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ACA Information Reporting & Employer Shared Responsibility

IRC §6055 and §6056 reporting, and the §4980H penalties the filings are used to assess.

Two obligations, often confused

The reporting rules and the penalty rules are separate parts of the statute that happen to use the same data. Understanding which is which makes the whole area considerably less alarming.

§6055 — who actually had coverage

Reports minimum essential coverage, month by month, for every covered individual including dependants. For a fully insured plan the carrier does this. For a self-funded plan it is the employer's job, reported in Part III of Form 1095-C, or on Forms 1094-B and 1095-B by an employer that is not an applicable large employer.

§6056 — what was offered

Applies to applicable large employers regardless of funding. Reports, for each full-time employee and each month, what coverage was offered, what the employee's share of the lowest-cost self-only option was, and which safe harbour applies. Forms 1094-C and 1095-C.

Are you an ALE?

Fifty full-time equivalents, measured on last year.

Count every employee averaging thirty or more hours a week as one. Add up all remaining hours across everyone else, cap each person at 120 hours in a month, divide by 120, and add that to the first figure. Average across the twelve months of the preceding calendar year. Fifty or more and you are an applicable large employer for the current year.

Two things catch employers out. Controlled groups are aggregated — commonly owned entities count together even when they file separately and think of themselves as separate businesses. And the test looks backwards, so the year you grow past fifty is the year you are not yet an ALE, and the following year you are, whether or not anyone noticed.

§4980H

The two penalties, and why the first is the frightening one.

§4980H(a) — the offer penalty

Triggered by failing to offer minimum essential coverage to at least ninety-five percent of full-time employees and their dependent children, where at least one full-time employee then receives a premium tax credit on the marketplace.

It is assessed on the entire full-time workforce, less thirty, not on the employees who were missed. One person short of the ninety-five percent threshold can produce a six-figure assessment. The per-employee amount is indexed annually.

§4980H(b) — the affordability penalty

Triggered where coverage was offered but was either unaffordable or failed minimum value, and an employee received a premium tax credit as a result.

Assessed only on the employees who actually received a credit, and capped at what the (a) penalty would have been. Materially smaller in most cases — which is why the offer itself is the thing to get right first.

Affordability, and the three safe harbours

Coverage is affordable if the employee's share of the lowest-cost self-only option offering minimum value does not exceed an indexed percentage of household income. Since no employer knows household income, the regulations provide three substitutes, and you may use a different one for different reasonable categories of employee.

  • W-2 — measured against Box 1 wages. Simple, but only known at year end.
  • Rate of pay — hourly rate multiplied by 130 hours a month. Usable prospectively, which is why most employers choose it.
  • Federal poverty line — the most conservative and the easiest to prove, but generally the most expensive to satisfy.

Deadlines

Statements to employees are furnished by early March. Filing with the IRS is due at the end of February on paper and the end of March electronically, and electronic filing is mandatory once the aggregate return count reaches ten. Several states — Massachusetts, New Jersey, California, Rhode Island and the District of Columbia among them — run their own individual mandate reporting on top of the federal filing, with their own portals and their own dates.

Letter 226-J

The IRS proposes an assessment through Letter 226-J. It carries a short response window and is very often based on a coding error in the 1095-C rather than on an actual failure to offer coverage. It should be answered, on time, with the underlying records — not paid, and not ignored.

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