Businesses qualifying as Applicable Large Employers (ALEs) must follow the Affordable Care Act (ACA) reporting requirements—reporting health coverage offered to full-time employees through Forms 1094 and 1095—to remain compliant. Sounds easy enough, but there’s a catch: the IRS definition of "full-time" for reporting purposes is not always the same as the employer's definition.
Employers must diligently monitor and record changes in employees’ month-by-month employment classifications, e.g., full-time, full-time equivalent, part-time, variable-hour and seasonal employees. So that information reported to IRS is both compliant and accurate, it is imperative that management and its reporting partner have a keen understanding of the relevant internal systems—payroll, timekeeping, benefits administration, HRIS, etc.
The investment of time is worth it because penalties are very, very real. (You can read more about the real-world potential penalty exposure in our article, “ACA 1095 Penalties Are Real. Here’s What You Need to Know.”)
So without further ado, here are six of the most common mistakes that employers make in ACA reporting and how to avoid them.
1. Offer Code Errors on Line 14
All employers subject to ACA reporting use Line 14 in Part II of Form 1095-C to report whether an offer of coverage is made to an employee for each month of the year. Line 14 reports the lowest-cost, ACA-compliant coverage offered to the employee for the particular month. For employers offering more than one major medical coverage option, the coding of Line 14 should not be based on the coverage ultimately elected by the employee.
The codes IRS requires employers to use are not intuitive. There are subtle differences between the two most common offer codes: 1A and 1E. Code 1A is for a "qualified offer" to an employee deemed full-time under the IRS definition and his/her spouse and children. Code 1E is for an offer of coverage to any employee, full-time or not, and his/her spouse and children. Code 1A requires that the employee contribution be low enough that the Federal Poverty Level safe harbor applies. To use code 1E, no safe harbor needs to apply.
Takeaway: The coding of Line 14 generally must be set up by the reporting partner and cannot be directly fed from a database. If an employee is eligible for multiple coverage tiers and/or multiple major medical plans, eligibility is more of an abstract concept than a database entry, and care must be taken to ensure the 1095 coding is correct.
2. Errors in Reporting a Partial Month Offer of Coverage
Line 14 (reflecting an offer of coverage to an employee) cannot be left blank. One of the nine codes must be entered for every month. The "All 12 months" box can only be used if the code is the same for all 12 months of the year. However, an offer of health coverage is only valid if the employee is eligible for the coverage every day of the calendar month.
Takeaway: If enrollment is offered or terminated mid-month, the Line 16 safe harbor codes provide an opportunity to explain why coverage was not offered for the entire month.
3. Errors Coding COBRA for Terminated Employees
Line 14 reports eligibility of active employees. Offers of COBRA continuation coverage upon employment termination are only reflected in Part III, and then only to the extent the former employee enrolls in self-insured COBRA continuation coverage.
Takeaway: A common mistake is entering code 2C in Line 16 for months when an employee is enrolled in COBRA continuation coverage. Code 2A should be entered instead.
4. Errors Coding COBRA for Active Employees
If an offer of COBRA continuation coverage is made to an active employee—such as if the employee lost eligibility due to a change in status from full-time, benefits-eligible to part-time, benefits-ineligible—then the employer must use the same codes it would use if it offered extremely expensive coverage to other part-time employees.
Takeaway: It is not uncommon to neglect the special coding required of active employees who lose benefits eligibility due to a change in status. Before submitting to IRS, the employer should review these cases with its reporting partner. Also, because of how the IRS uses the 1095 database to penalize employers, these situations must be carefully coded to minimize the penalty exposure risk.
5. Errors in Documenting the Stability Period for Employees with Reduced Hours
For employers using the look-back measurement method—meaning they have a documented procedure for averaging an employee's hours over some number of months—IRS requires that there be a stability period, which is akin to a vested period of eligibility for benefits for a certain period of time. If an employee’s hours are reduced to less than 30 hours per week, the employee must remain eligible for benefits for the duration of the stability measurement period.
Takeaway: The required stability period concept for employers using the look-back measurement method complicates reporting for leaves of absence, rehires and employees who change status during the year. Exercise great care here.
6. Errors in Completion of Part III on Form 1095-C
Part III on Form 1095-C only applies to employers sponsoring self-insured or level-funded plans, and it reports whether the employee and/or the employee's dependents are enrolled in self-insured or level-funded coverage.
Level funding has grown in popularity, particularly among mid-market employers, but because the marketing of level-funded plans makes it look like the plan is fully insured, employers mistakenly neglect to report the enrollment information required in Part III.
In addition, it's not uncommon for employers with fiscal contract or plan years to change from insured to level funded and back again. ACA reporting is based on the calendar year, so employers must be mindful to report enrollment information in Part III for partial calendar years where the level-funded or self-insured fiscal year overlaps, but not for the part of the year in which the coverage was insured.
Takeaway: There is no requirement for sponsors of fully insured plans to report under Part III on Form 1095-C because the insurance carrier will provide this information to employees via Form 1095-B. That's not true, though, for level-funded or any other type of self-insured coverage; reporting enrollment information in Part III is required for those plans, even for partial years.
If your employees are recording hours or pay under multiple EINs in the same controlled group or are covered by multi-employer plans, there are additional requirements to consider. For hands-on guidance specific to your situation, contact ERISAfire by pinging us on the blue in-app messenger below.
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.