Gathering, organizing and ensuring data consistency, particularly among disparate databases, can be challenging for organizations that are required to submit to the IRS employer reporting under the Affordable Care Act mandates.
The deadlines for filing ACA information returns with the IRS for the 2015 and 2016 tax years have passed. Hopefully, your clients who employ more than 50 or more full-time or full-time-equivalent employees, classified as “applicable large employers,” or ALEs, are among those who filed the information returns on time.
If not, they could be facing significant financial penalties for not filing, as well as for not complying with the ACA requirement to offer minimum essential coverage to 95 percent of their full-time employees and their dependents, demonstrating that the coverage for the employee meets the minimum value and is affordable. (Of course, that's assuming Congress doesn't repeal the Affordable Care Act along with its various penalties.)
A recent industry report estimated that ALEs could face up to $31 billion in ACA penalties for the 2016 tax reporting period alone for noncompliance with ACA requirements. These penalties include the Section 4980H penalties and Sections 6721 and 6722 penalties.
We are now over halfway through the 2017 tax year, and the question needs to be asked if your ALE clients are doing a better job in collecting the ACA-mandated information they will be required to submit with the IRS for the 2017 tax year. Chances are they are not.
Here are five common challenges these ALEs are facing in trying to comply with ACA requirements, whether they are large and mid-sized companies, small businesses, non-profits, local governments or educational organizations.
Disjointed data silos: Many ALEs keep their core data sets for human resources, payroll, time and attendance, leaves of absence, and health benefits in separate systems, creating disjointed data silos of information. The inability of these systems to interact with each other creates a highly administrative and overly burdensome process to properly extract, aggregate, consolidate and validate the necessary data for accurate reporting to the IRS. Such inefficiencies make it challenging to implement an effective internal monitoring and tracking process of ACA compliance activities on a monthly basis to minimize potential ACA penalties from the IRS. You may want to talk to your clients about their process for collecting this information. If ALEs want to save themselves a lot of headaches at year-end, they should track their ACA information each month.
Unresolved data discrepancies between data silos: Core data sets between disjointed data silos often have inconsistent employee information. This can result in contradictions in hiring dates, salaries and termination dates, and a lack of preparedness in recording and tracking of offers of benefits coverage to employees. Inadequate internal controls for periodically identifying and reconciling such inconsistencies lead to untimely offers of coverage to employees and erroneous IRS reporting that may lead to significant IRS penalty assessments. ALEs should be reconciling these data issues monthly.
Improper interpretation or application of the ACA employer mandate methodologies: Failure to correctly apply complex ACA methodologies sanctioned by the IRS, such as determining whether workers are full-time employees, inevitably leads to problems with proper reporting to the IRS. For example, ALEs with workforces that have a number of variable-hour, part-time or multi-position employees find it especially difficult to make accurate full-time determinations under the ACA. You might want to ask your clients how they are faring in determine these classifications.
Insufficient or non-existent documentation of ACA compliance activities: Lack of proper documentation can make it difficult for organizations to properly defend their business activities against regulatory inquiries, such as an IRS initiated ACA audit, which may result in tax penalties. Proper documentation is typically lacking at the (a) organization-level, e.g., ACA policies and procedures; and (b) employee-level, e.g., timely and accurate classification of all applicable employees. You may want to check in with clients to determine what internal controls they have in place in order to prepare for the possibility that their ACA information is audited by the IRS. The Treasury Inspector General for Tax Administration recently reported that it expects the IRS to be ready this summer to implement the systems necessary to identify ALEs that have not complied with the ACA’s Employer Mandate. Once these systems are in place, the IRS will be able to mass identify noncompliant businesses. This will allow the IRS to send en masse notices to noncompliant businesses for the 2015 and 2016 ACA reporting years, the ﬁrst step in a possible IRS audit.
Inadequate internal human and technology resources: ALEs face a significant challenge complying with the ACA if they do not have the right in-house staff, consultants and technologies in place to properly oversee the necessary data consolidation processes, application of ACA methodologies, and monthly tracking of ACA-related data and documentation. Such data consolidation is also critical for annual IRS reporting and forms fulfillment, employee communications about ACA matters, and Exchange Notice appeals. You might want to discuss with your clients if they feel they have the internal and technology resources they need to track ACA-mandated information on a monthly basis to avoid any year-end challenges in preparing to file this information with the IRS.
Many accountants may not consider the ACA to be an issue for them because compliance relies on the client’s HR data to complete the IRS filing. However, why isn’t this an area where accountants can bring value? This is information that is filed with the IRS. If this information is not filed properly with the IRS, or filed at all, clients are exposing themselves to a potential IRS audit and significant financial penalties, making it a tax penalty avoidance issue.
Consider getting ahead of the curve by talking with your clients about how they are ensuring their compliance with the IRS filing requirements for the ACA. If clients get an IRS audit notice in the near future, you know who those clients will be calling, and it won’t be an HR consulting firm.