrooks Vreeland & Thompson, P.C.

February 27, 2018

As some employers have learned in the last few months, the Internal Revenue Service has begun assessing penalties against employers who allegedly failed to provide qualifying health insurance coverage to eligible employees in 2015.

The Affordable Care Act (“ACA”)’s employer mandate requires employers with more than 50 full-time or full-time equivalent employees to provide minimum essential coverage that is affordable and provides minimum value to eligible employees. If employers do not comply with the employer mandate and an eligible employee receives a premium tax credit through the ACA’s Health Insurance Marketplace, the ACA imposes penalties depending on the number of employees who received the tax credit and the number of months they received the tax credit. For 2015, the penalties for each employee could range from $2,000 to $3,000 per month.

Some employers are receiving penalty assessments amounting to millions of dollars. The Congressional Budget Office previously estimated that companies would owe around $139 billion in penalties from 2016 to 2024. Employers and their counsel are already trying to fight back. Many opponents argue that the IRS lacks authority to impose the assessments, particularly because they did not receive notifications from the ACA marketplaces that employees were buying insurance on the marketplace, which is required before a penalty can be imposed. Employers and business groups are urging lawmakers,particularly Republicans, to repeal the employer mandate and dismiss and forgive the penalties.

Many opponents have also raised issues with the short time given to respond to the penalty assessments. Generally, employers have around two to three weeks to respond. This is problematic for the employers who receive penalties for multiple employees over several months. In order to oppose the penalties, employers are required to correct any errors on the Form 1095-C for each individual employee and provide a signed statement explaining the correction. This often requires reviewing previously submitted reporting forms, employee time records, and employee coverage forms and records. Employers cannot simply reject the penalty and expect it to go away. Moreover, many employers are still confused on the reporting requirements for the Form 1095-C, which is used to report coverage for individual employees on an annual basis. In light of this confusion that the IRS has still not fully addressed, many employers inadvertently report incorrect information on the Form 1095-C and are not sure how to correct the form to contest a penalty.

The best recommendation for employers trying to contest a penalty or trying to prevent any penalties in the future is to utilize available their available resources. The IRS has detailed instructions and examples on its website. While it could always provide more explanation, it is a good place to start for any new or inexperienced Human Resources employee. Additionally, if your company utilizes a third party vendor for reporting or data compilation purposes, you should immediately report any penalties to the vendor and obtain the necessary documentation from the vendor to contest the penalty. Additionally, if possible, you should consult your in-house or outside counsel regarding any penalties or questions on how to properly offer and report coverage for your eligible employees. At present, the penalties do not appear to be going away. As such, it is crucial to ensure that your employees understand the employer mandate and its reporting requirements to try to prevent penalties at the onset.