Recently, the ERISA Industry Committee (ERIC), an association advocating on behalf of large employers that sponsor benefits plans, sent a letter to the IRS. The letter, which addressed the penalty assessment process that has developed under the Affordable Care Act’s (ACA) employer mandate, caught our eye.
ERIC points out, quite rightly in our view, that the IRS has been assessing penalties against employers without making even marginally adequate efforts to determine, based on information within the IRS’s reach, whether the assessments are appropriate. ERIC’s letter urges the IRS to stop assessing penalties until it can adopt a more reasonable and equitable process. To that we add a hearty, “Hear, hear!”
Background on the ACA employer mandate
The ACA includes a mandate that employers with 50 or more full-time employees (or the equivalent) in their controlled group of businesses do the following, or risk tax penalties referred to by the IRS as “employer shared responsibility penalties,” or ESRP:
- Offer “minimum essential coverage” to 95% or more of their ACA FTEs (generally, those averaging at least 30 hours of service per week) and their children to age 26.
- Offer coverage, at least to the FTE alone (i.e., self-only coverage), that is “minimum value” and “affordable.” Affordability is determined by expressing the employee’s share of the cost for self-only coverage as a percentage of household income, W-2 pay, hourly rate of pay times 130 hours, or the federal poverty level.
If an employer fails to meet the first of these requirements, it is assessed a massive penalty, in excess of $2,000 per year for every ACA FTE – even the employees who received such an offer. The penalty is triggered if at least one ACA FTE of the employer receives federally subsidized medical insurance in an ACA marketplace, like HealthCare.gov.
If the employer meets the first obligation but not the second, the penalty is narrower and more contingent. If an ACA FTE doesn’t receive a minimum value and affordable offer, the employer is only penalized with respect to that employee, and only if that employee receives federally subsidized medical insurance in an ACA marketplace.
Lockton comment: Of course, if the employer fails to meet the second obligation with respect to multiple ACA FTEs, that narrower and more contingent penalty can be applied multiple times.
Why the ERIC letter requests suspension of penalty assessments
A sore spot for employers subject to the ACA mandate has been that the marketplaces have been awarding federal subsidies and triggering penalty assessment letters from the IRS against the employers – the assessments come in the form of a “226J letter” – based simply on employees’ representations that they did not receive an adequate offer from the employers, when, in fact, they did.
In addition, the IRS has assessed penalties against employers when part-time employees, and other employees with respect to whom the employers have no obligation to offer coverage, received federal subsidies in a marketplace. That is, the IRS has sometimes assumed the employees were full-time.
Frequently the IRS has assessed these penalties even where the employers’ annual ACA employer mandate filings with the IRS accurately reflected the adequacy of the coverage offer made to employees, or employees’ part-time status for a portion of the year, or even the fact that the employees were not employed or were in a waiting period for a portion of the year.
Lockton comment: These assessments have basically applied a presumption of guilt to the employers and forced the employers to then prove they made adequate offers or that the employees were not full-time or not the employers’ employees.
There does not seem to have been any pre-assessment review by the IRS of the employees’ employment status or household income, or of the employers’ plans or the coverage offers, though even a cursory review of the plans and offers – and the employees’ tax filing information – would indicate that the offers were for affordable, minimum-value coverage.
Therefore, Lockton joins with ERIC in its request to have the ESRP penalty assessments suspended until the IRS is able to determine, based on information readily available to it, whether an assessment is appropriate in the first instance.