The deadline to respond is nearing for employers that received the first wave of Letter 226J mailings proposing to assess them with Employer Shared Responsibility Payments (ESRPs) for 2015 under Section 4980H of the Internal Revenue Code of 1986, as added by Section 1511 of the Patient Protection and Affordable Care Act (ACA).
Unless it receives a response to a Letter 226J within 30 days, the Internal Revenue Service (IRS) will conclude that the employer does not disagree with the assessment of an ESRP or the amount of the proposed assessment. Some of the Letters 226J we have seen so far propose ESRPs in the millions and even tens of millions of dollars. Thus, an employer receiving a proposed assessment should be prepared to quickly plan a response and gather all of the data needed to support any objections it may have.
An ESRP Refresher
The ACA created a number of rules and mechanisms designed to increase the percentage of the U.S. population with health insurance. Code Section 4980H(a) created one of those mechanisms, namely, an employer “pay-or-play” mandate. As written, Section 4980H(a) exposes an employer to which it applies (i.e., “an applicable large employer”) to a heavy “assessable payment” if the employer fails to make a timely offer at least annually to each and every one of its full-time employees.
The so-called “‘A’ Penalty” is triggered if at least one of the employer’s full-time employees obtains coverage from an exchange and is allowed a premium tax credit to help cover the cost of that coverage. Regulations under Section 4980H(a) apply a rule of substantial compliance that mitigates the conditions for an A Penalty. An employer is treated as having made an enrollment offer to all of its full-time employees if it made such an offer to at least a stated percentage of those employees (70 percent for 2015; 95 percent for subsequent years).
The ACA also created a number of rules and mechanisms designed to make coverage more affordable and to govern the “value” of coverage available from employers and the marketplace generally. Code Section 4980H(b) created one of those mechanisms, namely an employer “pay or play” mandate. As written, Section 4980H(b) exposes an applicable large employer to a more modest “assessable payment” if the employer makes a timely offer at least annually to all of its full-time employees, but the coverage offered is either unaffordable or fails to provide minimum value.
The so-called “‘B’ Penalty” is triggered by each instance in which a full-time employee declines the substandard coverage, obtains coverage from an ACA exchange, and receives a premium tax credit to help cover the cost of the exchange coverage.
What’s in the Letter 226J?
As the first step in the process to enforce the ESRP requirements, Letter 226J will provide information on a proposed assessment and indicate whether the assessment relates to an “A” Penalty or a “B” Penalty. The Letter 226J will also list the full-time employees who triggered the potential penalty by receiving a federal premium tax credit to buy coverage on an ACA exchange.
What Steps Should You Be Taking?
Employers will want to ensure that they have access to all relevant 2015 enrollment and payroll records. Those employers that used an outside vendor for ACA reporting should verify that the vendor will provide copies of all documents and records if and when needed. Employers should also be on the lookout for Letters 226J, which may be received by a corporate human resources or benefits department—or by others within the company.
How Should You Respond?
An employer that receives a Letter 226J should review all documents to ensure that the IRS has correctly captured the information submitted on the 2015 Forms 1094-C and 1095-C. An employer that finds errors on those forms will want to make needed changes by submitting a Form 14765, Employee Premium Tax Credit Listing. Employers will not need to file amended Forms 1094-C and 1095-C, at least at this initial stage. Employers should also check their 2016 forms to ensure that errors from 2015 were not repeated. Any 2016 errors can be corrected by filing amended forms.
Initial responses are due to the IRS within 30 days of the date listed on a Letter 226J. Employers may request an extension, and may also dispute the proposed ESRP assessment by sending a written response to the IRS. Letter 226J provides detailed instructions on how to respond to any proposed assessment. An employer that agrees with the proposed assessment will want to: (1) sign the enclosed Form 14764, ESRP Response; and (2) remit the payment amount to the IRS within the 30-day period.
Can You Challenge Proposed Assessments?
Yes. To challenge a proposed assessment, an employer should complete the Form 14764, ESRP Response. It should include a signed statement explaining the reason(s) for the disagreement and any supporting documentation, such as the calculation of the adjusted Code Section 4980H assessment and the correction of any errors on the Form 1094-C or 1095-C. The employer will want to make any necessary changes to the Form 14765, Employee Premium Tax Credit Listing. Later in the process, an employer may also request a pre-assessment conference with the IRS Office of Appeals.
In all cases, the employer should respond within the 30-day deadline given in the Letter 226J. A failure to timely respond will trigger a Notice and Demand for payment (Notice CP 220J) by the IRS. Upon the issuance of such notice and demand, the assessment amount will be subject to IRS lien and levy enforcement actions, and interest will begin to accrue on the amount.