Employers that qualify as “applicable large employers” (ALEs) under the Affordable Care Act (ACA) must offer affordable minimum value (MV) health coverage to their full-time employees or risk paying a penalty. The ACA also requires that they file accurate annual information reports about their coverage (Form 1095-C, Employer-Provided Health Insurance Offer and Coverage) so that the government can assess each ALE’s compliance with the offer and affordability provisions of the ACA. ALEs that fail to offer required or affordable coverage to employees are subject to “pay-or-play” penalties, but ALEs are also subject to information reporting penalties if they fail to file the required forms or if they file inaccurate forms.
Information reporting errors can quickly scale up to significant penalty amounts, as they can cost over $300 per erroneous report, and many of the common errors are systemic issues that affect the reports for every employee every year. To protect against these errors, ALEs need to understand some of the most common causes of inaccurate reporting and review their systems to make sure that information about their health care coverage is being tracked effectively and communicated accurately to employees and the federal government.
Miscalculations related to ALE status
The first common area where employers fail to meet ACA reporting rules is the calculation of applicable large employer status. An employer is considered an ALE if it averaged at least 50 full-time employees during the previous calendar year. That calculation should include:
- Full-time employees, which the law defines as those who average at least 30 hours of service per week or 130 hours per calendar month, and
- Full-time equivalent (FTE) employees, which an employer calculates by adding the number of hours of service of all non-full-time employees for the month and dividing by 120.
Employers then add the full-time and FTE numbers to get a monthly total for each month, combine those monthly totals into an annual number, and divide that by 12 to get the average monthly employee number. If that average number is 50 or greater, the employer is an ALE and is subject to the ACA requirements for providing health coverage and filing related information reports.
The most frequent problem with this calculation is a failure on the part of the employer to properly include all part-time employees in the FTE calculation. An employer that meets the employee threshold for ACA compliance without realizing it is at risk for significant penalties as it may be failing the “pay-or-play” tests and failing to file information reports at the same time. To mitigate this risk, employers that have significant numbers of part-time employees in their workforce should work with an advisor to review their average full-time employee count under ACA rules.
Failure to provide Form 1095-C as required
In some cases, an employer may be aware of its ALE status but still fail to meet all of the requirements to file the information returns and provide them to employees. Employers that rely on a third party to prepare and file the Forms 1095-C sometimes find that the service only filed the forms with the government and failed to furnish them to employees. Employers that undergo a merger or acquisition during the year need to be careful to make sure that reporting covers all employees under the combined entity going forward.
Inaccurate coding and calculations in ACA reporting
Employers that meet the ALE threshold and need to comply with the ACA information reporting rules usually choose one of several options to document and report employee health insurance data. For some, the information may flow easily out of a benefits and/or payroll system. Others may rely on an outsourced third-party consultant or a benefits broker/agent.
No matter how an employer generates the information reports, it’s important to understand the critical nature of reviewing the process carefully at the beginning to make sure that elections are recorded accurately and that information flows through to the proper fields on the forms. If the system is set up wrong, the forms will be coded incorrectly from the outset, and each information report produced could be subject to penalties.
For instance, employers that sponsor a self-insured medical plan are subject to different reporting requirements than those that offer a fully insured plan. The rules require the employer to provide plan information that would be reported by the insurance carrier if the business had elected a fully insured option. Failure to understand that distinction can lead to significant inaccuracies on the required forms.
Some employers confuse the amounts used to calculate the affordability of the ALE’s health insurance offering. The ACA assesses the affordability of the coverage that the employer offers only to the employee, not any additional coverage that the employee elects for dependents. If the system picks up the full amount the employee pays for coverage instead of the portion paid for the employed individual, it can skew the results toward a penalty. Systems can also be set up to report per-paycheck premium amounts instead of the monthly amounts required by the ACA, leading to an inaccurate assessment of affordability that can be subject to penalty on review.
Addressing mistakes and omissions in ACA reporting
Despite an employer’s best efforts, mistakes and omissions sometimes occur in connection with ACA reporting. These mistakes and omissions may lead to the assessment of significant penalties by the IRS, but the rules do provide mechanisms to get these penalties abated. For failure-to-file penalties, the first step is to file the forms — regardless of how late they would be. The IRS generally won’t abate penalties for failing to meet an obligation that remains unfulfilled. Plan sponsors that discover they’ve filed mistaken or inaccurate forms can file amended returns and correspond with the IRS to describe the errors and the steps taken to correct them. Employers, like taxpayers generally, find greater success when they discover, report, and amend their own errors than when they’re trying to correct an error the IRS discovered.
Fortunately, the law provides for abatement of penalties when a plan sponsor can establish reasonable cause for the error or omission. An employer must show that the error occurred despite the exercise of reasonable due diligence on its part. The determination of what constitutes reasonable due diligence on the part of a plan sponsor and reasonable cause for an error or omission can rely on a wide variety of relevant factors that may be given different weight depending on an employer’s specific facts and circumstances. Due to the many factors that may be relevant in determining reasonable cause, an employer is well-served to seek experienced professionals to assist in uncovering relevant facts and preparing requests for abatement on the basis of reasonable cause.
Invest in setup and annual review
The takeaway for an ALE subject to the ACA health care reporting requirements is to focus on careful setup of the information reporting systems that translate the company’s health insurance benefits into the reports it furnishes to employees and files with the government. On the front end, make sure all stakeholders are represented. If finance is setting up this process because it’s being treated as a tax form, the employer should also bring in the right HR professionals to make sure that the filings accurately reflect the benefits offered. If an ALE is using a benefits broker or consultant, the employer needs to set aside any assumptions around what it thinks the process will look like and require the provider to answer questions in the setup process that it might not readily understand.
On the back end, employers can’t assume that the outputs are correct without a thorough review of the process. The code combinations and elections on the 1095-C aren’t always intuitive. A reviewer must understand how those codes interact, and which combinations are impermissible. The first thing the IRS will look for when it receives the form is a combination of codes that doesn’t make any sense or are missing altogether. A responsible representative at the ALE needs to work with the resource that generates the reports, whether that person is on staff at the employer or an external consultant, to review a sample of the Forms 1095-C that are generated and understand how the codes relate to the coverage which the employer provides to its employees.
Inaccurate forms can result in significant penalties. ALEs can be subject to fines for failing to provide insurance at all, failing to provide affordable insurance, and failing to file accurate information reports. The best defense against these potential risks is thoughtful participation by all affected parties when designing the system and a careful review of the annual reports by key executives.
