While no one can predict how long the Affordable Care Act (ACA) will be in place, 1095 reporting for the 2019 calendar year is still required, and IRS enforcement is on the rise.
Overview of Employer Requirements
Congress defunded the employee mandate (effectively repealing it), but the employer mandate is alive and well. Employers with 50 or more full-time equivalents are considered Applicable Large Employers (ALEs) and are required to report health coverage offered to full-time employees through Forms 1094 and 1095. Reporting is on a calendar year basis regardless of the employer’s plan year.
An ongoing challenge for employers remains in defining a full-time employee for 1095 purposes because the IRS definition of "full-time" is not always the employer's definition. Employers must also consider full-time equivalent, part-time and seasonal employees.
- Employer to Employees: The good news is that the IRS recently extended the deadline to furnish Forms 1095 to employees to March 2, 2020.
- Employer to the IRS: The deadline to file with the IRS is March 31, 2020, for electronic filing, February 28, 2020, for paper filing. Electronic filing is required if your company is filing 250 or more forms. In our experience, though, it rarely makes sense to file on paper even if your form count is under 250 because of the efficiencies gained in using electronic database scripts.
IRS Notice 2019-63, which announced the deadline extension, does not impact the requirements to file information with the IRS. It solely impacts the reporting requirements to individuals. Therefore, employers must still file Forms 1094-B, 1095-B, 1094-C and 1095-C with the IRS by these deadlines, unless they request an extension by filing a Form 8809.
Penalties Are Not Theoretical; They Are Real.
We've seen a tremendous volume of IRS enforcement activity concerning three common oversights: failure to file at all, failure to file on time and filing incomplete or incorrect information. Each of these scenarios has different penalty exposure.
Failure to File or Furnish at All
IRS has been sending employers letters advising that it expected to see some Forms 1095 from a particular EIN but it doesn't seem to have any on file. The letter kindly requests a very quick response from the employer. The stick is a large one because the penalty for failure to file is substantial: $3,339,000 for 2019 reporting if the company's gross receipts are more than $5 million, $1,113,000 if the company's gross receipts are less than that. If IRS discovers that the employer also didn't furnish employees their 1095s (which is extremely likely as furnishing to employees tends to happen in tandem with the IRS filing) the penalty is double that.
We suspect that IRS is looking at the number of W-2s filed under the EIN as an indication of the employer's ALE status. If an employer is filing 300 W-2s and there are no Forms 1095, it's a good bet the employer was required to file Forms 1095 and didn't. Now, IRS has limited enforcement resources, and a good CPA will tell you there's a lot you can probably get away with not doing. ACA 1095 reporting is not one of them. IRS is looking for employers that didn't file and is actively pursuing them. In our experience IRS has not formally imposed penalties for failing to file; instead, it generally has used the penalty as a stick to get the employer to file, and it has only been employers that outright ignore the IRS that get penalized for non-filing.
Late filing is a different matter. IRS has been sending employers late filing penalty letters recently, and the penalties have been substantial. The penalties step up depending on how late the forms are filed. Technically, there is a penalty of $50 per form for filing within 30 days after the deadline, but we haven't seen any letters assessing penalties at that tier, though there may be and we just haven't seen them yet.
For forms filed more than 30 days but before August 1, the penalty for 2019 forms is $110 per form. For forms filed on or after August 1, the penalty is $270 per form, up to a maximum of $3,339,000 ($1,113,000 if gross receipts are $5 million or less).
These penalties are real. IRS is assessing them, and it is collecting on them. Once the penalty process starts, the IRS tax collections machine starts, too, and IRS will levy property to collect if it needs to.
Filing Incorrect or Incomplete Information
IRS guidance provides relief from penalties for incomplete information if employers have made a good faith effort to comply. This relief specifically applies for missing taxpayer ID numbers if the employer has documentation of two annual efforts to request necessary data from employees. Consistent with this, we've seen no active enforcement efforts regarding things like employee addresses, Social Security numbers (other than the TIN matching that happens when you file) or even whether the employer used the correct series 1 code (1A versus 1E, for example).
What we have seen IRS question is things like whether Forms 1095 were filed under the wrong EIN. For example, an employer may have filed its Forms 1095 under the EIN of the parent company, but the employee's W-2 is issued under the EIN of the subsidiary. IRS is catching these mismatches and asking employers about them.
It's also incredibly important that the series 1 and series 2 coding be accurate and fully defensible. It appears IRS is assessing shared responsibility excise taxes under Code Section 4980H (aka "ACA penalties") based almost exclusively on the information reported on Form 1095. We're oversimplifying a bit (and only a bit), but if a series 2 box is left blank, there's penalty exposure. There are perfectly legitimate reasons to leave a series 2 box blank, but that doesn't seem to matter, and it feels a lot like employers are guilty until proven innocent.
Penalty Relief for Form 1095-B
The usual form employers must use is Form 1095-C, but there are some circumstances when a Form 1095-B is required. Starting with 2019 Forms 1095-B, however, the IRS will no longer automatically penalize employers that fail to furnish them to individuals. Congress defunded the individual mandate, so because individuals no longer need the information on a Form 1095-B in order to file personal income tax returns, the 1095-B is unnecessary, making the penalty unnecessary. So IRS will not impose a penalty starting with 2019 Form 1095-B filings if:
- A prominent website notice is posted with instructions regarding how to request Form 1095-B.
- Form 1095-B is provided within 30 days of an individual’s request.
The penalties are real, but they can also be defended. There are certain, very specific defenses IRS will accept either as a complete defense or as part of a negotiated settlement. ERISAfire and our partner law firm, LeFevre Law PC, have handled nearly every conceivable ACA penalty defense scenario, including failures to file and grossly incorrect and late submissions spanning multiple years.
As the saying goes, an ounce of prevention is worth a pound of cure, and we'd much rather help prevent penalties than defend them.
Benefits of hiring ERISAfire to handle your ACA reporting:
- No number crunching! All you have to do is provide readily available reports. ERISAfire will prepare custom database scripts to analyze the data and turn it into the necessary 1095 codes.
- Complimentary compliance audit. We'll audit data output and identify potential 4980H penalty exposure.
- Set it and forget it. We'll e-file your Forms 1094 and 1095 with the IRS as well as print and mail Forms 1095 to your employees.
Questions? Contact ERISAfire and LeFevre Law PC by pinging us on the blue in-app messenger below. You may also contact me directly at firstname.lastname@example.org.
ERISAfire LLC is an employee benefits compliance services firm, specializing in health and welfare benefits. ERISAfire has reimagined benefits compliance, leveraging a unique combination of custom-built technology to automate transactional tasks, ERISA geeks for complex analysis, and experienced ERISA attorneys to scrutinize even the most mundane compliance tasks. Learn more at www.erisafire.com.