Obamacare compliance in IRS crosshairs
Employers began receiving penalty letters this year warning them they were out of compliance with the Affordable Care Act. The potential fines are steep but many recipients have been able to avoid penalties by fixing errors in paperwork they had filed before.
The letters stem from efforts by the U.S. Internal Revenue Service to catch up with a backlog of penalty letters to employers that failed to demonstrate compliance with the act during 2015, the first year the law was in effect.
Since February, the IRS has been sending notices to companies that didn’t adequately prove they offered the minimum coverage required under the act, which was signed into law in 2010 and took effect over the next several years. The affected companies had at least 50 full-time equivalent employees.
The notices, referred to as 226-J letters, warn employers they might have to pay a fine.
According to the IRS website, the agency sent the letters after it reviewed the paperwork employers had to fill out and submit under the Affordable Care Act. The act, often referred to as Obamacare, requires large employers to provide minimum essential coverage and to report that coverage by filing 1094-C and 1095-C forms with the government.
“From our experience the vast majority of things we heard about were forms filled incorrectly because something was omitted unintentionally,” Matt Pfeiffenberger, vice president of health benefits solutions at Murray Securus in Lancaster city, said. “Companies were trying to do the right thing but were caught in the complexity of the reporting.”
Kimbarley Williams, a CPA with public accounting firm Boyer and Ritter of Camp Hill, said it was easy to make errors on the 1094-C and 1095-C forms.
“Everything in those forms relies on a code. If you put 2A down and you should have put 2D down,” she said, that would be an error.
Williams said one of her clients received a 226-J letter asking him to fix information from the filing – if there was an error – or face a bill for $6,500. Fines depend on the cost of health insurance an employee purchased as a result of not being offered it in the workplace.
The client’s employees “got their own insurance and the IRS is saying you should have offered it to them and why didn’t you,” Williams said.
But, Williams said, the employees referenced in the letter were ineligible for coverage at the time and it was an error made in the filing.
“In this case, the reporting was done by a third-party paymaster and it was the first year of the required ACA reporting,” Williams said, adding that the process to explain the error to the IRS was easy. “He completed the response as requested in the initial 226-J notice and within two months had an acceptance letter.”
Indeed, the IRS encourages businesses that receive a 226-J letter to provide the correct information if they believe they received it in error. Williams said that the letters aren’t bills, but with only 30 days to respond, they shouldn’t be taken lightly.
“You need to respond or they will send you a bill,” she said. “This notice is saying there is a potential owed amount. Take a look at the discrepancy.”
Tighter enforcement seen
Letters sent out this year were for compliance in 2015. The IRS has yet to send out 226-Js for subsequent years, said Mark Smith, a partner with Lancaster-based Barley Snyder law firm in charge of its employee benefits practice. Looking forward, Smith believes the IRS is going to tighten up on employers who failed to comply with the act and that future letters could target companies with larger penalties.
“If you are a larger employer and opted not to provide health coverage to your employees, it’s important that you start to understand that it carries with it a penalty and the IRS is now starting to focus on this requirement and they are pursuing people,” Smith said
Employers receiving letters for their 2015 reports should also be wary of their 2016 and 2017 filings, according to Smith. The act mandated that 70 percent of a company’s employees be offered coverage in 2015 as a transition, but the number rose to 95 percent in 2016.
“For someone who got a notice in 2015, chances are they will have an issue for ’16 and ’17,” Smith said.
While the penalties can be high, Smith said some companies could actually be saving money by just paying the fine versus offering health insurance. But they may pay for it in other ways in the long run.
“You pay for health insurance, you get a tax deduction,” Smith said. “It’s not as easy as saying it will cost me more to provide so I won’t pay the penalty. You will have retention issues if you aren’t providing coverage.