How to help employer clients with IRS Letter 226J
Remember the theory that the IRS could eventually enforce the ACA employer reporting rules? Well...
Agents and brokers have had their challenges when it comes to the Affordable Care Act and Internal Revenue Code Section 6056 reporting.
It was difficult for a broker to take the “stand back and watch” approach as clients were increasingly leaning on their brokers to guide them with everything that is ACA.
Situations involving Internal Revenue Service Letter 226J and forms 14764 and 14765 are where employers are going to be looking to their broker for help and guidance now.
Related: Is Obamacare dead/? No one told the IRS.
When employers open that dreaded IRS envelope, and the first thing they see is a big penalty in bold, they are going to reach out to their brokers. Brokers need to be knowledgeable.
Just because an employer hasn’t received a letter yet doesn’t mean the employer is in the all clear.
So, brokers, dust off your 2015 ACA rules and be ready for the phone call from your client.
Pre-letter file reviews
Brokers should be proactive and review each client’s 1094-C, even if they didn’t do the client’s filing.
Brokers should try to see for themselves if the client could receive a penalty letter, and provide their clients with a list of the options available.
Brokers should confirm their affordability calculators per client, confirm that minimum essential coverage was offered to at least 70% of the full-time employees, and check for the correct coding on the 1095-C’s. Example: Were boxes 1A and 1E filled out properly?
Clients are going to look to their brokers to help with their response to their 226J letter, but, more importantly, with the Form 14765 Premium Tax Credit.
Brokers should know how their clients handle qualifying events and status changes which could lead to “B” penalties.
If an employee went from full-time to per diem:
- Was the offer made through the stability period?
- Was the employee tracked for 3 months and coverage termed the first of the fourth month (if fewer than 130 hours, on average, per month) and COBRA offered?
Each employee on the 14765 needs to be fully reviewed, coding corrected and “B” penalty paid, as applicable.
This can be a cumbersome task, so brokers need to be ready to provide their clients with relief. It will be time to step up to the plate show your clients you are more than just a renewal broker but a subject matter expert!
Brokers should stay on top of guidance and also familiarize themselves with the Treasury Inspector General’s Employer Shared Responsibility Provision (ESRP) audit results that were issued in March 2018. The audit revealed that the IRS did not identify 840 employers potentially subject to more than $113 million in ESRP responsibility. The failure to identify these employers as applicable large employers (ALEs) occurred because the information used by the IRS was incomplete or inaccurate.
The ostrich problem
Employers who made the decision not to file, hoping that ACA would “just go away,” are in for a surprise as well.
Brokers should be proactive and discuss the potential issues that face their clients in this predicament. because the IRS is looking for them!
The IRS is reviewing their records and issuing Letter 5699 “Request for Employer Reporting of Offers of Health Insurance Coverage” When the letter arrives, employers will need to respond quickly; they will only have 30 days to answer from the date of the letter.
Possible answers include:
- I was an ALE for calendar year 2015 and filed under the following name.
- I was an ALE and Form 1094-C and 1095-C are enclosed (only for paper filer use).
- I was an ALE for calendar year 2015 and will file with the IRS under the following name.
- I was not an ALE for calendar year 2015.
- Other: Why I didn’t file and actions I plan to take.
If an employer who didn’t file receives Letter 5699, a broker will need to know about the client’s options and be ready to discuss the options, because it does appear that the IRS is providing employers in that situation with the opportunity to correct the error of their ways.
Does that mean the non-filers won’t face any penalties?
How would they prove “good faith” effort in this scenario? Meeting the requirements for showing “good faith effort” would appear to be quite challenging.
The New TIN discovery service
The IRS is replacing the existing Taxpayer Identification Number (TIN) validation system that is used to perform TIN validation for ACA information returns. After spending $2.3 million to date, the IRS stated that it plans on the transition being completed in time for the filing season for calendar year 2018. This should provide some relief.
The new TIN Discovery Service will perform the following on information returns:
- Validate issuer and recipient TINs.
- Discover a TIN based on name and date of birth.
- Discover a TIN based on name and address.
- Determine TIN type and.
- Reattempt to validate TINs that were unable to be previously validated.
Letter 226J risk analysis
So what action steps should a broker and client take at this time? Review the 2015 filing to determine if your client may expect a Letter 226J in the near future.
- Did you offer minimum essential coverage to at least 70% of your full-time employees (and their dependents) in 2015?
- If you did, make sure you checked the “yes” box in line 23, or the lines for each month -of the year!
- Best practice: if your employee count in column (b) of Part III of Form 1094-C varied by month, check lines 24-35 in column (a) rather than using the “all 12 months” box.
- Review your affordability calculation – did you accurately use one of the safe harbors – W-2, rate of pay, or federal poverty level?
- If you qualified for 4980H transitional relief based on size (50-99 full-time equivalents (FTEs) or 100+ FTEs), was line 22 box (C) checked?
Employers that find that they may potentially have an issue with their 2015 filing that may lead to IRS Letter 226J in their future, what course or action or correction steps should they take? Brokers should be ready to assist their clients or potentially their vendor with amending their 1094-C and determine if the error was carried forward for 2016 and perhaps 2017 and make those corrections as well.
The future
So, while employers finished their 2017 filings and are facing less challenges, what will 2018 and the future of reporting look like? The individual mandate is in effect until Dec. 31, 2018, so it appears that no form changes or employer reporting obligations would change. However, for 2019 filing, perhaps there will be no need for 1095-B’s or 1095-C part III completion.
While it might be wishful thinking that the ACA reporting requirements will change, loosen up or go away all together, it doesn’t look likely. The Tax Cuts and Job Act will have the IRS busy with amending tax forms, updating instructions and releasing guidance, giving the agency little time to amend ACA reporting. However, the IRS appears to continue with enforcement. Will ACA enforcement find its way to the back burner? As of now, no.