Failure to comply with the Affordable Care Act’s Employer Mandate could cost your organization over $150,000 for the first group of 100 full-time employees, and over $200,000 for every additional group of 100 full-time employees.

The IRS requires all employers with 50 or more full-time or full-time equivalent employees to provide health care coverage every month to least 95% of their full-time employees. It’s a pass/fail test. Either you offered the coverage or you didn’t. If you didn’t offer the required coverage to your full-time workers each month, expect a significant penalty assessment to be issued against you by the IRS. If you failed to meet that standard for your full-time employees and you have 100 full-time employees, that amount would cost you over $150,000 per year. If you failed to do so since 2015, that adds up to nearly $1 million. For each additional set of 100 full-time employees, the penalty adds over $200,000 per year. You can see how penalties can escalate quickly into the millions of dollars.

Critical to complying with the ACA is determining the full-time status of your employees. This can be one of the most complicated requirements of the ACA for industries that have a robust mix of full-time and part-time employees. This part of the ACA is largely an accounting and regulatory compliance function that is almost always assigned to HR departments to manage. Many HR departments, when faced with this task, purchased a software or payroll solution. These technology solutions are typically used at the end of the year to help employers prepare the filing of forms 1094-C and 1095-C with the IRS, leaving the employers on their own to prove that they have complied with the ACA.

These technology solutions, however, are fatally flawed in addressing ACA compliance. The ACA measures success by how employers have met its compliance requirements on a monthly basis. These technology solutions are after-the-fact, at the end of the year, when all you can do is determine whether you did or did not comply. They don’t provide a monthly assessment of where employers stand with their ACA compliance, which would allow employers to make appropriate adjustments to avoid non-compliance for the remainder of the year. It’s too late to comply if you wait until the year is over. These solutions also don’t have the proper internal controls in place to help employers defend themselves against an IRS penalty notice or audit. 

Why does this matter to you? Because it’s now clear that failing to do ACA compliance right can be costly. The IRS has already assessed $4.5 billion to employers that were identified as failing to comply with the ACA, and that was only for the 2015 tax year. More penalty assessments have been issued for the 2016 tax year. Next, the IRS is issuing penalty notices for the 2017 tax year. Employers can expect this enforcement to continue for subsequent tax years. Not classifying your full-time employees correctly or providing inaccurate data on employees in forms 1094-C and 1095-C can result in significant ACA penalties.

So how does the IRS determine if employers have not complied with the ACA? By cross checking employer data with data provided by government health exchanges like Healthcare.gov.

Let’s use the 2018 tax year as an example. There were almost 12 million people in the U.S. that purchase individual health coverage through a state or federal exchange. About 9.2 million, or 75%, of these people qualified for a premium tax credit (PTC) from the federal government to reduce the cost of the monthly health insurance premiums. These people qualified for a PTC because they fell below 400% of the federal poverty line. For 2018, the average monthly tax credit was $520 a month, resulting in a cost to the federal government of over $57 billion. 

These exchanges are required to file annually IRS Form 1095-A. This form identifies the social security number of each person that has qualified for a PTC, as well as the dollar amount of the PTC and the months in which it was issued. Employers with 50 or more full-time or full-time equivalent employees (Applicable Large Employers or ALEs) are required to file IRS Form 1095-C with the IRS for each full-time employee. These forms are filed to verify whether the employer offered health insurance to at least 95% of full-time employees. The offered coverage must satisfy minimum value and be affordable to the full-time employee. The monthly data reported on the 1095-C form is used by the IRS to determine if the employer has complied with the ACA or should be assessed a penalty for not complying.

The IRS has built an Affordable Care Act Compliance Validation “ACV” System that cross checks the social security numbers and the 1095-A forms against the employers 1095-C forms. This cross-check of the data does one of three things:

1)   If the employer complied with the law on a monthly basis by offering a plan that had minimum value and was affordable to an individual who received a PTC, the IRS can "claw back" erroneously obtained PTCs from that individual.

2)   If the information reported on Form 1095-C shows that an employer was not in compliance, the IRS will automatically send the employer a Letter 226J penalty notice.

3)   If there is no 1095-C form to reconcile, then individuals are at least initially considered not full-time employees and presumed not to have been offered coverage, thereby being entitled to the PTCs. 

ALEs have been required to start filing the forms 1094-C and 1095-C starting with the 2015 tax year. However, it took the IRS until November 2017 to begin issuing penalty notices to employers for the 2015 tax year. The IRS acknowledged early on that it missed many employers that had filed non-compliant returns. However, the IRS is getting its sea legs in ACA enforcement, with the aid of an improved ACV system and enforcement process. In October 2018, the IRS began sending penalty notices for the 2016 tax year, and is issuing penalty notices for the 2017 tax year this summer. The IRS will eventually get to the current 2018 filings. 

If you’re like most employers you may be thinking you are safe because all of the following are true: 

• I have a qualified insurance plan in place.
• I have worked with my broker to offer ACA compliant insurance.
• I have filed the forms 1094-C and 1095-C each tax year with the IRS.
• I haven’t received any IRS notices.

You should be sure. Even if all of the above applies to you, you could still be penalized. For example, even if you have a qualified plan in place, and work with a broker, that doesn’t mean you satisfied the 95% offer threshold to full-time employees as defined by the ACA or that such offer met minimum value or was affordable to the employee. 

And just because you have not received an IRS penalty notice yet does not mean that the IRS will not catch up to you at some point. A well-known national payroll vendor recently emailed me that their clients have received $220 million dollars in penalties for failing to offer the necessary health insurance to all of their full-time work forces as far back as 2016. 

Another well-known national payroll vendor identified in a survey that the biggest problem employers are having is the quality of their workforce data being used to complete their forms 1094-C and 1095-C. The inaccuracy in the input data for these forms are triggering IRS penalty notices. Even if these employers ultimately can prove they are in compliance with the ACA, the effort to defend against these penalties can be costly and time consuming.

For those employers that are concerned with being slapped with an expensive ACA penalty, I advise them to undertake an ACA Penalty Risk Assessment. This assessment will help identify lapses in compliance and issues with data quality that will provide employers a chance to get ahead of any IRS enforcement activity. Employers can do this on their own, but many third-party vendors, First Capitol included, will undertake this assessment for free. In my experience, employers with a significant mix of full-time and part-time workers and employee churn will benefit most from this type of analysis as those type of industries are being hit the hardest, with some penalties being assessed in the millions of dollars

Finally, maybe in the back of your mind, you thought the ACA was going to be repealed or the IRS wouldn’t have the resources to enforce the law. If so, it is definitely time to rethink your approach to ACA compliance. 

If you’re concerned that failure to comply with the ACA might possibly cost your organization up to $200,000 for every 100 full-time employees for the last three years, please contact me about undertaking an ACA Penalty Risk Assessment. The consult is free.

Considering the significant cost of ACA penalties, it may prove to be one of the best investments you will make this year.

Gregg Kasubuchi helps organizations understand the complexities of IRS rules and regulations to help them become more successful. He has been recognized as an expert in the deep complexities of the Affordable Care Act and how to help employers navigate the ACA to minimize their risk of being assessed financial penalties by the IRS. He also has a degree in Fire Administration and Technology. Want to find out if your employer is at risk of receiving ACA penalties from the IRS? Check out information on a free ACA Penalty Risk Assessment.