A few weeks after the national election, the Internal Revenue Service began to issue notices to employers who may have failed to comply with the Patient Protection and Affordable Care Act.
These notices appeared to be the first salvo in the IRS ACA audit process. Failure to successfully defend this IRS audit could mean significant ACA related penalties. A recent industry report projects that companies could face up to $31 billion in ACA penalties in the 2016 tax reporting period for noncompliance with ACA requirements. These penalties, which include the Section 4980H penalties and Section 6721 and 6722 penalties, may be imposed on what the ACA terms Applicable Large Employers, or ALEs, namely, those employers with 50 or more full time or full-time equivalent employees.
The Section 4980H penalties comprise “A” penalties for ALEs who fail to offer minimum essential coverage to 95 percent of their full-time employees at an annualized rate of $2,080 (for 2015, and adjusted upwards annually) multiplied by the total number of full-time employees and “B” penalties at a rate of $3,120 (for 2015, and adjusted upwards annually), multiplied by the number of full time employees who obtain a tax subsidy for ALEs who offered such coverage but such coverage failed to meet “minimum value” and/or such coverage was not “affordable.”
The Section 6721/6722 penalties include a failure to accurately and completely file returns with the IRS and a failure to accurately and completely furnish statements to the applicable employees, i.e., the IRS 1094/1095 Schedules. These penalties can reach $260 per return (on an employee basis), adding up to more than $6 million for combined filing and employee statement distribution failures. Moreover, the employer penalties are double for a willful failure, which the employer bears the burden to show that any failure to comply was despite reasonable diligence.
So what must an ALE do to defend against an IRS audit?
Establish documentation: Documentation is the key for ALEs to prove to the IRS they have provided coverage under the law. The documentation should include an offer of benefits, the plans’ measurements, administrative information and stability periods. The processes for tracking hours and calculations for determining eligibility determination must also be documented.
Demonstrate the methodology is accurate and applied correctly: A proper understanding of the tracking and calculations in the methodology must be conveyed, regardless of whether the monthly measurement method or the look-back measurement method was used to determine the full-time status of employees. The ALE will need to provide documentation of how the method was applied and that it was applied correctly under the IRS regulations, including the timing of the offer of coverage. Moreover, the ALE will need to provide documentation justifying the application of any limited non-assessment periods.
Data validity: Evidence of data extraction from multiple sources, along with measurement, tracking and reporting, must exist. Properly structuring the flow of data through multiple systems and implementing the appropriate validation controls will go a long way towards a smooth end-of-year ACA experience in the distribution and filing of IRS Forms 1094-C and 1095-C.
During an IRS ACA audit, the ALE has the burden of proving the ALE offered minimum essential coverage to 95 percent of its full-time employees. Unless the ALE is going to concede that all of its employees are full time, this can be challenging for the ALE to prove that some or all of its employees should not be counted as full time. This often involves conducting the look-back measurement method sanctioned by the IRS.
The ALE will also need to show it made the offers of coverage to all applicable employees in a timely manner. Unless the ALE is going to concede that each applicable employee should have been offered coverage for every month of the reporting year, the ALE must prove that, for the months that the applicable employee was not offered coverage, there was an applicable exclusion under the IRS regulations. This could include the dates of hiring employees and the applicability of various limited non-assessment periods.
Accounting professionals working for or on behalf of ALEs will want to encourage their clients to consider using a digital platform that will document full-time employee status tracking and all of the various human resources and payroll data relevant to the offer of coverage, including hire and rehire dates, termination dates, leaves of absences, etc.
For many companies, the combination of accounting professionals working with specialists to handle their ACA compliance allows them to keep company personnel focused on what really matters, the success of their business.