ACA Compliance Bulletin: IRS issues pay or play enforcement guidance

On Nov. 2, 2017, the Internal Revenue Service (IRS) updated its Questions and Answers (Q&As) on theemployer shared responsibility rules under the Affordable Care Act (ACA) to include information onenforcement. Specifically, these Q&As include guidance on:

• How an employer will know that it owes an employer shared responsibility penalty
• Appealing a penalty assessment
• Procedures for paying any penalties owed

The IRS also maintains a website on understanding Letter 226-J, which will be used to inform employersof their potential penalty liability.

Action steps

No penalties have been assessedunder the employer sharedresponsibility rules at this time.However, employers subject tothese rules are still responsible forcompliance. These Q&As indicatethat, for the 2015 calendar year,the IRS plans to issue lettersinforming employers of theirpotential liability for an employershared responsibility penalty, ifany, in late 2017.

Background

The ACA’s employer sharedresponsibility rules requireapplicable large employers (ALEs)to offer affordable, minimum valuehealth coverage to their full-timeemployees, or pay a penalty. Theserules, also known as the “employermandate” or “pay or play” rules,only apply to ALEs, which areemployers with, on average, at least50 full-time employees, includingfull-time equivalent employees,during the preceding calendar year.The employer shared responsibilityrules took effect for most ALEsbeginning on Jan. 1, 2015.

However,some ALEs may have had additionaltime to comply with theserequirements. An ALE may besubject to a penalty only if one or more full-time employees obtainan Exchange subsidy (eitherbecause the ALE does not offerhealth coverage, or offers coveragethat is unaffordable or does notprovide minimum value).Prior to 2017, the IRS has beenunable to identify the employerspotentially subject to an employershared responsibility penaltyor to assess any penalties. TheIRS previously indicated that it expected to begin sending lettersin early 2017, informing ALEs thatfiled Forms 1094-C and 1095-Cof their potential liability for anemployer shared responsibilitypenalty for the 2015 calendar year(with reporting in 2016). However,at this time, no letters have beensent to any ALEs.

Enforcement guidance

The general procedures the IRSwill use to propose and assess theemployer shared responsibilitypenalties are described inLetter 226-J. The IRS plans toissue Letter 226-J to an ALE if itdetermines that, for at least onemonth in the year, one or moreof the ALE’s full-time employeeswas enrolled in a qualified healthplan for which a premium taxcredit was allowed (and the ALEdid not qualify for an affordabilitysafe harbor or other relief forthe employee).

Letter 226-J will include:

• A brief explanation of Section 4980H.
• An employer shared responsibility penalty summary table itemizing the proposed penalty by month and indicating for each month if the liability is under Section 4980H(a) or Section 4980H(b) (or neither).
• An explanation of the employer shared responsibility penalty summary table.
• Form 14764, Employer Shared Responsibility Payment (ESRP) Response, an employer shared responsibility response form.
• Form 14765, Employee Premium Tax Credit (PTC) List, which lists, by month, the ALE’s assessablefull-time employees (individuals who for at leastone month in the year were full-time employees allowed a premium tax credit and for whom the ALE did not qualify for an affordability safe harboror other relief — see instructions for Forms 1094-C and 1095-C, line 16), and the indicator codes, if any, the ALE reported on lines 14 and 16 of each assessable full-time employee’s Form 1095-C.
• A description of the actions the ALE should take if it agrees or disagrees with the proposed employer shared responsibility penalty in Letter 226-J.
• A description of the actions the IRS will take if the ALE does not respond to Letter 226-J on time.

The response to Letter 226-J will be due by theresponse date shown on Letter 226-J, which generallywill be 30 days from the date of Letter 226-J. Letter226-J will contain the name and contact informationof a specific IRS employee that the ALE should contactif the ALE has questions about the letter.

For the 2015 calendar year, the IRSplans to issue Letter 226-J informingALEs of their potential liability foran employer shared responsibilitypenalty, if any, in late 2017.

For purposes of Letter 226-J, the IRS determination ofwhether an ALE may be liable for an employer sharedresponsibility penalty and the amount of the potentialpenalty is based on information reported to the IRSon Forms 1094-C and 1095-C and information aboutfull-time employees of the ALE that were allowed thepremium tax credit.

Appeals

ALEs will have an opportunity to respond to Letter226-J before any employer shared responsibilityliability is assessed and notice and demandfor payment is made. Letter 226-J will provideinstructions for how the ALE should respond inwriting, either agreeing with the proposed employershared responsibility penalty or disagreeing with partor all or the proposed amount.

If the ALE responds to Letter 226-J, the IRS willacknowledge the ALE’s response with an appropriateversion of Letter 227 (a series of five different lettersthat, in general, acknowledge the ALE’s response toLetter 226-J and describe further actions the ALEmay need to take). If, after receipt of Letter 227, theALE disagrees with the proposed or revised employer shared responsibility penalty, the ALE may requesta pre-assessment conference with the IRS Officeof Appeals. The ALE should follow the instructions provided in Letter 227 and Publication 5, Your Appeal Rights and How To Prepare a Protest if You Don’t Agree, for requesting a conference with theIRS Office of Appeals. A conference should berequested in writing by the response date shownon Letter 227, which generally will be 30 days fromthe date of Letter 227.

If the ALE does not respond to either Letter 226-Jor Letter 227, the IRS will assess the amount of theproposed employer shared responsibility penaltyand issue a notice and demand for payment —Notice CP 220J.

Paying a penalty

If, after correspondence between the ALE and the IRS(or a conference with the IRS Office of Appeals), theIRS or IRS Office of Appeals determines that an ALE isliable for an employer shared responsibility penalty,the IRS will assess the employer shared responsibilitypenalty and issue a notice and demand for payment(Notice CP 220J). Notice CP 220J will:

• Include a summary of the employer shared responsibility penalty and reflect any payments made, credits applied, and the balance due, if any.
• Instruct the ALE how to make a payment, if any.

ALEs will not be required to include the employershared responsibility penalty on any tax return thatthey file or make a payment before notice and demandfor payment. For payment options, such as enteringinto an installment agreement, refer to Publication594, The IRS Collection Process.

Please contact us with any questions.