Coming Soon: Employer Mandate Penalties From the IRS

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Joanna H. Kim-Brunetti
Vice President of Regulatory Affairs
First Capitol Consulting Inc.
Columnist
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With the first two reporting years (2015 and 2016) behind us since the implementation of the employer mandate under the Affordable Care Act (ACA), the IRS has yet to impose any penalties on employers for failure to comply with the employer mandate.

These are the “A” and “B” penalties under Code Section 4980H, which correspond to (A) penalties for failure to offer minimum essential coverage, and (B) penalties for those that offer such coverage, but fail to meet minimum value and/or affordability requirements.

“A” penalties carry a penalty of more than $2,000 for each full-time employee not offered health insurance coverage by a business, if at least one full-time employee goes onto a healthcare exchange and obtains a tax subsidy. “B” penalties carry a penalty of more than $3,000 for each employee who goes onto a healthcare exchange and obtains a tax subsidy if a business had offered that employee healthcare coverage, but that coverage was determined to be either unaffordable or did not provide minimum value as per ACA regulations.

While this delay in assessing penalties may have suggested to some businesses that the IRS would not be enforcing the employer mandate, a recently issued report by the Treasury Inspector General for Tax Administration (TIGTA) tells us otherwise.

On April 7, TIGTA issued “Affordable Care Act: Assessment of Efforts to Implement the Employer Shared Responsibility Provision.” In this report, TIGTA explained that the ACA Compliance Validation (ACV) system will be used to identify potentially noncompliant applicable large employers and calculate the “A” penalty under the employer mandate. The IRS has been developing the ACV system since July 2015, with a scheduled completion date of January 2017. However, “the implementation of the ACV system has been delayed to May 2017,” the report states. 

Moreover, due to challenges with the ACV system, the IRS is developing an automation tool outside of the ACV system to identify nonfilers and applicable large employers subject to the “A” penalty. Similarly, the IRS is developing an automation tool to identify nonfilers and applicable large employers subject to the “B” penalty.

TIGTA’s report explains that while the IRS is still in the process of developing and implementing these key tools and systems needed to identify noncompliant businesses subject to the employer mandate, the federal tax agency will be ready to put those systems into effect sometime after May 2017. Once the systems are in place, the IRS will be able to mass identify noncompliant employers. This will allow the IRS to send en masse notices to noncompliant employers for any and all reporting years. 

What this means for businesses is that the current lack of IRS notices for noncompliance with the employer mandate does not imply that the IRS does not intend to enforce the employer mandate. It also marks the start of the IRS ACA audit process for 2015 reporting. The audit process for 2016 reporting may also be getting underway this year. 

A recent industry report projects that companies could face up to $31 billion in ACA penalties for the 2016 tax reporting period alone for noncompliance with ACA requirements. These penalties, which include the Section 4980H penalties and sections 6721 and 6722 penalties, may be imposed on what the ACA terms “applicable large employers” – those employers with 50 or more full-time or full-time-equivalent employees. 

Accounting firms and internal company accounting departments should encourage businesses that have so far not filed the required ACA information with the IRS to do so as soon as possible. This will help to minimize filing penalties and possibly head off a full-scale IRS audit that will cost these businesses both extensive time and money.

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