The Basics of ACA Compliance and Reporting
How Does ACA Reporting Work?
The Affordable Care Act (ACA) changed requirements for the types of health insurance plans qualifying employers must offer to meet affordable insurance standards. This law also carries ACA reporting compliance requirements for employer-sponsored health plans. These requirements include employee notices, IRS reporting for Applicable Large Employers (ALEs), and employer reporting for self or level-funded insurance plans, regardless of employer size.
Meeting these reporting requirements is essential to avoiding costly fines and penalties. Many employers who qualify as an ALE do not realize they have to meet these requirements, so it’s essential to understand your responsibility regarding ACA compliance.
Is your organization required to complete ACA reporting?
Any organization that meets ALE requirements, must comply with ACA regulations. An ALE is any employer with 50 or more full-time or full-time equivalent employees. To determine ALE status, employers must take an average of all employee hours to determine if they meet the full-time equivalent requirement. Those who meet this requirement must offer minimum essential coverage to at least 95% of their full-time employees and the coverage must meet minimum values.
The ACA reporting codes are complicated and, if done incorrectly, can result in fines for your organization. While a good-faith waiver was granted at first for mistakes on forms filed, as of 2021, the IRS no longer grants penalty relief for good-faith efforts to comply with ACA filing regulations.
Employers are starting to see letter 1865-C for filing periods through 2020 stating missing or incorrect forms. These letters can be sent out multiple times, even on forms that were filed correctly. It is recommended to use e-filing to reduce these filing issues.
What Does Full-Time Equivalent Mean?
When determining Applicable Large Employer status, employers must average the hours of part-time and seasonal employees against full-time hours. If these calculations provide a combination of full-time hours among non-full-time employees, those hours are considered full-time equivalent.
Applicable Large Employer or ALE status occurs if an employer has 50 or more full-time and full-time equivalent employees.
Tracking FTE Status:
For employers who already qualify as an ALE, employers are required to track hours for part-time and seasonal employees. This can be tracked in two different ways.
Monthly Tracking: Employers can track hours for variable employees monthly. If employees meet full-time hours for one month, coverage must be offered for the following month.
Look-Back Tracking: An employer can also use a look-back measurement period to track hours based on a period anywhere from three months to twelve months. If full-time hours are met during the period tracked, the employer is required to offer coverage for an equivalent period.
If you are unsure whether you are considered an ALE, you can download our free ALE calculator to help average employee hours. Providing accurate and detailed information when completing reporting forms and maintaining accurate records are your best defenses against IRS penalties. Our ACA services and tools provide essential and affordable solutions for employers to determine and complete their ACA reporting requirements.
ACA Safe Harbor Calculations
Those who meet ACA compliance requirements must also meet requirements to offer affordable coverage for eligible employees. Premium affordability is based on three possible safe harbor calculations:
- Federal Poverty Line Threshold
- Rate of Pay
- W-2 box 1 earnings
The calculations used to determine affordability are based on employer determinations. Each calculation has its pros and cons. Download our free Safe Harbor Calculator (see below) to determine the best calculator to ensure you meet affordability requirements.
ACA Compliance Deadlines
Meeting ACA compliance deadlines is essential as the IRS may impose penalties of up to $280 per form for failing to furnish an accurate form to employees and $280 per form for failure to file an accurate form with the IRS. Penalties continue to increase if IRS penalty letters are not addressed.
2022 ACA Filing Calendar:
1095-C forms delivered to employees * – March 2nd
Paper Filing with the IRS – February 28th
Electronic Filing with IRS** – March 31st
*Starting in 2021, the IRS permanently extended the employee distribution deadline. As a result, employers will not be able to request additional time to distribute forms to employees.
**Employers that file 250 or more information returns with the IRS must file electronically.
ACA forms for filing
Form 1094-C and 1095-C: Employers with 50+ full-time or full-time equivalent employees need to use forms 1094-C and 1095-C to report fully insured and self-insured plans. Once the information has been completed for each employee, it must be transmitted to the IRS using submittal form 1094-C.
Form 1094-B and 1095-B: Employers with fewer than 50 full-time or full-time equivalent employees who provide employer-sponsored self-or level-funded insurance coverage, must file using forms 1094-B & 1095-B.
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ACA reporting is required by all organizations that meet Applicable Large Employer (ALE) requirements. The reporting must also be completed by employers who average less than 50 FT or FTE employees but are self-insured or level funded. The employer is considered the insurer in these instances and therefore the 1094 and 1095 B Forms must be submitted each year to show employees and any dependents that were covered by health insurance.
An ALE or Applicable Large Employer is any organization with 50+ full-time or full-time equivalent employees. To determine if your company meets these requirements, you can download our free ALE calculator.
The most common penalties received are Section 4980H (a) and (b), also known as penalty A and penalty B. These penalties increase each year.
• 4980H (a) = $2,750
• 4980H (b) = $4,120
• 4980H (a) = $2,880
• 4980H (b) = $4,320
The A penalty is assessed when the employer does not offer health insurance to at least 95% of their full-time employees that meets ACA requirements of minimum essential coverage. This penalty is assessed on all FT employees for each month the employer did not meet ACA requirements, minus the first 30 employees. If even one employee receives a premium tax credit and the employer does not correctly mark the box that states they offer MEC, they will receive the penalty.
The B penalty is assessed when a MEC plan is offered but does not meet minimum value or affordability requirements. These penalties are only assessed on the employees who did not receive a qualifying offer and who went to the Marketplace to enroll in medical coverage and received a premium tax credit.
Letter 226-J is an initial letter the IRS sends to ALEs to notify them that they may be liable for an Employer Shared Responsibility Payment (ESRP). Employers receive these letters if the IRS believes there was a failure to offer MEC or a failure to meet minimum value requirements. Employers are likely to see one of these letters if an employee files for a premium tax credit.
Letter 227 includes a series of letters based on a review of an employer’s ESRP liability. These letters are a follow-up to the 226- J letter providing an acknowledgment that a response to 226-J was received, giving an update on the ESRP status, and offering the next steps to close the review or contest it.
Letter 5699 gets sent if the IRS believes that an employer met the requirements as an ALE for a tax-filing year but did not file ACA reporting documents. This letter is triggered based on the number of W2s filed for the tax year in question. If more than 50 W2s were filed, the IRS may assume the employer is an ALE under the full-time equivalent regulations and must comply with ACA reporting requirements. The employer is required to respond to the letter, indicating whether they were an ALE or not. If the employer was an ALE, they must file the forms and a reason for filing late.
Letter 5698 gets triggered if the employer fails to respond to Letter 5699. This letter reminds the employer they have not responded, and they need to do so immediately, or risk penalties based on their W2 filings.
Letter 5005-A is the penalty notice following Letters 5699 and 5698. This letter focuses on the failure of ALEs to distribute 1095-C forms to employees and to file 1094-C and 1095-C forms with the federal tax agency by the required deadlines.
CP215 acts as the official “bill” received after the 5005-A. The 5005-A is not a request for payment, and the employer still has a chance to respond to the IRS before penalties are applied.
Letter 916C comes as a notice from the IRS indicating a claim or request is incomplete and cannot be processed. The letter will recommend filing the forms electronically.
Notice 972 CG is a proposed penalties notice sent when returns are filed after their due date, when returns were filed on paper but exceeded the 250 returns threshold that requires electronic filing, or when returns were filed with an incorrect or missing TIN.
Letter 1865C - letter sent to inform an employer that the IRS is unable to process the 1094/95 B or C forms because the forms are incomplete or not in the required format OR the 1094 B or C was missing. The letter asks that the employer resubmit the forms by a certain date.
The interesting thing we have found with this notice to some of our previous clients is 1) They receive multiple versions of the letter that say different things. 2) The fax or phone number is either missing, not working, or goes to a source who does not clearly identify themselves as IRS. 3) General delays with IRS operations erroneously sent penalty notices to clients who filed as requested. 4) The IRS sends out these letters even to clients for who we have 100% confidence that all the forms were submitted correctly and timely.
The Affordable Care Act (ACA) was enacted to ensure affordable health insurance is available for more people in the United States. The law provides subsidies, called premium tax credits, to lower insurance costs for households with income between 100% and 400% of the federal poverty level.
Rhode Island and Washington D.C. have enacted requirements on the state level for all levels of health coverage. California and New Jersey have requirements for self-funded coverage only. Massachusetts has its own form for filing.
Each of these states have enacted individual mandates. This includes employers in the state and employers with employees in the state.
The IRS has set the 2023 rate at 9.12%.
Minimum Value (MV) – An employer-sponsored plan provides minimum value if it covers at least 60 percent of the assumed cost for the standard population to cover the benefits provided. This is the equivalent of a bronze-level plan.
Minimum Essential Coverage (MEC) – MEC refers to types of coverage that satisfy the ACA’s individual mandate. This typically involves insurance policies that provide major health coverage. ALE-qualified employers must offer MEC to at least 95% of their full-time employees.
Affordability – Affordability deals with providing plans with premiums that are affordable based on one of three safe harbor calculations. Under the employer-shared responsibility affordability safe harbors, employers are allowed to use Form W-2 wages, an employee’s rate of pay, or the federal poverty line.