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As the IRS begins rolling out a new round of ACA penalty notices this month, we can’t stress enough how important it is to assess your compliance with the ACA on a monthly basis to optimize your compliance process. If you haven’t already implemented a monthly process, you should consider doing so as your organization can benefit significantly by avoiding ACA penalty assessments from the IRS.
It’s on a month-to-month basis that the IRS determines penalty assessments for ACA non-compliance. The Letter 226J notice calculates penalty amounts on a monthly basis under IRC 4980H. The total penalty assessment in the notice is based off the sum of those monthly figures. The agency also identifies which employees received a Premium Tax Credit (PTC) and for which months they were received, which can impact the type and size of a 4980H penalty.
By incorporating a monthly ACA compliance process, you are in a better position to cross-reference the information in the IRS’ Letter 226J with your own records. This will save your organization time and money, in addition to getting you set up for responding to the notice in a timely manner. With the agency now enforcing a reduced amount of time for an extension to an organization to respond to Letter 226J, time will be of the essence.
In addition, if your organization is administering a monthly ACA compliance process, you can pinpoint missing offers of coverage, calculate the potential penalty exposure with the IRS, and take action to reduce that penalty exposure.
Here’s an example of how an ACA monthly compliance process can help contain your ACA penalty exposure:
If a particular employee, deemed full-time under ACA regulations, misses an offer of coverage for the month of February, that employee would theoretically pose a risk for ACA penalty exposure for every month thereafter until an offer of coverage was made to that employee. It’s something you might not catch until later in the year if you don’t look at ACA data until the end of the year, which could result in significant ACA penalties being assessed by the IRS.
If your organization was administering a monthly ACA compliance process, you could quickly remedy the situation by making the offer of coverage as soon as possible, containing the penalty exposure to just one month. While the penalty exposure for the month of February remains, you can confidently assert that they were only eligible for the month of February.
With the monthly ACA compliance process, your organization can track employees who may become eligible for health benefits, putting your organization in the ideal position to make timely offers of coverage in order to comply with the requirements of the ACA’s Employer Mandate.
Organizations that want to set up a monthly ACA compliance process should take into account these three critical areas: (1) regulatory knowledge, (2) documentation and record-keeping, and (3) data quality management.
Regulatory Knowledge: When addressing ACA compliance needs on a monthly basis, a complete understanding of the mechanics of the law is required. If employers do not have employees who have this deep level of understanding of the ACA, consider hiring third-party consultants who have intimate knowledge of ACA regulations, and understand how to interpret and take action in accordance with the requirements of the law. Mastery of ACA regulatory concepts, such as IRS Approved Measurement Methods, affordability Safe Harbors, and Limited Non-Assessment Periods, can come in handy as you navigate the law, particularly if you want to minimize or eliminate penalties.
Documentation and Record-Keeping: Monthly ACA compliance relies heavily upon supporting documentation in order to be “audit ready” in case you receive a penalty assessment from the IRS. Documentation should include items such as a Summary of Benefits and Coverage, rate contribution sheets, offers of coverage to employees, medical invoices, enrollment forms, waiver forms, and acknowledgment of offers to employees for the relevant reporting year. Your organization will want records close at hand if it becomes necessary to respond to the Letter 226J notice.
Data Quality Management: This relates to the management of your workforce (HR) data. The raw inputs matter here. Data fields, such as census information, time & attendance, employment type, wage and rate information, as well as contribution structure, must be accurately tracked in order to comply with the ACA. For some employers who also use paper files, unstructured HR data is another factor to consider. In the end, the analytical data outputs are only as good as the quality of the raw data inputs that feed the calculations required to meet ACA regulations to avoid IRS penalties. This is particularly true if you use do-it-yourself software packages which will automatically complete IRS forms without checking if the data being used is accurate. This is a significant trigger of ACA penalties issued by the IRS.
The IRS has issued more than $4.5 billion in penalties to employers that failed to comply with the Affordable Care Act’s Employer Mandate for the 2015 tax year alone. By the year 2026, the amount of ACA penalties issued by the IRS is expected to reach $228 billion. If you haven’t received a penalty notice from the IRS, one may still be in the offing. The IRS has started to issue penalty notices for the 2017 tax year this month.
In addition to the Letters 226J, the IRS is also issuing Letters under IRC 6721/6722, which are additional penalties for not filing or furnishing the underlying 1094-C and 1095-C Schedules upon which the IRS bases the Letters 226J.
The IRS is becoming more proficient at identifying and assessing penalties against those employers who are not complying with the ACA. Undertaking a monthly ACA compliance process will have you that much better prepared to address any penalty assessments issued to your organization, or, better yet, avoid receiving them.
