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Head shot of Howard Gerver

Howard Gerver, president of HR Best Practices

Unlike Frankenstein, Dracula and your run-of-the-mill ghosts, Employer Mandate penalties as defined in the Affordable Care Act (ACA) are real. To any business the penalties are scarier than the scariest horror movie because they can literally kill profits.

Employers can still survive, if not actually destroy the monster, by taking matters into their own hands. (More on that later.)

The penalties come from the ACA provision that requires employers with 50 or more employees or “full-time equivalents” to provide health benefits for their employees or face penalties.

The IRS began issuing employer-mandate penalties in December 2017 and continued on its penalty campaign ever since. All told, about 30,000 employers (including non-profits) have been slammed with penalties as high as $3 million.  Employers that were noncompliant for the 2015 Form 1095/1094 reporting year received Letter 226-J penalty notices. This is no surprise, as the IRS had updated its FAQs to state that “non-complying Applicable Large Employers should expect to receive penalty letters by late 2017.”  What makes this horror flick even scarier is 2015 was the first reporting year when “best efforts” and “transitional relief” were inplace.

To illustrate the magnitude of the penalties, here are two examples.

Case #1 — Manufacturer with 65 employees

  • Penalty amount: $75,000.
  • Triggered by five employees receiving a Premium Tax Credit when they purchased health insurance on the ACA insurance exchange.

Case #2 — Staffing Company with 1,000 employees

  • Penalty amount: $340,000.
  • Triggered by one employee receiving a Premium Tax Credit when he purchased health insurance on the exchange. The employer was penalized — even though the employee waived employer coverage and was technically ineligible for a Premium Tax Credit. The employer challenged the penalty, but unfortunately it did not secure a signed waiver from the employee when he did not elect health insurance coverage.

In spite of improved reporting technology and outsourcing to payroll experts, employers continue to have data and reporting struggles, primarily due to “bad data” and lack of ACA technical knowledge.

A Rapid ACA Compliance Audit Can Mitigate IRS Penalty Risk

Employers can help themselves by proactively auditing themselves for 2016, 2017, and even 2018.  A self-audit can reduce an employer’s penalty exposure by identifying problems ahead of time and either fix them or benefit from acting in good faith.  For example, if an employer knows 400 employees were ACA eligible and only 300 1095-C forms were produced, an employer could amend their return so the information is accurate.

With the 2018 reporting deadline only a few months away, now is the time for employers to audit at-risk areas including health insurance eligibility (particularly for part-time and variable-hour employees), 1095-C recipients, 1095-C covered individuals, as well as form 1095-C line 14 Offer of Coverage and line 16 Employee Status code accuracy. Don’t take bookkeeping errors lightly; the penalty for each incorrect ACA form is $260. Also, VERY IMPORTANT – If you don’t have signed waiver forms from employees that opted out of the plan, now is the time to collect these forms.

The IRS Is Not Trick-or-Treating

When the IRS knocks on your door, they want all of your “candy” – and more!  And what makes IRS ACA penalties a real “horror show” is you only have 30 days to reply or pay up. To that end, best practice employers either have great processes, technology and people, or hire an independent and objective firm to provide assurance their ACA penalty exposure is minimized.


About the Author –

Howard Gerver and the HR Best Practices team have provided health insurance cost containment, administration, and compliance services on behalf of hundreds of employers with 75 to 100,000 plus employees since 1983. HR Best Practices is a full-service ACA IRS Reporting, Hours Counting, 1095 Auditing, benefits administration and healthcare cost containment company. The company also offers ACA consulting, data conversion, legal support, employee communications and contact center support for client employees.