The IRS has issued draft instructions for completing the 2016 Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and 2016 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, having previously issued draft Forms 1094-C and 1095-C. The IRS has not yet issued draft instructions for the 2016 Forms 1094-B and 1095-B, which are used by health insurance issuers and by providers of health care coverage that are not large employers, though the forms were previously issued.

The IRS also released proposed regulations (REG-103058-16) addressing a number of issues related to the ACA information reporting requirements under Section 6055. This Alert addresses the changes the draft instructions made to the Forms 1094-C and 1095-C reporting. A separate Tax Alert is forthcoming that addresses the Section 6055 proposed regulations.

The IRS is accepting comments on the draft instructions and Forms 1094-C and 1095-C on the "Comment on Tax Forms and Publications" page of IRS.gov.

Background

Large employers — those with 50 or more full-time employees (including full-time equivalent employees) in the previous year — must use Forms 1094-C and 1095-C to report information required under Sections 6055 and 6056 about the offer of employer-sponsored health care coverage and the employees' enrollment in the coverage. Under Section 6055, an employer that provides a self-insured health care plan must file a return with the IRS and furnish a statement to the employees who enrolled in the coverage with information about the employees' and dependents' coverage and the months they are covered. Under Section 6056, every employer considered a "large employer," together with the other members in the group, must file a return with the IRS and furnish a statement to the employees with information reporting the terms and conditions of the health care coverage offered by the employer during the year. Large employers report the information required under Sections 6055 and 6056 on the Form 1094-C, which is the transmittal form filed with the IRS, and the Form 1095-C, which the statement furnished to employees.

Draft instructions to Forms 1094-C and 1095-C

The instructions to the Forms 1094-C and 1095-C do not vary materially from the instructions to the 2015 forms. However, they provide a number of noteworthy changes and clarifications.

Three changes were made to the 2016 forms:

1. Two new codes were added to Part II, Line 14 — Codes 1J and 1K have been added to report offers of coverage that are "conditional" for an employee's spouse. A conditional offer is an offer of coverage that is subject to one or more reasonable, objective conditions. For example, an offer to cover an employee's spouse only if the spouse is not eligible for coverage under Medicare or a group health plan sponsored by another employer is a "conditional" offer.

2. Certain codes and boxes that were used in the 2015 form have been "reserved" because they related to reporting on transition relief rules that applied in 2015 but have no ongoing applicability in 2016.

3. Clarifying changes have been made to the forms to make them easier to understand. For example, on Form 1095-C, the language, "Do not attach to your tax return. Keep for your records," was inserted under the title of the form to inform the recipient that Form 1095-C should not be submitted with the return. Other minor clarifying changes also were made to both forms.

The instructions also make clarifying points for both the Form 1094-C and the Form 1095-C, as discussed below.

For Form 1094-C, the draft instructions clarify the rules related to the "Authoritative Transmittal" form. The instructions emphasize that each large employer that is a member of an aggregated group should file only one authoritative form. In addition, the aggregated group of employers should not file an authoritative form; this is in opposition to consolidated corporate groups for which a single tax return is filed for the group. Several examples were added to illustrate these points.

For Form 1095-C, the instructions explain that each employee should receive only a single form for the year from a single employing entity, but employees considered employed by more than one entity in an aggregated group of employers in different months in the calendar year should receive a form from each group member. An individual is treated as employed by the member of the group for whom the employee provided the most hours of service in the given month.

The draft instructions provide guidance for completing Form 1095-C for offers under COBRA. Consistent with the guidance first provided last September in the final instructions for the 2015 forms, the draft instructions provide that when an employee continues coverage under COBRA on termination of employment, the employer reports in Part II of Form 1095-C that no offer of coverage was made (line 14, code 1H) and that the employee is not employed in the given month (line 16, code 2A). In that case, however, if the employee is enrolled in self-insured coverage, that enrollment continues to be reported for that former employer and his dependents for the year in Part III of Form 1095-C.

In contrast, the draft instructions provide that when an employee loses coverage due to a reduction in hours worked, but remains employed, the COBRA coverage that is offered to the employee in this situation is reflected on Form 1095-C, Part II.

The draft instructions add new guidance about situations in which an employee was offered coverage for his spouse and dependents but enrolled in self-only coverage. In that case, the instructions provide that, for purposes of Section 4980H, an employer is treated as having made an offer to the employee's dependents for an entire plan year if the employer provided the employee an effective opportunity to enroll the employee's dependents at least once for the plan year, even if the employee declined to enroll the dependents in the coverage and, as a result, the dependents did not receive an offer of COBRA coverage. (The instructions include an example that is inconsistent with this position and concludes that the indicator code 1B (indicating an offer covering solely the employee) should be used when a COBRA offer is made to an employee who loses coverage due to a reduction in hours. We are aware that the IRS has already received comments pointing out this apparent inconsistency and will address it in the final instructions.)

The draft instructions also clarify that the reporting for any former employee who is offered coverage in the post-employment period will be the same as that applicable for COBRA. For example, if an employer provided coverage for retirees or former employees on severance, for months following the month of termination of employment, the employer would report in Part II of the Form 1095-C that no offer of coverage was made (line 14, code 1H) and that the employee is not employed in the given month (line 16, code 2A).

For purposes of reporting enrollment in coverage on Part III of Form 1095-C, the draft instructions provide that the employee should be listed first (i.e., on Line 17, the first line of Part III of Form 1095-C) and any other family members listed on subsequent lines.

The draft instructions add clarity to the ongoing 2015 transition relief applicable to plans maintained on the basis of a non-calendar year plan year. Under a 2015 transition rule, a large employer that offers coverage to at least 70% of its full time employees was not subject to the excise tax for failure to offer coverage to its full-time employees. In 2016, that percentage increases to 95%. The IRS has previously provided, however, that the 70% level applies in 2016 for the calendar months in 2016 that fall within the plan year that began in 2015. What was not clear was how this rule would apply to a large employer maintaining plans using different plan years. The draft instructions provide that the 70% transition rule will continue for that member through the last day of the latest of those plan years ending in 2016.

Implications

The draft instructions provide taxpayers with additional clarity on how to complete the 2016 Forms 1094-C and 1095-C. The explanations related to COBRA offers provide employers with welcome guidance that they will still be treated as offering coverage to dependents even when an employee loses coverage during the year. The additional guidance on the 70% transition rule provides the greatest amount of transition coverage possible for affected employers. Employers and their return preparers should be relieved that the Form 1094-C and 1095-C remain largely unchanged and required the only one system change to accommodate the additional indicator codes for conditional offers to spouses.

———————————————