Reporting for 2021 is just around the corner. Applicable employers are still required to file 1095 and 1094 B/C forms to demonstrate that they have offered affordable health coverage that meets minimum value and minimum essential coverage to employees and their dependents. Reporting this year is still required even though Republican lawmakers passed H.R.1, the Tax Cuts and Jobs Act in December 2017. While this tax bill left most of the ACA’s taxes intact, it did include repeal of the individual mandate penalty.
A year later, in 2018, a judge in Texas found that the ACA was unconstitutional without the individual tax mandate. The ruling was appealed and in July of this year oral arguments were heard before the Fifth Circuit Court. Although a ruling has yet to be made in the case, it is almost guaranteed that regardless of the ruling, the case will ultimately go before the Supreme Court. Until then, the employer requirements, including insurer information and reporting responsibilities, are still intact.
Because there are not any significant changes to the reporting requirements, this bulletin will briefly review who must report, the affordability threshold for 2019, the IRS Letters currently being sent to employers, and the penalties being assessed.
Who Must File the Affordable Care Act Updates?
All Applicable Large Employers (ALEs) must file using the C forms. Applicable Large Employers are employers that have averaged 50 or more full-time (FT) or full-time equivalent (FTE) employees the preceding calendar year. If you are not sure if you are an ALE, please click here for our ALE calculator which allows you to add up the number of FT employees and FTE hours for the previous year.
Small employers (with fewer than 50 FT/FTE employees) who are self-funded or level-funded also must report by filing B forms.
The affordability standard is the highest percentage of household income an employee can be required to pay for monthly plan premiums, based on the least expensive employer-sponsored plan offered that meets the ACA’s minimum essential coverage requirements. At least one employer-sponsored plan option should meet this threshold to avoid penalties.
Because employers aren’t expected to know what their employee’s household income is, the employer is responsible for ensuring affordability under one of three safe harbors by using the current year affordability contribution percentage.
The employee’s W-2 wages, as reported in Box 1, multiplied by that year’s affordability contribution percentage.
The employee’s rate of pay; the lowest hourly wage rate for that calendar year, multiplied by 130 hours per month or the lowest monthly salary, multiplied by that year’s affordability contribution percentage.
Calculating the cost of an insurance plan by using the Federal Poverty Level for that year multiplied by that year’s affordability contribution percentage.
The Affordability calculation for 2019 is set at 9.86% and 9.78% for 2020. The Federal Poverty Level for 2019 is $12,140; for 2020, it is $12,490. For an employer to meet the FPL safe harbor in 2019, the cost of the premium to the employee for employee-only coverage cannot cost more than $99.75 per month in 2019 and $101.79 in 2020.
The IRS has been sending various letters with regards to Affordable Care Act Compliance. This is a summary of the types of letters that are currently being sent out:
J226: These letters detail penalties based on not offering minimum value / minimum essential coverage (MV/MEC) and/or Affordable coverage under the requirements of 4980H (a) (b). Currently, the IRS is notifying employers and assessing penalties back to the 2015 ACA reports. They are initiated when an employee has enrolled in health coverage on the Marketplace and received a Premium Tax Credit towards the cost of their health coverage. HR Service has found that, with most of these letters, the forms that were submitted were either incorrect or incomplete. Employers have been successful in responding to the IRS and having the penalties canceled, once the employer identifies the corrections and/or clarifications needed to the IRS.
227M: Following the J226 letter is the 227M letter in which the IRS says that after review they are still assessing a penalty under the 4980H (a) (b). Once an employer receives this letter, the IRS requires that the employer either call them to request a meeting or that the employer file a formal protest. If the employer and the IRS don’t reach an agreement or if the employer doesn’t respond to the letter with a call or formal protest, the matter then must go through an IRS Appeals process.
5699: The IRS letter 5699 indicates that the IRS believes the employer might be an ALE and details the requirements and obligations for filing. This letter is initiated when the IRS cross- references the number of W2 forms that were filed. If there are more than 50 employees, the IRS assumes that the employer may be an Applicable Large Employer (ALE) and therefore must file and 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 1094/1095 C forms and explain why they are filing late and when they will file the forms.
5698: Failure to respond to the 5699 letter will trigger a subsequent notification IRS Letter 5698, which reminds the employer that they have not responded to IRS Letter 5699 and that they need to immediately, or they will be assessed a penalty. Failure to respond will lead the IRS to issue IRS Letter 5005-A and Form 886-A, which gives the amount of the penalty for not filing. The IRS determines the penalty amount by using the number of W2s that were filed and assumes it should be the same number of forms. These penalties are assessed under IRC 6721 and 6722.
As discussed above, the penalties the IRS is currently assessing include:
The IRC 4980H (a) penalty is assessed when an employer does not offer “minimum essential coverage” (MEC) to at least 95% of its full-time employees and their dependents.
The IRC 4980H(b) penalty is assessed when an employer does offer MEC to at least 95% of its full-time employees and their dependents, but the coverage is not “affordable” or does not provide “minimum value.”
Penalties under IRC 6721 and 6722 are not exclusive to Affordable Care Act Reporting; these penalties are assessed for not filing correct information returns and/or not furnishing correct payee statements. The penalty amounts for 2016-2019 filings are:
$50 per form if submitted within 30 days after due date
$100 per form if submitted after 31 days and before August 1st of that year
$260 per form after August 1st or not at all (2016) and $270 per form in 2017-2019
Minimum Value (MV) – An employer-sponsored plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan and provides substantial coverage for inpatient care and physician treatment.
Minimum Essential Coverage (MEC) – types of coverage that satisfies the ACA’s individual mandate, typically insurance policies that provide major health coverage.
Affordability – Because employers are not likely to know the household income of their employees, there are three safe harbors that an employer may use to determine affordability for purposes of the employer shared responsibility provisions. In general, under this 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, instead of household income in making the affordability determination. If you are interested in reading the full ACA Act, please visit the U.S. Congress Website: https://www.congress.gov/bill/111th-congress/house-bill/3590.
Written by: Holly Young, SPHR, SHRM-SCP HR Business Partner
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