Penalty risk continues as the IRS begins to focus on noncompliance with Affordable Care Act (ACA) for the 2017 calendar year. The IRS is continuing ACA enforcement and proposing penalties for the 2017 calendar year for 1) failure to file and furnish Forms 1095-C and Forms 1094-C and 2) non-compliance the employer mandate. Letters 5699 will be sent to non-filers this summer, as well as Letters 226-J for non-compliance with the ACA’s Employer Shared Responsibility Mandate.
Many employers are struggling under the increased complexity of compliance with the ACA. Non-filers may be required to file up to four years’ worth of Forms 1095-C and 1094-C in order to become up-to-date and compliant. Employers who are non-compliant with the employer mandate may be required to review the proposed penalties employee-by-employee referring to old HRIS or payroll records. It is important that employers work with their tax consultant to appropriately and timely respond to the IRS.
Failure to file or furnish penalties
Letter 5699 is sent to certain large employers who failed to file Forms 1094-C and 1095-C with the IRS under IRC Section 6056. In late 2018, the IRS began issuing Letter 5699, indicating that an organization failed to file Form 1094-C and 1095-C with the IRS for the 2015 and/or 2016 tax years. The IRS is identifying potential non-filers by cross-referencing the number of Forms W-2 versus their Forms 1094-C and 1095-C.
Failure to respond to Letter 5699 or to address any filing issues result in a formal penalty assessment being issued on a Letter 5005-A and a Form 886-A. The penalty amount is $260 per form for each failure to file a return (IRC Section 6721) and $260 for each failure to furnish a statement to the employee (IRC Section 6722) capped at an annual maximum of $3,193,000 for the 2017 tax year. However, there is no maximum if the IRS determines that the failure to file and/or furnish was intentional. (For failure to file and furnish, these penalties are combined ($520) for the 2017 tax year.) It is important that employers work with their tax consultant to bring their ACA compliance up-to-date.
Noncompliance with the employer mandate (ESRP penalties)
Letter 226-J is the initial letter issued to an “applicable large employer” (ALE) who may be liable for an Employer Shared Responsibility Payment (ESRP) under the ACA. The proposed ESRP is based on information from Forms 1094-C and 1095-C filed by the employer and the individual income tax returns filed by its employees. The IRS plans to begin issuing the 2017 Letters 226-J this summer.
Letter 226-J indicates whether an ALE is subject to an ESRP for each month under either IRC Section 4980H(a) or 4980H(b):
- IRC Section 480H(a) penalty – ALE did not offer minimum essential coverage to at least 95% of its full-time employees (and their dependents) and at least one full-time employee was allowed a Premium Tax Credit.
- IRC Section 4980H(b) penalty – ALE did offer minimum essential coverage to at least 95% of its full-time employees (and their dependents), and at least one full-time employee was allowed a Premium Tax Credit (because the coverage was unaffordable or did not provide minimum value, or the full-time employee was not offered coverage).
Letter 226-J includes Form 14764, ESRP Response, and Form 14765, Employee Premium Tax Credit Listing. These forms should be used to respond to the proposed penalty. From our experience, the majority of Letters 226-J are due to errors in preparation of the Forms 1094-C and 1095-C rather than non-compliance with the ACA’s Employer Shared Responsibility Mandate. Errors in preparing the Forms can be corrected in order to reduce or eliminate proposed penalties.
The table below summarizes the ACA penalty amounts for 2017.
Impacted employers need to address these IRS letters as soon as possible. If you receive a letter 5699, employers should respond to the letter and file your delinquent Forms 1094-C and 1095-C. If you receive a Letter 226-J, review your forms 1094-C and 1095-C to determine if there were any errors in preparing the Forms. Respond to letter 226-J through Forms 14764 and 14765 with corrections to any errors or to agree with the proposed penalty. Review your organization’s ACA compliance and begin planning for filing 2019 Forms 1094-C and 1095-C in order to avoid future potential penalty letters.
Grant Thornton has assisted many clients in responding to these letters. We were able to minimize or eliminate proposed penalties for both non-compliance with the ACA’s Employer Shared Responsibility Mandate and failure to file Forms 1094-C and 1095-C.
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