IRS to Begin Mailing Penalty Notices to Applicable Large Employers (ALEs)
The Affordable Care Act implemented penalties on certain employers – known as Applicable Large Employers (ALEs) – who don’t offer affordable coverage that meets the minimum value standard of 60 percent to most of their full-time employees and have at least one employee enroll in Marketplace coverage and receive a premium subsidy. These penalties are known as employer shared responsibility payments, the employer mandate, and play or pay penalties. The first year that penalties applied was 2015.
The Internal Revenue Service (IRS) recently updated its Employer Shared Responsibility Provisions questions and answers page to describe how the IRS will notify ALEs of potential penalties for the 2015 calendar year. The IRS used forms 1094/5-C filed by an ALE along with the individual income tax returns of its full-time employees to determine if the ALE might owe a payment.
This article provides general information about this process. Employers should direct specific questions about the penalties and correspondence received from the IRS to their legal counsel or tax professional. This article is not legal or tax advice.
Questions 55 through 58 of the Employer Shared Responsibility Provisions questions and answers page describe how the IRS will notify ALEs of possible penalties and the steps employers can take if they receive a penalty notice. The process includes three general steps:
• Step 1: The IRS will send the employer a Letter 226J advising of the potential employer shared responsibility payment (ESRP).
• Step 2: If the employer responds to Letter 226J, the IRS will send a Letter 227 advising of actions taken by the IRS based on the employer’s response.
• Step 3: If the IRS believes the ESRP is still due or the employer does not respond to Letter 226J, the IRS will issue a notice and demand payment, Notice CP 220J, advising of the amount due.
For the 2015 calendar year, the IRS plans to mail Letter 226J in late 2017. Letter 226J will provide instructions for how the employer can respond in writing, either agreeing with the proposed ESRP or disagreeing with part of or the entire proposed amount. Employers will generally have 30 days to respond to Letter 226J, with the specific deadline for responding included in the letter.
Employers who respond to Letter 226J and disagree with the proposed or revised ESRP described in Letter 227 can request a conference with the IRS by following the instructions provided in the letter. A specific deadline for requesting a conference in writing will be included in Letter 227; it is generally 30 days from the date of the letter.
Penalties are assessed based on the type of coverage offered by an ALE. An excerpt from the Employer Shared Responsibility Provisions questions and answers page describes the two scenarios for which an ALE may be penalized:1
42. Under what circumstances will an employer owe an employer shared responsibility payment?
There are two different circumstances in which an ALE may owe an employer shared responsibility payment. An ALE is liable for an employer shared responsibility payment only if:
(a) The ALE does not offer coverage or offers coverage to less than 95 percent of its full-time employees (and their dependents), and at least one of the full-time employees receives a premium tax credit to help pay for coverage through a Marketplace;
(b) The ALE offers coverage to at least 95 percent of its full-time employees (and their dependents), but at least one full-time employee receives a premium tax credit to help pay for coverage through a Marketplace, which may occur because the employer did not offer coverage to that particular employee or because the coverage the employer offered that employee was either unaffordable or did not provide minimum value.
The penalty under scenario (a) in 2014 was $2,000 per full-time employee (less 30) on an annual basis and $3,000 under scenario (b) per each full-time employee who enrolled in individual coverage through the Marketplace and received a premium subsidy.
Penalties for 2014 were not assessed due to a delay in implementing this provision. After 2014, penalty amounts are increased each year based on an index. The 2015 through 2017 adjusted penalty amounts are:
Therefore, for the 2015 calendar year, the penalty under scenario (a) above will be $2,080 – $173.34 per month – times the number of full-time employees less 80.2 The penalty under scenario (b) above will be $3,120 – $260 per month – times the number of full-time employees who enrolled on the Marketplace and receive a premium subsidy.
For more information about the penalty and how to calculate it, please refer to the Employer Shared Responsibility Provisions questions and answers page.
The IRS has numerous resources available for ALEs, including the following webpages:
• ACA Information Center for Applicable Large Employers
• Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Acts
• Transition Relief for 2015 Plan Years
• Letter 226J
Employers should contact their legal counsel or tax professional with specific questions and assistance. This information is provided for general use and is not legal or tax advice.
1) Transitional relief may apply in 2015 and 2016. Please refer to the IRS webpage: https://www.irs.gov/affordable-care-act/employers/employer-shared-responsibility-provision-transition-relief-for-2015-plan-years
2) For 2015, the number of full-time employees is reduced by 80 due to transition relief. After 2015, the number of full-time employees is reduced by 30.