December 11, 2017 | Benefits Management | Posted by Ascentis Thought Leadership
Employers May Receive IRS Letter 226J for ESRP Penalties
As you may have read recently, the IRS began mailing notices of proposed Employer Shared Responsibility Payment (“ESRP”) assessments to employers in November 2017, for tax year 2015 – the very first year employers filed forms 1095-c/1094-c. These letters are the result of computer matching program audits requiring no IRS agent intervention. In other words, the IRS has the capacity to send out tens of thousands of these notices daily, with these mailings expected to continue at least through the end of 2018.
The notice an employer would receive is called Letter 226J, and a sample can be found here. It includes a proposed total dollar assessment, a detailed calculation basis for that assessment (by employee) and a form the employer can use to respond, either disputing or agreeing to the IRS’s calculations, within a 30-day maximum time period. These letters relate to ESRPs assessed for the first year of required filings and the transition rules that were in effect for 2015 ONLY and the ESRP penalty amounts are indexed for medical inflation so the amounts change annually.
What are some of the penalties that employers can see imposed as a result of these letters?
Section 4980H(a) Penalties (the “Pay” Penalty in “Pay or Play”)
If an employer chooses not to offer health insurance to at least 95% of their full-time employees, this penalty applies, but an employer’s first 30 violations are penalty-free. For 2015 ONLY, this minimum of 95% employee full-time coverage dropped to a minimum of 70% full-time employee coverage, and the number of penalty-free violations increased from 30 to 80. The Section 4980H(a) Penalties apply to all full-time employees (except for the violation exclusion of 30 or 80) if even ONE employee buys health insurance through an Exchange AND received a Premium Tax Credit as part of their coverage for the month in question. The penalty for 2015 was $173.33 per month, and the IRS assesses each month of the year as a separate evaluation period.
Example: Adams Corporation had 110 full-time employees each month in 2015. They chose to “pay” rather than “play” for this first year of Employer Mandate reporting. Because they have to have offered coverage to 70% of full-timers, they had to offer coverage to 77 employees to avoid penalties. One full-time employee, Susan Spoiler, bought health insurance from the Exchange and, based on her family income, qualified for a Premium Tax Credit. Therefore ESRP penalties apply to Adams’ entire full-time population. But their first 80 violations in 2015 are penalty-free, so Adams Corp’s penalty is:
110 – 80 = 30 employees. 30 employees at $173.33 per month, times 12 months = $62,400.00
Section 4980H(b) Penalties (the “Play” Penalty in “Pay or Play”)
If an employer chooses to offer health insurance to at least 95% of their full-time employees, but the coverage fails to meet specific minimum essential coverage, minimum value and/or affordability standards, this penalty applies, but is only assessed on those full-time employees who obtain Exchange coverage and receive a Premium Tax Credit. The penalty for 2015 was $260.00 per month, and the IRS assesses each month of the year as a separate evaluation period.
Example: Beta Corporation had 150 full-time employees each month in 2015. They chose to “play” rather than “pay” for this first year of Employer Mandate reporting. They offered ALL full-time employees health care coverage that met Minimum Essential Coverage and Minimum Value standards, and although they thought they were keeping the premiums “affordable” under the Monthly Rate of Pay safe harbor, they discovered through their 1095-c reporting that the rate of pay of 10 employees as of the first day of the plan year failed to meet affordability standards, as reported on Line 15. Of these 10 employees, six declined the coverage Beta offered and went to their state/federal Exchange and purchased coverage. Of these six, four qualified for, and received, a Premium Tax Credit to reduce their cost of coverage for the entire year. Therefore ESRP penalties apply to four of Beta’s full-time employees. Their penalty is:
4 * 12 = 48 penalty assessment periods. 48 penalty assessment periods at $260.00 per = $12,480.00
Could Your IRS Notice be Lost in the Mail(room)?
Benefits advisory consultants are reporting that, despite the fact that the 1094-c form header required all employers to identify payer details like FEIN, Payer Name, Contact Address, and Contact Individual Name, the IRS is not picking up the contact name, as reported of form 1094-c, when addressing the Letter 226J to an employer. If this continues, employers may lose valuable time against the strict 30-day response window imposed by the IRS to dispute the assessment, if that Letter gets mis-routed within an organization. Unless an employer responds (ESRP response) within 30 days of receipt of this Letter, a Notice 220J will be sent as a formal Notice and Demand for Payment. If the employer does send an ESRP response letter, they can expect a letter 227 in reply from the IRS. So be on the lookout for your notice; you’ll want every one of those 30 days in the allotted response period to verify the IRS’s calculations.
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