Manage ACA compliance for Tax Year 2016: Know the IRS penalty risks

Manage ACA compliance for Tax Year 2016: Know the IRS penalty risks

By Helen Karakoudas | ACA Education Director, Integrity Data
January 29, 2016

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 noncompliant 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.

The first must-know about the ACA sledgehammer and tack hammer penalties – nicknames that an employee benefits lawyer originated back in 2011 – is that they go up every year. The increase is because of what is called “the premium adjustment percentage” – inflation for premium costs. What was $2,000 and $3,000 in 2014 – the year that the IRS added the ACA pay-or-play regulations to the tax code – then became $2,080 and $3,120 in 2015, and now is $2,160 and $3,240 for Tax Year 2016. (To check this fact and find all the arithmetic behind it, scroll to Answer 13 in IRS Notice 2015-87.)

ACA sledgehammer penalty for Tax Year 2016

So if in Tax Year 2015, you did not offer any coverage to a workforce of 100 full-time employees (and again in Tax Year 2016, you also did not make any coverage offer) – and in March of each year, an employee went to an exchange and got subsidized coverage, then – before exemptions for each year were taken – you would be facing $6,670 more in the sledgehammer penalty for Tax Year 2016.

Once you apply exemptions – which are 80 for Tax Year 2015 and 30 for Tax Year 2016 – then the sledgehammer penalty for Tax Year 2015 would be $34,666 and $126,000 for Tax Year 2016.

ACA penalty risk for Tax Year 2016

 

 

 

 

 

 

Second, it’s important to remember that once a coverage penalty is triggered – an eligible employee goes out to an exchange and gets subsidized coverage – then the respective penalty (either the sledgehammer or the tack hammer) will be assessed monthly.

RS ACA penalties for Tax Year 2016_Integrity DataWith ACA compliance for Tax Year 2016 in mind, that’s what we show here: $2,160 divided by 12 is $180 a month.

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 this dollar figure multiplied by all your ACA-defined full-time employees – for that month and all months afterward in that tax year. (For Tax Year 2016, you have 30 exemptions.)

ACA tack hammer penalty for Tax Year 2016

The same monthly concept applies to calculating the tack hammer penalty: $3,240 divided by 12 is $270 a month.

If you offered coverage but it was a plan that didn’t meet ACA standards for affordability and quality – and an employee eligible for coverage 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.

Non-filing penalty: $520* per required return

The third penalty listed here is not ACA-specific and has nothing to do with whether coverage was offered to employees. It’s the non-filing penalty – the same penalty that applies to all information reporting required of employers but not ever submitted.

If you do not produce every W-2 or 1099 that you are required to produce, you face a $520* a form penalty per required return. Because the filing of copies of 1095-C forms with the IRS is a reporting obligation for certain employers, this penalty will be assessed on an “intentional disregard” basis if the IRS finds it did receive the required returns from those employers.

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.

Yes, you can be offering the highest quality coverage at absolutely no cost to your employees and still be ACA-noncompliant if you do not stop to account on 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.

Who needs to be ACA-compliant and by when

ACA Form Deadlines for Tax Year 2015_Integrity Data ACA ComplianceCompliance requirements under the Affordable Care Act apply not just to those businesses who you always hear mentioned: employers with 50 full-time employees, including equivalents.

The ACA coverage and reporting requirements also apply to:

  • smaller companies if they are part of a commonly controlled or affiliated group whose total FTE count is at least 50.
  • smaller companies if they are self-insured

Please see this flowchart for a quick 1-minute review of your ALE (Applicable Large Employer) status.

To check how to calculate head count for ALE status, please review this blog post: 1095-C reporting: Determining a company’s ALE status

Keep on top of ACA reporting

To make sure that you are ready for the very first ACA filing season and on top of managing ACA compliance for Tax Year 2016, learn more about what we do at Integrity Data.

 

Related post: Take cover from ACA sledgehammer and tack hammer penalties

 

*subject to change for filing year 2017

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