The Internal Revenue Service (IRS) recently began issuing penalty notices (IRS Letter 226J) to employers for their employer shared responsibility payment (ESRP) for 2015. Below is an overview of the basis of these letters, who may be subject to the ESRP, and how it is calculated from the IRS’ website. As further discussed in the conclusion of this article, if an employer receives Letter 226J, it should seek professional advice. It is possible that transition relief available in 2015 may reduce or eliminate the employers’ ESRP.
Under the Affordable Care Act’s employer shared responsibility provisions, certain employers (called applicable large employers or ALEs) must either offer minimum essential coverage that is “affordable” and that provides “minimum value” to their full-time employees (and their dependents), or potentially make an employer shared responsibility payment to the IRS.
The same employers that are subject to the employer shared responsibility provisions (that is, ALEs) also have reporting requirements regarding minimum essential coverage offered to employees. These responsibilities require employers to send reports to employees and to the IRS. An employer that sponsors self-insured health insurance coverage – whether or not the employer is an ALE – has other reporting requirements as a provider of minimum essential coverage.
Which Employers are Subject to the Employer Shared Responsibility Provisions?
ALEs are subject to the employer shared responsibility provisions. Whether an employer is an ALE in a particular calendar year depends on the size of the employer’s workforce in the preceding calendar year. To be an ALE for a particular calendar year, an employer must have had an average of at least 50 full-time employees (including full-time-equivalent employees) during the preceding calendar year. Full time employees and equivalent employees must be calculated according to the IRS’ rules.
Under What Circumstances Will an Employer Owe an Employer Shared Responsibility Payment and How Much?
An ALE member may choose either to offer affordable minimum essential coverage that provides minimum value to its full-time employees (and their dependents) or potentially owe an employer shared responsibility payment to the IRS. Depending on its decisions about offering minimum essential coverage to its full-time employees and their dependents, an ALE member may be subject to one of two potential employer shared responsibility payments.
An ALE member will owe the first type of employer shared responsibility payment if it does not offer minimum essential coverage to at least 95 percent of its full-time employees (and their dependents), and at least one full-time employee receives the premium tax credit for purchasing coverage through the Health Insurance Marketplace. On an annual basis, this payment is equal to $2,000 (indexed for future years) for each full-time employee, with the first 30 employees excluded from the calculation. This calculation is based on all full-time employees (minus 30), including full-time employees who have minimum essential coverage under the employer’s plan or from another source.
Even if an ALE member offers minimum essential coverage to at least 95 percent of its full-time employees (and their dependents), it may owe the second type of employer shared responsibility payment for each full-time employee who receives the premium tax credit for purchasing coverage through the Marketplace. In general, a full-time employee could receive the premium tax credit if: (1) the minimum essential coverage the employer offers to the employee is not affordable; (2) the minimum essential coverage the employer offers to the employee does not provide minimum value; or (3) the employee is not one of the at least 95 percent of full-time employees offered minimum essential coverage. On an annual basis, this payment is equal to $3,000 (indexed for future years) but only for each full-time employee who receives the premium tax credit.
If an employer receives Letter 226J, they should seek professional advice as soon as possible. Penalties can be substantial based upon the IRS’ penalty calculation model summarized above.
There are several transition relief provisions applicable to 2015, and some limited transition relief for 2016. Therefore, if an employer is an ALE subject to employer shared responsibility provisions for 2016 forward, it is possible that there are unique arguments applicable to 2015 that may eliminate or reduce the employer’s penalty. Moreover, because 2015 was the first year certain ACA filings were required, understandably there was confusion and inaccurate reporting by employers, which could have resulted in the IRS asserting penalties that are arguably inapplicable.