ACA good faith reporting standards sunsets this year. The American Rescue Plan has added further complexities. Make sure you are equipped to comply with these ever-shifting employee health care regulations to avoid unnecessary expenses.
When it comes to federal Affordable Care Act (ACA) reporting this year, employers need to understand how the pandemic and a new presidential administration could open them up to increased risk of receiving penalty letters and potential fines from the IRS. The good news is that taking the right proactive steps can reduce that risk.
Let’s take a look at these new challenges and how to meet them head on.
1. Increased Eligibility for Subsidies
The Biden administration’s opening up of marketplace subsidies to more income earners could expose employers to more ACA Penalty B fines.
Since President Joe Biden took office, there has been a renewed focus on the future of the ACA. Biden said he wants to do more than preserve the ACA; he wants to expand it by increasing eligibility for subsidies. The new American Rescue Plan, which he signed into law in March, does just that.
Until now, only individuals who made less than 400 percent of the federal poverty level (FPL) were eligible to receive a subsidy. Now, the American Rescue Plan expands eligibility by eliminating the 400 percent FPL income cap for tax years 2021 and 2022. With the threshold removed, more individuals will qualify for subsidies, resulting in greater risk to employers for failing to offer affordable coverage. In addition, the extension of special enrollment periods on the marketplace that we saw this year may also impact employer penalty risk, as it gives employees more time to enroll.
If your business reduced workforce hours or pay, you may be at an increased risk for ACA Penalty B. Read our Ask the Expert blog for details: https://t.co/2527WYjbNV
— Health e(fx) (@HealthEfx) January 4, 2021
Why is this? Under the original ACA, employers are deemed at risk of incurring a fine (known as Penalty B) when they fail, for whatever reason, to offer affordable health coverage that meets minimum value to eligible employees. Coverage is considered affordable if the employee’s contribution for employee-only (or single) coverage is less than or equal to 9.83 percent of their income. Failure to meet this requirement results in a $4,060 penalty per full-time employee who receives a subsidy when purchasing insurance through a public health care exchange.
When full-time employees receive marketplace subsidies, the IRS will send the employer a 226-J Letter with a list of employees for whom a Penalty B will be assessed unless the employer can demonstrate that an affordable offer was made, in which case the penalty would not apply. Employers that do not meet the offer requirements described above can face tens or hundreds of thousands of dollars in fines. Even for compliant employers, responding to a 226-J Letter can be time-consuming and costly.
2. Sunsetting of the “Good Faith Reporting Standard”
Anticipated discontinuation of this standard could increase IRS scrutiny and lead to stricter enforcement of ACA reporting.
For the past several years, the IRS has been taking in good faith that the information contained in employers’ ACA reporting forms is true and accurate. This “good faith reporting standard” was allowed in order to give employers time to educate themselves about the new reporting requirements and to transition from having no systems in place for collecting and reporting employee health coverage data to the federal government (pre-ACA) to having to collect and report in detail for every coverage-eligible person in their employ.
In late 2020, the IRS announced that it is terminating this transition relief after tax year 2020. What this means for employers is that if they’ve been somewhat complacent about reporting compliance in the past, it’s time to become laser-focused on accuracy, both in the forms sent to employees and files sent to the IRS.
3. Health Benefit Decisions Driven by Staffing Changes
When employers deliberate staffing strategies as the pandemic eases, the health benefit decisions they have made or may make could increase their risk of incurring ACA penalties.
The pandemic-induced reduction of workforce hours also presents increased risk of employers being classified as noncompliant with ACA offer requirements. Coverage for employees whose work hours and income have been reduced may no longer be considered affordable under the ACA. (Remember, a health plan is deemed affordable if the employee’s contribution for single coverage is less than or equal to 9.83 percent of their income.)
Affected employees who turn to a health care exchange to purchase insurance could set up a scenario in which the employer incurs an IRS 226-J penalty.
Adding to the confusion for employers is that “affordability” is calculated differently on the exchanges than it is at the employer level. Employers, following the rules set out for them under the ACA, can leverage safe harbors – the FPL, rate of pay or W2 calculations – to determine whether the coverage they offer each full-time employee is affordable. Safe harbors were established because, as the law is written, the ACA determines affordability based on a taxpayer’s total household income – information that employers frequently don’t have access to. Exchanges, on the other hand, determine affordability on household size and household income – data they collect directly from the individuals who are applying for coverage.
What this means for employers is that there may be a larger subsidy-eligible population than an employer realizes within their workforce, especially for single earner households with larger families – and this subsidy eligible population is the one that puts employers at risk for ACA Penalty B.
5 Steps You Can Take Now to Avoid Penalties in the Future
To increase confidence in your company’s ACA compliance efforts in light of these new challenges, consider the following action items:
1. Correctly Determine Each Employee’s Eligibility for Health Insurance Coverage
To determine whether your organization is required to report means looking at your full-time staff as well as the number of part-time staffers and combining those two groups to determine whether or not the organization qualifies as an Applicable Large Employer. (To correctly count the number of your full-time employees, an employer needs to take into account that, when combined, an employee who works 10 hours and an employee who works 20 hours equates to one full-time employee at 30 hours.)
To avoid potential IRS penalties, an employer must then correctly calculate its number of ACA full-time employees (who work 30 hours per week or 130 hours per month) and use that number to determine whether or not they are meeting the 95-percent offer threshold to avoid the substantial ACA penalty A.
Employers also need to take care that they are populating 1095 forms to accurately reflect types of insurance coverage offers and to whom the offers were made according to hierarchy rules laid out in ACA reporting instructions. Data needs to show whether or not an offer: was of minimum value; whether or not it was made to the employee only, the employee and spouse but not dependents or the employee and dependents; and whether the person was determined full-time under ACA rules at the time the offer was made. Remember that for ACA purposes, full-time status means 30 hours per week worked (or 130 hours per month), not the traditional 40-hour work week, and calculations are based on either a monthly measurement or a look-back measurement methodology.
It’s never been simple to measure the eligibility of employees who work variable or seasonal schedules. COVID-19 has sparked further complexity due to furloughs, reduced hours and pay, leaves, layoffs and more. For example, employees who have been kept on the company payroll but who also have not been working throughout all or a portion of the current national health crisis still must be measured for eligibility during the measurement period. Furthermore, employees who have been laid off or terminated and then rehired within 13 weeks (26 weeks for educational institutions), must be treated as ongoing employees — not new hires — which factors how measurement occurs. Conversely, employees who have not been credited with any hours for more than 13 weeks (26 weeks for educational institutions) may be treated as new hires by the employer.
2. Validate Data and Correct Anomalies
Human resource information system (HRIS) platforms are a wonderful advancement for HR management. However, the data they generate is only as good as the information entered. As the pandemic has caused changes in the status of employment for millions of workers, their employers need to update these changes in their HRIS platforms. The challenge lies in that, oftentimes, updating information for ACA reporting purposes falls off the priority list for many HR teams. Teams may also struggle with systems that don’t quite meet their needs in special circumstances like a pandemic – resulting in data that’s fragmented, missing and/or confusing.
For example, if an employer were to code an individual as a terminated employee, even though that person was actually furloughed and still on the payroll, the resulting ACA report will reflect inaccurate data and may ultimately result in IRS penalties. Employers should validate all of their data before their ACA reports are submitted. Double- and triple-check that worked and credited hours are counted accurately.
3. Review Your Company’s Approach to ACA Affordability Requirements
Employers may use one or more safe harbor protections to ensure the employee-required contribution is no more than the affordability threshold for a given year. Keep in mind that safe harbor protections can be applied differently to various populations and may need to be re-evaluated when a population has worked substantially fewer hours or experienced a reduction in pay.
Federal Poverty Level (FPL) Safe Harbor
The FPL safe harbor uses the annual federal poverty line to establish affordability. If premiums are not more than 9.83 percent of the 100 percent FPL rate for the current plan year (i.e., $12,760 for 2021 calendar year plans and $12,880 for plans starting after July 12, 2021), coverage is affordable. Note: there are different FPLs for Alaska and Hawaii. Because the FPL is established each year by the federal government, the FPL safe harbor method does not require any additional data about your employees and their earnings, making affordability easy to calculate. However, it’s important to consider that using FPL as your safe harbor may not always be a cost-effective solution in comparison to using rate of pay or W-2.
Rate of Pay Safe Harbor
The rate of pay safe harbor uses an employee’s hourly rate of pay or monthly salary to establish affordability. For employee groups that benefit from regular overtime pay, rate of pay safe harbor may not be the most beneficial option for the employer. For salaried employees, premiums may be considered affordable if not more than 9.83 percent of their monthly salary (based on their rate of pay at coverage period start), provided they have had no reductions in pay below their wages at the beginning of their coverage period. For hourly employees, premiums may be no more than 9.83 percent of the monthly rate of pay (calculated using the hourly rate of pay for the month or the hourly rate of pay at the beginning of the coverage period multiplied by 130 hours, whichever is lower).
Form W-2, Box 1 Wages Safe Harbor
In this case, coverage is considered affordable if premiums are not more than 9.83 percent of an employee’s wage (Box 1 on their W-2 form). Keep in mind that the Box 1 figure is the income reduced by all pre-tax deductions (for example 401(k), HSA and benefit contributions). For the W-2 safe harbor to apply, coverage must be affordable for all the months the employee is eligible, and adjustments must be made for partial year offers of coverage.
4. Comply with State Individual Mandate Employer Reporting Requirements and Be Sure to Follow Privacy Rules
While the federal individual mandate penalty has been reduced to $0, the mandate lives on in several states, including California, Rhode Island, New Jersey, Massachusetts and the District of Columbia. These state-based mandates offer new challenges and complexity for employers. Where once companies had a single mandate to follow, they now are required to adhere to each state-based mandate where their employees reside. This can give rise to potentially costly misconceptions and errors.
For example, one misconception is that the employer’s location or service area dictates which mandates apply, when in reality individual state mandate requirements are applied based upon the state(s) in which your employees live. Another common misconception is that employers can send their entire ACA filing to the state. This could put the employer at risk of violating privacy laws, as each company must be especially mindful that the information they submit is applicable to that state and only that state’s residents.
5. Communicate with Co-Workers
It may seem too simple to even mention, but cross-departmental communication can greatly reduce your organization’s ACA noncompliance risk profile. In today’s world of remote working, it’s not unusual for cross-departmental communication to take a back seat to the streamlined efficiencies of siloed work processes. However, any efficiencies that practice brings to the table can come at the cost of million-dollar noncompliance penalties.
There are many scenarios in which the straightforward act of communication could greatly reduce the risk of paying potentially unnecessary or increased IRS fines. To name just a few:
- The benefits professional who was in charge of filing ACA data leaves the company and no one else was trained to handle the obligation.
- A 226-J Letter ends up in the inbox of, say, the tax or finance department (and is subsequently ignored) instead of the benefits department (which usually is assigned ACA compliance responsibilities).
- Whomever opens the 226-J notice assumes the assessed penalty is accurate and starts the payment process without digging into details as to whether the company actually owes the assessment or merely needs to provide updated data in response to the 226-J letter.
We’ve seen these instances happen, and we encourage large employers to share as much information as possible throughout their accounts payable, finance and/or tax departments regarding the ACA reporting process. This includes what information is filed with the IRS and why, along with deadlines the IRS sets for requesting extensions and correcting errors.
Complying with ACA reporting obligations can be complex, confusing and time consuming, especially as new rules and regulations come into play during the largest workplace upheaval in recent history. It’s important for employers to be informed about ACA, tax and legal solutions so they don’t incur penalties or end up incurring unnecessary costs.