The pandemic is changing the way we all work, including the IRS. Since the scathing report from the Inspector General earlier this year, the Internal Revenue Service haven't answered their calls, still we know they are working diligently behind closed doors to step up their penalty letters and create much-needed revenue. According to the report, the IRS collected a mere 4.4% of its original goal for assessing ACA penalties. The estimated penalty income was based on employers failing to offer affordable health coverage to employees; however, most employers were already providing coverage, so the IRS lost big! Now, it is time to make that up, and you or your client could be the one opening up your wallets to pay substantial fines.
How can you prepare? We have a few steps to take that will help you and your clients protect your business.
The IRS Letters
First thing first: You must become familiar with the letters the IRS sends regarding penalties. The most important is the 226J letter. Learn more about the 226J letter by reading our past blog HERE. The 226J letter is the initial communication the IRS sends Applicable Large Employers (ALE) to notify them they MAY be liable for an Employer Shared Responsibility Payment (ESRP). Seriously, it will truly aid your understanding of the 226J letter if you read our previous blog. The 226J includes a summary of the penalties, explanation if the penalty is assessed under §4980H(a) or (b), actions for the ALE, and the possible outcome if the ALE does not timely reply.
Secondly, Section 4980H is the employer mandate and has two requirements:
A: Health coverage must be offered to 95% of full-time employees (FTE)
B: The coverage must be affordable
The third document to be aware of is the Form 14765. Form 14765 arrives with the 226J letter and lists the FTEs who received a subsidy from the marketplace. It also provides ALE code combinations for Form 1095-C, lines 14 and 16. Employers are required to complete the second line of codes and indicate how the FTEs should be counted. Employers must review this information against their HR employment records and their benefit offering records. The information requested on For 14765 is critical in the appeal process and can cause extreme penalties if not reported correctly.
The fourth letter(s) to keep on the lookout for is the 227 letters. There are several types of 227 letters, but two are the most important.
Letter 227K - AKA The Letter Employers WANT
- Acknowledges the receipt of your information for the appeal
- Informs employer the ESRP was reduced to $0
- Case closed, no response needed
Letter 227M - AKA The Letter Employers Do Not Want
- Acknowledges the receipt of the appeal information
- Informs employer the ESRP did not change
- Provides an updated Form 14765
- Includes a revised calculation table
- Options for the ALE moving forward
Mistakes happen, I get that, you get that, the IRS does NOT get that. Mistakes can prove costly and drive the expense of your penalty from $0 to $1,000,000 fast! Below is a list of common errors for ACA Employer Reporting to help you better prepare.
Not completing FTE and total employee count on Form 1094-C
Lines 14 & 16 not correct, or confusion with codes on Form 1095-C
Filing late or not filing with the IRS at all
First-time ALEs struggle with new requirements
Difficulty with measurement periods & filing issues
What You & Your Clients Need to Know
We know the ACA is complicated, but the basics can be pretty straightforward. There are two main reasons for penalty letters, one is the failure to file, and the other is the failure to furnish. Failure to file describes an employer who did not complete employer reporting and submit to the IRS. Failure to furnish describes an employer who did not provide the required tax forms to employees. The IRS assumes that these go hand in hand; if there is a penalty for one, there is a penalty for the other...it is the ultimate double-whammy. Businesses must keep their eyes open for letters. If they fail to respond within the time allotted, they will receive more penalties. Employers are tasked with a great deal of research, documentation, record-keeping, and balancing priorities.
Are you or your clients ready? Do you feel prepared?
Lighten the Load
IRS penalties are now at $270 per form. If the trend continues, they will rise to $280 per form for tax-year 2020. This cost is doubled when considering failure to file and failure to furnish. It would be much easier for partners and clients to ease their burden by asking for help! Medcom offers a wide variety of ACA services, including Penalty Appeal Support and Back Filing. ACA Back Filing for years where forms were not completed correctly or at all is a whole other can of worms. Let Medcom handle this for you! We have an expertly-trained staff and the technology to take ACA filing off employers so they can focus more on the needs of their employees. Partners and brokers no longer have to answer the tough questions; Medcom provides the assistance everyone needs, saves employers money, and provides a good night's sleep for all involved.
Reach out to us to learn more about our solutions, or if you have questions about ACA penalties and appeals.