HB Counsel Client Alert: “ACA Still in Effect: Affordability Shake-Up for 2020 and Timely Reporting to Avoid Penalties”
With the constitutionality of the Affordable Care Act (“ACA”) being called into question by the courts, it is important to remember the ACA is currently still the law of the land. Applicable Large Employers (“ALEs”), defined by the ACA as employers employing 50 or more full-time employees, must continue offering certain group health plan coverage and complete annual reporting, to avoid incurring nondeductible penalties from the Internal Revenue Service (“IRS”). The IRS is aggressively assessing penalties against ALEs for failure to offer coverage and failure to timely file mandated reporting. This article provides an update for employers in determining whether group health plan coverage is affordable for 2020 plan years and a reminder to timely file the ACA mandated reporting for 2019.
Background on Affordability
The ACA requires that ALEs offer “affordable” minimum essential health coverage that meets minimum value to full time employees and their dependents, or face nondeductible penalties from the IRS. The affordability standard is the highest percentage of household income an employee can be required to pay for employee-only monthly plan premiums, based on the least-expensive employer-sponsored group health plan that provides minimum essential coverage.
This limit on health plan costs as a percentage of an employees’ income is adjusted by the IRS annually.
- IRS Lowers 2020 Affordability Threshold
On July 22nd, the IRS updated the 2020 Employer Shared Responsibility affordability threshold to 9.78 percent.
It is important to note this is an actual decrease from 9.86 percent in 2019.
As a result, some employers may have to reduce the employee responsibility for employee-only coverage in order to keep their plan affordable.
The adjusted percentage applies on a plan-year basis, not on a calendar-year basis. Thus, calendar-year plans will need to use the 9.78 percent threshold in determining affordability for plans beginning January 1, 2020.
Non calendar-year plans should continue to use 9.86 percent to determine affordability in 2020 until their new plan year begins.
- Affordability Safe Harbors
Because employers have no way of knowing what the total household income for each of their employees is, there are three affordability safe harbors employers may use to ensure that they offer an “affordable” plan to their employees. The affordability safe harbors are as follows:
- Box 1 W-2 Income.
This safe harbor is based on the employee’s W-2 wages as reported in Box 1.
- Rate of Pay.
This safe harbor is calculated by taking the employee’s hourly wage rate (as of the first day of the plan year) and multiplying it by 130 hours per month.
- Federal Poverty Level (“FPL”).
This safe harbor is determined by using the individual FPL as of six months prior to the beginning of the plan year (this is because the FPL isn’t released until January or February for a given year).
Many employers prefer to use the FPL safe harbor to set the maximum employee contributions for employee-only coverage because it guarantees affordability with minimal administrative burden, and it simplifies the ACA reporting process. The FPL safe harbor does not rely upon the income of the employee. Whereas with the W-2 and Rate of Pay safe harbors, a calculation must be done based on what each employee earns.
Note that non calendar-year plans will not be able to calculate the FPL safe harbor contribution limit for plan years beginning after January 1, 2020, until the Department of Health and Human Services issues the 2020 FPL guidelines in January or February. Therefore, the maximum monthly premium contribution that meets the FPL safe harbor will be 9.86 percent of the prior year’s FPL ($12,490) divided by 12, or $101.79.
Background on ACA Reporting Requirements
Under the ACA, ALEs are required annually to file Forms 1094-C and 1095-C with the IRS for each full-time employee for the prior calendar year. These forms show for what months an eligible full-time employee was offered health coverage, whether it met minimum value, whether the employee was enrolled in the health coverage, and what safe harbor the employer used to determine affordability. In addition to filing these forms with the IRS, ALEs must furnish a Form 1095-C to each of their full-time employees.
The reason behind the reporting requirement is two-fold. One reason is to ensure that ALEs are offering ACA compliant health coverage to their full-time employees. The second is to make sure that individuals obtaining premium tax credits aren’t also receiving disqualifying employer-sponsored health coverage. Therefore, the IRS uses the information reported on the forms, coupled with information about full-time employees who received a premium tax credit, to determine an ALEs’ potential liability under Code Section 4980H.
- ACA Reporting Deadlines
- January 31, 2020
Deadline for ALEs to provide employees with Form 1095-C. Form 1095-C provides information on health coverage offered to employees in 2019.
- February 28, 2020 – Paper Filing Deadline
Deadline for ALEs’ paper submissions of Forms 1094-C and copies of Forms 1095-Cs to the IRS.
- March 31, 2020 – Electronic Filing Deadline
Deadline for ALEs’ electronic submissions of Forms 1094-C and copies of the Forms 1095-C to the IRS. Electronic filing is required for employers with more than 250 1095-Cs).
- Penalty Assessment
The IRS is aggressively assessing and pursing penalties against ALEs who fail to comply with the ACA reporting requirements. Recently the IRS has issued Notice 972CG to ALEs who failed to timely comply with the 2017 reporting requirements. Employers must respond to Notice 972CG within sixty (60) days or the IRS will assess the proposed penalty against the ALEs. As explained below, the penalties associated with reporting failures can be very steep.
Failure to File
Under Code Section 6721, failure to file correct information returns includes: (1) any failure to file an information return on or before the required filing date, and (2) any failure to include all of the information required to be shown on the return or including incorrect information on the return.
The penalty for failure to file is generally $250 for each return for which the failure occurs. The total amount imposed for all such failure to file violations during a given calendar year is not to exceed $3,000,000.
Failure to Furnish
Under Code Section 6722, failure to furnish correct payee statements includes: (1) any failure to furnish a payee statement on or before the date required to whom the statement is required to be furnished, and (2) any failure to include all of the information required to be shown on the given payee statement or including incorrect information on the statement.
The penalty for failure to furnish is generally $250 for each statement for which a failure occurs. The total amount imposed for all failure to furnish violations during a given calendar year is not to exceed $3,000,000.
Additionally, there are special rules applicable that increase the per-statement penalty if there is an intentional disregard for the requirement to file or furnish a report.
In order to avoid any sort of penalty assessment, ALEs must ensure that they are in compliance with the ACA by making an affordable offer of minimum essential coverage that meets minimum value, as well as meeting their reporting obligations to the IRS. With the upcoming reporting process for 2019 on the horizon, it is time to begin gathering pertinent data to complete the applicable forms.
It is important to closely monitor any correspondence you, or any of your controlled group members receive from the IRS during the coming months for any penalty assessments made on prior reporting years. Employers receiving such correspondence should contact legal counsel for assistance in preparing a response to the IRS.
The content herein is provided for educational and informational purposes only and does not contain legal or tax advice. Please contact our office if you have any questions about ACA compliance.
Dated: October 24, 2019