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IRS Employer Mandate

The IRS has alarmed many employers over the last few years by sending 226-J letters assessing potential penalties for alleged violations of the employer mandate under the Affordable Care Act (ACA). While in most cases the employers have been able to dodge those penalties by convincing the IRS that the employer had satisfied the mandate but had merely misreported that fact to the IRS, a Treasury Department audit reports wants the IRS to become less forgiving of those errors in the future.

The IRS’s proposed penalty assessments were based not on IRS audits of employer practices, but simply on the basis of annual ACA employer mandate reporting forms filed by the employers, most notably the Form 1094-C. In almost every case, the employer had incorrectly reported to the IRS that it had either failed to offer coverage to at least 95% of its ACA full-time employees, or failed to offer one or more such employees coverage considered “affordable” under the ACA.

Lockton comment: Employers who fail to meet the ACA employer mandate’s 95% test trigger massive penalties (more than $2,500 annually for nearly every ACA full-time employee of the employer, even those employees who received an offer of coverage). We’ve referred to this as the “nuclear penalty.” Employers who meet the 95% test but fail to offer “affordable” coverage to one or more ACA full-time employees risk what we’ve called the “needle penalty,” a fine of more than $3,800 annually for each such employee who is not enrolled in group coverage and obtains federally subsidized coverage in an ACA marketplace.

Despite receiving proposed penalty assessments from the IRS, most employers have been able to convince the IRS that the employer did, in fact, comply with the employer mandate, but simply failed to accurately report that fact. The IRS generally has agreed, once the employer shared the correct information. Further, and just as relevantly, the IRS also has not rigorously pursued employer penalties for filing incorrect reports with the agency. So, the crisis was averted! Huzzah!

Nevertheless, Lockton and other advisors have been telling employers that the IRS is likely to lose patience at some point with incorrect reporting and not be quite so willing to abate penalties that are assessed, including penalties for inaccurately reporting information to the IRS. It appears that the day of reckoning for employers might be getting closer.

Treasury Inspector General finds that IRS is not properly assessing ACA penalties

The Treasury Inspector General for Tax Administration (TIGTA) recently reported that, due to the IRS’s leniency related to ACA employer mandate compliance and reporting, penalty collections under the ACA for violations of the mandate have been a fraction of what was expected at the time of the ACA passage.

According to TIGTA “[t]he Congressional Budget Office’s (CBO) Joint Committee on Taxation estimated revenues from [employer mandate] penalties would be $167 billion for the 10-year period starting in Fiscal Year 2016, including $9 billion in Fiscal Year 2016, $13 billion in Fiscal Year 2017, and $15 billion in Fiscal Year 2018. Using the current [employer mandate] assessment rates, we forecast that the IRS will collect nearly $8 billion for the entire 10-year period [italics added].” That is less than 5% of what the CBO estimated.

Unfortunately for employers, rather than ascribing that deficit to poor prognostication skills on the part of the CBO, TIGTA ascribed that disparity to deficiencies – too soft gloved an approach – in the IRS assessment and collection process.

The audit found that in its sample group the IRS proposed to assess penalties, in the aggregate, of more than $10 billion in 2015 and more than $6 billion in 2016, but the actual penalty assessments amounted to merely $259 million in 2015 and $490 million in 2016, or approximately 3% and 7%, respectively, of the proposed assessments.

The reason for this discrepancy, as we noted above, was that in a very large group of cases the employers simply reported their medical plan coverage inaccurately. For example, they had satisfied the employer mandate’s 95% test but incorrectly noted on their reporting forms (Part III of Form 1094-C) that they had not.

Those errors were more or less understandable in the early years of employer mandate reporting. Time frames were tight, employers and vendors were learning the rules, and the rules were quite complex. Understanding that, the IRS has provided, through the 2019 reporting year at any rate, that it would require merely a “good faith” effort in the reporting process.

While employers and their advisors have appreciated that approach, the TIGTA auditors do not. The audit report recommended that the IRS do more to collect penalties, even from employers who may have complied with the mandate, made a good faith effort to file their reports accurately, but nevertheless filed inaccurate reports.

The audit report made available to the public included redactions, so its specific recommendations to the IRS were not disclosed, but it implied that the IRS should at least impose penalties on employers for filing inaccurate reports. Most employers will be heartened to note that the IRS disagreed with that finding, although the full rationale was also redacted.


The IRS continues to provide employers with flexibility for avoiding penalty assessments under the employer mandate, where the employer satisfied the mandate but filed its reports with errors. However, as pressure on the IRS continues to rise to begin collecting penalties, and with the federal government staring at ever larger budget deficits, at some point the IRS might cave to the TIGTA audit report recommendation. Perhaps the IRS will reconsider its position when it begins issuing the 226-J letters for 2018 later this year. We hope not.

All of this underscores what we’ve been preaching for years now: Don’t hit the “submit” button on your ACA reports without double-checking the accuracy of the information on those forms, particularly the 1094-C, Part III, column (a).