IRS to Send Out Employer Mandate Penalty Notices in Late 2017

Practical Law Legal Update w-011-3001 (Approx. 6 pages)

IRS to Send Out Employer Mandate Penalty Notices in Late 2017

by Practical Law Employee Benefits & Executive Compensation

Employer Mandate Penalty Notices to Be Sent in Late 2017

The IRS has indicated that it will send out Letter 226Js in the remaining months of 2017 regarding potential employer mandate penalties for the 2015 calendar year.

Employer Mandate Penalties Under the ACA

Employers may be subject to two types of employer mandate penalties under the ACA. First, under Section 4980H(a) of the Internal Revenue Code (Code), an employer is subject to penalties if:

It fails to offer full-time employees and their dependents an opportunity to enroll in minimum essential coverage (MEC) under an employer-sponsored plan.
Any full-time employee is certified to receive a premium tax credit (PTC) for the ACA health insurance exchanges.

(26 U.S.C. § 4980H(a); see Practice Note, Employer Mandate Under the ACA: Determining Full-Time Employees for Employer Penalties and Article, Health Insurance Exchange and Related Requirements Under the ACA).

Second, under Code Section 4980H(b), an employer is subject to penalties if:

It offers full-time employees and their dependents the opportunity to enroll in MEC under an employer-sponsored plan.
One or more full-time employees is certified to receive a PTC because the employer's coverage is unaffordable or does not provide minimum value.

(26 U.S.C. § 4980H(b); see Practice Note, Employer Mandate Under the ACA: Overview: Two Types of Employer Mandate Penalties.)

The employer is not subject to penalties under Section 4980H(b) if it offers MEC that provides minimum value and an employee receives a PTC for a time when the coverage is determined to be affordable under one of the following three safe harbors:

Form W-2 safe harbor.
Rate of pay safe harbor.
Federal poverty line safe harbor.

(For more information on the affordability safe harbors, see Practice Note, Employer Mandate Under the ACA: Overview: Affordability Requirement and Safe Harbors.)

Content of IRS Letter 226Js

The IRS intends to issue Letter 226Js to large employers if it determines that:

For at least one month in the year, one or more of an employer's full-time employees was enrolled in a qualified health plan (QHP) for which a PTC was allowed.
The large employer did not qualify for an affordability safe harbor or other relief for the employee.

When deciding if an employer will receive Letter 226J, the IRS will consider information:

That the employer reports to the IRS on Forms 1095-C and 1094-C (see Practice Notes, ACA Information Reporting: Forms 1095-C and 1094-C (Overview) and ACA Information Reporting: Forms 1095-C and 1094-C Line Instructions).
About an employer's full-time employees who were allowed PTCs.

Letter 226J will contain the following information:

A general explanation of the ACA employer mandate (26 U.S.C. § 4980H).
A "payment summary table" that:
- itemizes the proposed employer mandate penalties by month; and
- indicates whether the penalty is being imposed under Section 4980H(a), 4980H(b), or neither.
An explanation of the penalty payments table.
An employer response form: Form 14764 (ESRP Response).
A form (Form 14765 (Employee Premium Tax Credit (PTC) List)) that:
- lists by month the employer's full-time employees who received a PTC and for whom no affordability safe harbor applied; and
- specifies any indicator codes the employer reported on Lines 14 and 16 of the employees' Forms 1095-C (see Practice Note, ACA Information Reporting: Forms 1095-C and 1094-C Line Instructions: Part II, Lines 14-16: Employee Offer of Coverage).
Actions the employer should take if it agrees or disagrees with the proposed penalty.
Actions the IRS will take if the employer fails to timely respond to the Letter 226J.
Contact information for an IRS employee the employer may contact with questions about Letter 226J.
The date by which the employer must respond to the proposed penalty (generally 30 days from the date of Letter 226J).

Letter 226J also will contain instructions for how the employer should respond in writing, either:

Agreeing with the proposed employer mandate penalty.
Disagreeing with part or all or the proposed amount.

The IRS's determination of whether an employer may be liable for employer mandate penalties (and the penalty amount) are based on information:

Reported to the IRS on Forms 1095-C and 1094-C.
About the employer's full-time employees who were allowed a PTC.

Employer Response: IRS Letter 227 and Pre-Assessment Conferences

An employer that receives Letter 226J can respond to the proposed penalty before the IRS assesses the penalty and demands payment. An employer that responds to Letter 226J will receive a follow-up letter (Letter 227) that acknowledges the IRS's receipt of the employer's response and identifies any other steps the employer should take. According to the IRS, there are five different versions of Letter 227.

After receiving Letter 227, an employer that disagrees with the proposed penalty may request a pre-assessment conference with the IRS Office of Appeals before the penalty is assessed. Employer conference requests are governed by instructions contained in:

Letter 227 itself.
IRS Publication 5 (Your Appeal Rights and How to Prepare a Protest If You Don't Agree).

Employer conference requests must be submitted in writing by the date specified in Letter 227 (generally 30 days from the date of Letter 227).

If an employer does not respond to Letter 226J or the follow-up letter, the IRS will assess the proposed penalty and demand payment (Notice CP 220J).

Paying Employer Mandate Penalties

In some cases, the IRS may conclude – after corresponding with an employer or holding a pre-assessment conference – that the employer is nonetheless liable for employer mandate penalties. When this occurs, the IRS assesses the penalty and demands payment using Notice CP 220J, which will:

Include a summary of the employer mandate penalty.
Reflect any payments made, credits applied, and the balance due.
Instruct the ALE how to make payment.

Large employers need not:

Include the penalty payment on any tax return they file.
Make payment before notice and demand for payment.

Employer payment options (for example, installment payments) are addressed in IRS Publication 594 (The IRS Collection Process).

Practical Impact

The IRS's expanded procedures regarding employer mandate penalties and payments suggest that Service is ramping up enforcement and that noncompliant employers could begin receiving Letter 226Js in the coming weeks. Time will be of the essence for these employers, particularly given the short timeframe within which a response to Letter 226J is due. An employer that must prepare a response will need to have available its 2015 records concerning employee enrollment and ACA information reporting.

IRS to Send Out Employer Mandate Penalty Notices in Late 2017 | Practical Law