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IRS Enforcement of ACA Employer Penalties Accelerates

As Published in the June, 2019 Issue of the PELRAS Newsletter

Published on: Mon 17th Jun, 2019 By: David E. Mitchell

Although the government shutdown that ended in late January 2019 temporarily slowed enforcement of Affordable Care Act employer shared responsibility penalties, the Internal Revenue Service has renewed its efforts to collect those penalties.  The IRS is currently collecting penalties for calendar year 2016 and employers will soon begin receiving notices relating to calendar year 2017.  One public employer recently received an IRS notice asserting that owed over $700,000 in ACA penalties.  

If a Large Employer (50 or more full-time employees or full-time equivalents, based on a 30 hour per week standard) fails to offer coverage to at least 95% of its full-time employees and their dependents over the course of the entire year, it will be subject to a Section 4980H(a) penalty calculated by multiplying the number of its full-time employees (minus 30) multiplied by $2,500 for 2019.  If a Large Employer offered coverage but that coverage was either not affordable or did not provide minimum value, the Employer will potentially be subject to the Section 4980H(b) penalty.  The Section 4980H(b) penalty for 2019 is calculated by multiplying just the number of employees who were offered coverage that was not affordable or did not provide minimum value and who got a premium tax credit or subsidy for getting Marketplace or Exchange coverage by $3,750 if the deficiency continues for the whole year.  Penalties are calculated on a monthly basis and it is not uncommon for an employer to owe a penalty for only part of the year.

There are three key points for employers to keep in mind.  First, if you receive a notice from the IRS asserting that a penalty is owed, the clock is already running and legal counsel should be contacted immediately.  Employers only have 30 days to respond to an IRS penalty notice.  Second, it is critical to retain complete records of what coverage was offered and copies of the employer’s 1094 and 1095 filings with the IRS in a readily accessible location.  In many cases penalties can be successfully appealed or reduced if they are based on mistaken information, but an employer will not be in position to do that if the necessary records cannot be located several years later when a penalty notice is received.  Finally, “part-time” employees remain the biggest potential problem with respect to ACA penalties.  Many part-time employees are actually full-time employees for ACA purposes and should be offered appropriate coverage because they average 30 or more hours of paid service per week.  This can easily occur where a part-timer who was originally intended to work less than 30 hours per week is asked to take on additional shifts to cover for employees on medical leaves or vacation.  Large Employers should continue to track the hours of part-time employees very closely and offer appropriate coverage to those who average 30 or more hours of paid service per week.