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The trade bill signed into law this week included provisions steeply increasing the penalties related to employers’ Affordable Care Act (ACA) reporting (e.g., reporting required to be done on Forms 1094-C and 1095-C).

The bill also reinstated the trade-related Health Coverage Tax Credit (the “HCTC”), which had expired on Dec. 31, 2013. We previously thought the HCTC’s 2013 demise was permanent. Like an insufficiently dismembered zombie, however, it is once again active. Moreover, it’s slated to remain available through the end of 2019.

Lockton Comment: The HCTC is a seldom-encountered health insurance subsidy program entirely different from the subsidies available through the insurance exchanges under the Affordable Care Act. The interaction of the HCTC with the exchange subsidies and COBRA administration is discussed below.

The High Cost of Noncompliance Keeps Going Up

Employers probably didn’t need an additional incentive for doing their best to comply with the ACA reporting requirements (most employers will complete, provide and file Forms 1094-C and 1095-C for this purpose). But just in case an additional incentive was needed, the trade bill made steep increases in the penalties for reporting failures. These increased penalties also apply to other information returns and filings, such as W-2s, and are effective for reporting required to be filed or furnished after 2015. For example, the increased penalties would apply to the first year’s filings under the ACA, which relate to 2015, but are due in early 2016.

  • The general penalty for failure to file a required information return with the IRS (which is subject to reduction, waiver or increase for various reasons) will increase from $100 per return to $250 per return.
  • The cap on the total amount of penalties for such failures during a calendar year will increase from $1,500,000 to $3,000,000.
  • If a failure relates to both an information return (e.g., a Form 1095-C required to be filed with the IRS) and a payee statement (e.g., that same Form 1095-C required to be furnished to the individual), these penalties are doubled.
  • If a failure is caused by intentional disregard, the new $250 penalty noted above is doubled to $500 for each failure, and no cap applies to limit the amount of penalties that can be applied with respect to that calendar year.

As you consider these increases, keep in mind that these do not affect the IRS’s enforcement policy for the first year of ACA filing. Specifically, the IRS will not penalize employers “that can show they make good faith efforts to comply with the [ACA] reporting requirements.” So, we still have the “good faith efforts” standard, but the penalties that will apply if that standard is not met are much more severe.

What are good faith efforts? If the employer attempts to complete the forms, but the information reported is incorrect or incomplete, that reporting failure may be excused under the IRS enforcement policy. If, however, the employer does not file or provide a required form by the deadline, it seems that the good faith standard would not apply.

Remember the HCTC

The HCTC is a tax credit available to certain workers who lose their jobs due to foreign competition. For those who qualify, it covers 72.5 percent of eligible healthcare costs. Since most employers have absolutely no compliance issues related to the HCTC, many benefits professionals have never encountered it.

The HCTC sometimes affects employers’ health plans because COBRA coverage is one type of coverage for which a qualifying individual can receive the HCTC. Those effects might include:

  • Unless the employer is virtually certain that none of its employees will become eligible for the HCTC, it should include information regarding the HCTC in the COBRA election notices it provides.
  • In some cases, a former employee who was offered COBRA following his trade-related termination of employment but did not elect it must be allowed a second opportunity to elect COBRA upon becoming eligible for the HCTC.
  • An individual who qualifies for the HCTC may receive it by paying premiums for COBRA or other eligible coverage and then claiming the HCTC with respect to those payments on his or her individual tax return. Such employees may ask the former employer or the plan for documents showing their premium payments.
  • Alternatively, if the plan providing the eligible COBRA coverage elects to participate in the “HCTC Program” (there’s no requirement for the plan to do so), the federal government will provide the HCTC by paying part of the qualifying individual’s health coverage premiums as they come due.
  • Unless the plan has elected to participate in the HCTC program, the HCTC seldom affects day-to-day COBRA administration under employer plans.

It’s All Coming Back…With a Few Tweaks

Under the HCTC as reinstated,all of the COBRA interactions noted above remain the same. Because there have been a number of changes in other laws, however, employers’ compliance concerns in connection with the HCTC have also changed since it was last in effect.

  • The ACA now prohibits all preexisting condition exclusions and limitations, so a previous HCTC rule bridging 63- day or longer breaks in creditable coverage no longer applies.
  • HCTC rules requiring that employers provide extended periods of COBRA coverage to certain HCTC recipients were not extended beyond their Dec. 31, 2013, expiration date.
  • A new provision explains that a qualifying individual cannot receive the HCTC with respect to coverage purchased through an insurance exchange. It also explains the adjustments that an individual will make on his tax return if he receives the HCTC and also receives a subsidy through an insurance exchange.

With the 2014 advent of federally subsidized health insurance through the insurance exchanges, we thought that the HCTC might have exited permanently at its Dec. 31, 2013 expiration. Apparently, both the HCTC and the exchange subsidy are needed because they function differently (for example, the HCTC is available regardless of income and there is no employer penalty related to an individual qualifying for the HCTC).