The Internal Revenue Service (IRS) has issued answers to new frequently asked questions (FAQs) regarding employer penalties under the Affordable Care Act (ACA). These penalties apply to applicable large employers (ALEs), which are employers with 50 or more full-time employees, including full-time equivalent employees.
The first penalty letters will apply to calendar year 2015. For 2015, transition relief applied and only employers with 100 or more employees were subject to the penalties. Other forms of transition relief have the effect of reducing the amount of penalties and the number of employers subject to penalties.
The FAQs indicate that the IRS will begin sending penalty letters in late 2017 and reports are that some employers have begun to receive the letters. The IRS plans to issue Letter 226J if it determines that one or more full-time employee of an ALE received a subsidy (also known as an advance premium tax credit) for at least one month in 2015.
The letter will include:
- A brief explanation of Internal Revenue Code Section 4980H
- A table summarizing the proposed penalties for each month, with an explanation of the table
- Form 14764, which employers can use to respond to the IRS
- Form 14765, which will list the employees, by month, who received a subsidy and whose Form 1095-C did not indicate that the employer was entitled to relief from the penalties
- A description of the action the employer should take if it agrees or disagrees with the proposed penalties
- A description of the actions the IRS will take if the employer does not respond on a timely basis.
Responses to Letter 226J will be due by the date specified in the letter, which will generally be 30 days from the date of the letter. Given mailing time and potential delays getting the letter to the appropriate personnel, employers may have very little time to respond. Employers that have been offering affordable, minimum value coverage to full-time employees should make sure they have all the information necessary to appeal any proposed penalties, including payroll records and documentation regarding the offer of coverage.
Employers that receive Letter 226J should review the letter carefully and determine whether there is a basis to pursue an appeal. For example, an employer using the lookback method may have properly categorized an employee as a variable hour employee and that employee may not have qualified as a full-time employee.
Employers should remember that retaliating against an employee who received a subsidy (thereby triggering a penalty) is prohibited.
No one knows how many employers will receive letters saying they owe a penalty; some estimates are that it will be tens of thousands of employers.
Even though the Trump Administration is opposed to the penalties, the law says that the IRS “shall” enforce the mandate and reports indicate that Treasury Department lawyers could find no grounds for the Secretary to direct the IRS not to send the letters.