ACA Deadline Changes and Elimination of Transitional Good Faith Relief
Earlier this year the proposed regulations updating deadlines and ending good faith relief for Affordable Care Act (ACA) reporting became law. (See Federal Register : Information Reporting of Health Insurance Coverage and Other Issues)
Among other things, the regulations require that:
- The deadline for furnishing IRS Forms 1095-C to employees will be March 2 (or March 3 in a leap year) – which is 30 days more than what was previously allowed; and
- The transitional “good faith relief” for employer ACA reporting would no longer apply to tax years after 2020.
What does the elimination of “good faith relief” mean for employers?
For tax years 2015 through 2020, the transitional good faith relief insulated employers from penalties assessed under Internal Revenue Code for furnishing or filing a Form 1095-C that contained mistakes or was missing information so long as employers filed timely and made reasonable efforts to complete Form 1095-C accurately. Elimination of this “good faith relief” means that the IRS will be enforcing a stricter standard as it relates to the accuracy and timeliness of filing and furnishing 1094-C and/or 1095-C forms to employees.
Despite the elimination of the transitional good faith relief, the IRS will continue to provide penalty relief for “reasonable cause”. Needless to say, “reasonable cause” is a higher standard than good faith. IRS Publication 1586 explains that to demonstrate reasonable cause, “filers must establish both that they acted in a responsible manner both before and after the failure occurred and that: there were significant mitigating factors with respect to the failure . . . or the failure was due to events beyond the filer’s control.” There is no guarantee that penalty relief will be granted.
It is important to note that this change does not apply to all ACA related penalties. It does not change the penalties assessed or process for mitigation of the employer shared responsibility provisions (ESRP) penalties.
There are a few different types of fines that can be assessed under the ACA:
The first two, listed below, are related to the ESRP and are not impacted by the new rules. Employers who may have violated these provisions will continue to be provided with IRS Letter 226-J, which includes instructions for dispute and correction of mistakes.
For the 2022 tax year, the 4980H(a) penalty amount is $229.17 a month per employee ($2,750 annualized). The total fine is calculated by multiplying the penalty amount by the total number of full-time employees (less 30).
The 2022 tax year 4980H(b) penalty amount is $343.33 a month per employee ($4,120 annualized). This fine only applies to those impacted.
Section 4980H generally provides that an applicable large employer is subject to an assessable penalty if either (i) the employer fails to offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and any full-time employee is certified to receive a premium tax credit or cost-sharing reduction; or (ii) the employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage and one or more full-time employees is certified to receive a premium tax credit or cost-sharing reduction. Very simply, these fees apply if an employee is certified to receive a premium tax credit or cost sharing reduction because the employer has failed to offer minimum essential coverage (4980H(a)) or because the minimum essential coverage offered is not affordable (4980H(b)).
Assessment of penalties for failure to meet the requirements of 4980H has been in effect since 2013 with transitional relief into 2014. Nothing has changed in this regard.
The change is to the enforcement of fees related to providing accurate and timely returns to the IRS and employees. Fees for the 2022 tax year are as follows:
Failure to File Penalty
The 2022 tax year penalty is $280 per return for not filing correct ACA information returns by the mandated deadlines.
Failure to Furnish Penalty
The 2022 tax year penalty is also $280 per return and doubles for intentional disregard, just like the failure-to-file penalty when it comes to failing to furnish Form 1095-C to employees by the deadline.
There is a potential total of $560 per return if both are not provided in time and done accurately. The penalty amount increases to $570 if an employer intentionally disregards their filing responsibilities.
In both cases, if mistakes in the returns are discovered and corrected quickly, the general penalty may be reduced to as low as $50 per return if corrected within 30 days of the due date, or $110 per return if corrected more than 30 days after the due date but before August 1.
What can you do to improve the accuracy of your returns?
Here are some general tips to help you avoid fines related to timely and accurate filing:
- Save any documentation of coverage offers, premium costs, and related information to demonstrate the accuracy of the forms.
- Review reporting vendor contracts to determine which party is responsible for mistakes. The IRS will look to the employer if a form is incorrect.
- Work with your vendors to provide advance drafts of the forms, so you have an opportunity to review them.
- For 1094-C Forms:
- Review the forms closely. Ensure the correct information appears on Form 1094-C and the correct boxes are checked.
- Check the Aggregated ALE Group box if the tax ID number for which you are filing is the aggregated filer in the controlled group.
- Make sure that Part III, Column A reflects the correct answer regarding the 95% MEC offer of coverage.
- Make sure that Part IV contains all controlled group tax ID numbers (if applicable).
- For Forms 1095-C:
- Review a sampling of forms to look for errors. Focus on unique cases such as rehired employees, change in status employees (full-time to part-time and part-time to full-time), employees that transitioned to COBRA, and employees that took a leave of absence.
- If applicable, make sure the applicable forms reflect the correct affordability safe harbor. If inapplicable, review to ensure the accuracy of the monthly premium amount.
- Ensure every “1” code has a corresponding and applicable “2” code.
- Ensure completion of Part III for both level-funded and self-funded plans – include all employee and covered dependent information.
- Ensure that you are not filing 1095-C forms for individuals who are not employees.
Why is this important now?
As the IRS has recently received additional funding, this may be an area of greater audit focus in 2023. Now is the time to review your processes and prepare to submit your 2022 returns accurately and on time.