The IRS recently posted updated FAQs describing the Affordable Care Act (ACA) employer shared responsibility excise tax provisions under Section 4980H. The FAQs address for the first time the procedures that the IRS will undertake to notify the employer that it may owe an excise tax payment under Section 4980H and the procedures for the employer to challenge or pay the tax.

Background

Under the ACA, "applicable large employers" (ALEs) are subject to "employer shared responsibility" excise taxes beginning in 2015. Section 4980H generally imposes these employer shared responsibility payments (ESRPs) if an ALE does not offer minimum essential coverage to its full-time employees and any full-time employee purchases coverage through a health insurance exchange (marketplace) and receives a premium tax credit.

Premium tax credits, which are federal subsidies to buy health insurance through an exchange, are provided to individuals under Section 36B to the extent that household income does not exceed 400% of the federal poverty level. An employee (and dependents) cannot obtain a premium tax credit if the employee and dependents are actually covered by a health plan outside of the exchange that meets the requirements for minimum essential coverage (as defined in Section 5000A) (e.g., an employer group health plan). In addition, an employee is not eligible for a premium tax credit if the employee receives an offer of minimum essential coverage from an ALE that meets certain affordability and minimum value standards. Thus, there is a relationship between the ALE's offer of coverage and an employee's ability to obtain a premium tax credit through the exchange.

An ALE may be assessed an excise tax under Section 4980H(a) in the annual amount of $2,000 (as adjusted for cost of living), multiplied by the total number of the ALE's full-time employees to the extent that "minimum essential coverage" (within the meaning of Section 5000A) is not offered to the ALE's full-time employees (and dependents) and at least one full-time employee purchases coverage on a health insurance exchange and receives a premium tax credit. A transition rule in place for 2015 provides that an ALE is treated as satisfying the offer of minimum essential coverage if the offer is made to at least 70% of the ALE's full-time employees. After 2015, the requirement is that the offer must be made to at least 95% of the ALE's full-time employees.

If minimum essential coverage is offered to full-time employees, an excise tax may still be owed under Section 4980H(b) to the extent that any full-time employee is not offered minimum essential coverage that meets an affordability and minimum value standard. Under Section 4980H(b), the excise tax is an annual amount of $3000 (as adjusted for cost of living), multiplied by the number of employees who actually purchase coverage on a health insurance exchange and receive a premium tax credit.

The ESRPs assessed under Section 4980H(a) and (b) will actually be assessed on a month-by-month basis, meaning that, if an employee qualified for a premium tax credit in only one month of the year, the ALE would be assessed one-twelfth of the annual excise tax amounts for the month in which the ALE fails to comply.

IRS updates FAQ on ALE ESRPs

In the updated FAQ, the IRS announced that it plans on sending letters in late 2017 to ALEs notifying them of any potential liability for 2015 ESRPs. Up to this point, the IRS has not taken any enforcement action against ALEs that might be assessed ESRPs. The IRS has identified the new pre-assessment notification letter as Letter 226J. The FAQ indicates that the letter will contain the following information:

— Brief explanation of Section 4980H, the Code provision outlining the obligations for ESRPs

— ESRP summary table itemizing the proposed payment by month and indicating for each month if the liability is under Section 4980H(a), Section 4980H(b) or neither

— Explanation of the ESRP summary table

— ESRP response form, Form 14764, ESRP Response

— Employee PTC list, Form 14765, Employee Premium Tax Credit (PTC) List, which lists by month the ALE's assessable full-time employees (individuals who for at least one month in the year were full-time employees allowed a premium tax credit and for whom the ALE did not qualify for an affordability safe harbor or other relief) and the indicator codes, if any, the ALE reported on lines 14 and 16 of each assessable full-time employee's Form 1095-C

— Description of actions the ALE should take if it agrees or disagrees with the proposed ESRP in Letter 226J

— Description of actions the IRS will take if the ALE does not respond timely to Letter 226J

If an ALE receives a Letter 226J, it is allowed the opportunity to respond to the IRS's finding in the Letter 226J before any liability will be assessed or notice and demand for payment is made by the IRS. Under the FAQ, ALEs will generally only have 30 days to challenge the initial IRS letter before the IRS moves to assess the excise tax. Letter 226J provides instructions for how the ALE should respond in writing, either agreeing with the proposed ESRP or disagreeing with part or all or the proposed amount. The IRS has posted a sample of Letter 226J on its website.

After receiving the ALE's written response, the IRS will respond with Letter 227. If, after receipt of Letter 227, the ALE disagrees with the proposed or revised excise tax, the ALE may request a pre-assessment conference with the IRS Office of Appeals. The ALE will generally have 30 days from the receipt of the Letter 227 to request the conference.

If the ALE does not respond to either Letter 226J or Letter 227, the IRS will assess the amount of the proposed ESRP and issue a notice and demand for payment, Notice CP 220J.

Implications

Many ALEs have delegated the administration and reporting for the ACA requirements to their human resources or employee benefits departments. The issuance of these letters by IRS may be the first time that an ALE's tax department becomes more intimately involved with the ACA reporting and excise tax requirements. We expect that an ALE's tax department and human resources and benefits department will need to work closely to review and timely respond to the Letter 226J. ALEs should ensure that there are processes in place to route the letters to the proper personnel in their organization who are responsible for responding to IRS letters. The 30-day time limit may be a major impediment to formulating an accurate response, given the amount of information that could be contained in that letter. However, we expect the IRS employees listed on the letters will routinely grant extensions on request, especially in this first year of enforcement activity.

The accuracy-related penalties for ALE reporting requirements were waived for 2015 if the ALE made a good faith attempt at filing and the information returns were furnished and filed timely. Therefore, the information provided on the filed Forms 1094-C and 1095-C might not be as accurate or informed as it may be now in the third year of reporting. With the information on the filed returns not necessarily being fully accurate, the review of potential 2015 liability may be more difficult in this first year of assessments.

As mentioned, the initial Section 4980H assessments would be for 2015. Under 2015, an ALE satisfied the 4980H(a) requirement if it offered coverage to at least 70% of its full-time employees. Therefore, the emphasis in the 2015 assessments likely will be heavily weighted on the 4980H(b) excise tax. That said, the assessments for 2016 could follow on the issuance of the 2015 letters, as the IRS has all of the final returns it needs filed by October 15 of the calendar year following the year of assessment. With the higher 95% coverage threshold in place for 2016, there could be increase in the assessment of the much larger full-population-based 4980H(a) ESRP for that year. In 2015, the excise tax under Section 4980H(a) was adjusted to an annual amount of $2,060 (or $173.33 per month) and the excise tax under Section 4980H(b) was adjusted to an annual amount of $3,120 (or $260.00 per month).

The IRS may release supplemental guidance or conduct a webinar on this process. In the meantime, our ACA and tax controversy professionals are studying the particulars of the process and will keep our clients abreast of further developments and details.

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