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ACA Non-Compliance Penalties Are Coming to Town

by Christine Bentson, CPA, RPA, CEBS

Are you getting an ACA non-compliance letter for Christmas? The IRS has begun to issue proposed penalties to companies that are not offering health care coverage in compliance with the Affordable Care Act (ACA). Letters regarding the proposed penalty assessments are being sent to companies in late 2017.

Since 2015, Applicable Large Employers (ALEs)--or companies with at least 50 full-time or full-time equivalent employees--have needed to make minimum essential care with minimum value affordable for their employees.

For those who haven't, IRS letter 226J is the wake-up call. Monthly penalties? You got it. Employers have 30 days to respond to a 226J letter.

What does the ACA say about health coverage and non-compliance penalties?

Code Section 4980H(a) penalty

At least ninety-five percent (70%+ for 2015) of full-time employees and their dependents must be offered an insured or self-insured group health plan, and it must meet minimum value and affordability requirements. This applies to employees working 30+ hours a week and their dependents up to age 26. Spouses are not technically included, but many employers opt to add them in anyway.

Penalties for health coverage that do not meet the thresholds above are calculated like this:

Penalties are equal to $2,080 for 2015, $2,160 for 2016, and $2,260 for 2017--bearing in mind that thresholds for avoiding the penalty are 70%+ coverage in 2015, and 95%+ for 2016 for full-time employees. Let's call this "penalty value."

You can subtract 30 from the total number of employees for 2016, and 80 for 2015 when calculating the penalty. Let's call this value "employee adjustment."

(number of full-time employees - employee adjustment) x penalty value = total nondeductible penalty

For example, a company offers coverage to just 92% of employees in 2016, with 200 total employees. The penalty is assessed as:

(200 - 30) x $2,160 = $367,200

Code Section 4980H(b) penalty

Minimum value: Healthcare plans should be designed to cover at least 60% of employees' medical costs. You must certify that you've done this on form 1095-C and document how you have verified that you meet this threshold.

Affordability: Self-only coverage for employees should a) cost employees no more than 9.5% of a) Form W-2, box 1, b) employer's monthly pay, or c) the federal poverty level. Percentages change annually. 2015 - 9.56%, 2016 - 9.66%, 2017 - 9.69%.

Penalties here are large as well: $3,000 and up per employee in your organization.

Note that these penalties apply if at least one full-time employee purchased health coverage on the Marketplace and received a premium credit.

I already received the 226J letter. What can I do next?

We suggest the following:

  • Contact your provider that assisted you in the filing to find out if they will be assisting you in responding to the IRS letter.
  • If you prepared the filings internally, contact us and we can assist you in how you should respond.
  • Review the data that was submitted as part of the ACA filing (Form 1095-C) with the IRS letter to identify any inaccuracies between your filings and the information provided in the IRS letter.
  • Respond with the requested information to the IRS by the response date shown in the letter, which should be 30 days from the date the letter was issued.
  • Respond in writing, either agreeing with the proposed penalty or disagreeing with part or all of the proposed penalty assessment. You should make sure you have documentation if you are disagreeing with the proposed assessment. The letter will provide instructions on how the ALE should respond.
  • Depending on your agreement or disagreement with the proposed penalty, additional steps can be discussed with our office.

Do you want to know more about the 226J IRS letter, need more information on these rules/filings, or want to discuss how to mitigate the risk of falling into a penalized category? Contact Christine Bentson today at cbentson@redpathcpas.com or 651-407-5808.

Christine Bentson, CPA, RPA, CEBS

Christine Bentson, CPA, RPA, CEBS

Christine Bentson, employee benefits service area leader is a CPA, retirement plan associate, and certified employee benefit specialist. She specializes in establishing, designing and administering employee benefit and retirement planning services for closely-held business clients, as well as preparation of government reporting for welfare benefit plans. Christine has provided public accounting services at Redpath and Company since 1987.