Manage ACA compliance for Tax Year 2018: Know the IRS penalty risks

Manage ACA compliance for Tax Year 2018: Know the IRS penalty risks

Content updated April 25, 2018

We know that you often hear of employers’ pay-or-play penalties under the Affordable Care Act in terms of $2,000 a year per full-time employee (for offering no coverage) and $3,000 a year per full-time employee (for offering non-compliant coverage). As with all mentions of numbers, these dollar figures need background and perspective – particularly when they are in the context of a law that defies quick overviews.

There are two potential penalties related to the Employer “Shared Responsibility” provision. The first penalty is referred to as the Sledgehammer penalty. The ACA Sledgehammer penalty affects Applicable Large Employers (ALEs) who fail to offer any coverage, despite affordability, to at least 95% of its full-time employees AND one of those full-time employees obtains subsidized coverage on the Exchange. The second penalty is called the Tack Hammer penalty. This penalty affects employers who offer coverage to at least 95% of its full-time employees, but the coverage is NOT affordable.

The first must-know about the ACA sledgehammer and tack hammer penalties is that they increase every year. The increase is because of what is called “the premium adjustment percentage” – inflation for premium costs. The other thing to keep in mind is that an ALE may be subject to only one penalty and not the other.

ACA sledgehammer penalty for Tax Year 2018

IRS ACA penalties Integrity Data

As mentioned above, it’s important to recognize that the penalties increase each year. The original amount of the sledgehammer penalty was $166.67/month or $2,000/year for each full-time employee. The current penalty amount for tax year 2018 is $193.33/month or $2,320/year for each full-time employee. (To check this fact and find all the arithmetic behind it, scroll to Answer 13 in IRS Notice 2015-87.) Also remember that the IRS allows an ALE to exclude the first 30 full-time employees from the calculation.

A company will be hit with this penalty in 2019 if, during 2018 you offered full-time employees no health plan AND one of those employees got subsidized coverage on the Exchange. Again, the monthly penalty would be $193.33 per-employee and per-month OR $2,320/year per employee. So for example, a business with 100 full-time employees, does not offer insurance for the entire year and one full-time employee receives federal insurance subsidies on the exchange: the business will pay $2,320 per full-time employee (minus the first 30) for a total penalty of $162,400. Calculation: 100 – 30 = 70 employees. 70 x $2,320 = $162,400.

If you have an employee that was eligible for coverage in a certain month and your 1095-C reporting shows that no offer of coverage was made to that employee in that month, then the penalty you’re facing is $193.33 multiplied by all your ACA-defined full-time employees (minus 30) for that month and all months afterward in that tax year.

ACA tack hammer penalty for Tax Year 2018

The same concept applies to calculating the tack hammer penalty. This penalty is $3,480/year per employee OR $290/month per employee.

If an employer offers coverage but the plan didn’t meet ACA standards for affordability and quality AND an eligible employee went to an exchange and got a subsidy, then the penalty you’re facing is this dollar amount multiplied by number of eligible employees who got exchange subsidies. The penalty can go up to, but not exceed, the sledgehammer penalty. The employer would be responsible for paying the lesser of $3,480 per subsidized employee OR $2,320 per full-time employee (minus 30). So for example, if the employer had 10 FT employees who obtain a subsidy, the penalty would be $52,200. Calculation: 15 x $3,480 = $52,200. Therefore based on the calculations, $52,200 would be the lesser of the two.

Incorrect Form/Late Submission Penalty

Employers also need to keep mind that there are penalties related to late submission and/or incorrect 1094/1095 forms. In tax year 2017, the penalty for failure to file correct information returns by the IRS deadline was $260/return with a maximum penalty of $3,218,500 per organization.

If the IRS determines that an employer’s failure to file is the result of intentional disregard, the penalty amount will be $530/ form without limitations.

According to the IRS,

Penalties for not filing correct information returns (Code Section 6721) may apply if you:

Penalties for not providing correct payee statements (Code Section 6722) may apply if:

  • Don’t file a correct information return by the due date and a reasonable cause is not shown
  • You don’t provide a correct payee statement by the applicable date and a reasonable cause isn’t shown
  • File on paper when you were required to file electronically
  • All required information isn’t shown on the statement
  • Don’t report a Taxpayer Identification Number (TIN)
  • Incorrect information is included on the statement
  • Report an incorrect TIN
 
  • Don’t file paper forms that are machine readable
 

ACA compliance defined

Remember: Compliance with the Affordable Care Act is about more than benefits. It is also about documenting for the IRS, on Form 1095-C, what you are doing – or not doing & submitting ACA Form Deadlines Integrity Data ACA Complianceall forms by the IRS deadlines.

Yes, you can be offering the highest quality coverage at absolutely no cost to your employees and still be ACA non-compliant if you do not stop to account for what you offered your employees.

You also can be ACA non-compliant if you opt to accept the sledgehammer penalty for offering no health insurance and believe that this readiness to pay makes it so you do not have to file 1095-C forms. It does not. You must furnish ACA forms to your employees and then file copies of them with the IRS even when you have a “pay” strategy.

Keep on top of ACA reporting

To make sure that you are ready for this filing season and on top of managing ACA compliance for Tax Year 2018, learn more about what we do at Integrity Data.

 

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