What are the latest enforcement efforts of the IRS in regard to the employer mandate and reporting requirements?

As a reminder, the employer mandate (also known as the employer shared responsibility) only applies to employers with 50 or more full-time employees, including full-time equivalents (FTEs).

In November 2017, the IRS began enforcement of the employer mandate. Their efforts thus far have focused only on calendar year 2015. In 2015, most small employers with 50 to 99 FTEs qualified for transition relief. This transition relief exempted them from employer mandate penalties for that year, but they were still required to comply with Section 6056 reporting (Forms 1094-C and 1095-C).

The method of enforcement used by the IRS involves issuing a Letter 226J to the employer. The letter will identify the total assessment that the IRS believes the employer owes, the reasoning for the assessment, including a listing of the employees who received a premium tax credit, and instructions for appealing the assessment.

To our knowledge, the first round of letters sent by the IRS assessed Penalty A for failure to offer minimum essential coverage (MEC) to substantially all full-time employees (70 percent in 2015). Almost all of the letters we’ve seen were due to a reporting mistake rather than actual failure to comply with the employer mandate. In other words, the employer indeed offered MEC to substantially all full-time employees, but their Form 1094-C didn’t indicate that fact. Specifically, column (a) of the Form 1094-C was incorrectly marked “No” in response to whether they offered MEC to full-time employees.

The most recent letters we’ve seen seem to assess Penalty B for an employer’s failure to offer minimum value, affordable coverage to specific employees who received a premium tax credit. Again, the penalties are generally due to erroneous reporting. A common scenario is that the employee was indeed not offered coverage, but the employer had a valid reason for not offering it. For example, the employee was in an initial measurement period, part-time or not employed for that month. The employer entered 1H on line 14 of the Form 1095-C, but failed to claim the correct safe harbor code on Line 16.

In most cases, the IRS has been cooperative with employers. They have advised employers as to what documentation is necessary to eliminate or reduce the penalty assessment. In some cases, the IRS representative granted a 30-day extension to give the employer more time to respond and gather documentation.

The letters are still being sent out on a regular basis. We saw several employer letters just last week. So, just because you haven’t seen one yet doesn’t mean you’re in the clear. And remember, so far, they’ve only focused on 2015. We haven’t seen any enforcement action related to 2016 or 2017 yet. However, several IRS representatives have told employers that if the employer has knowledge that their 2016 or 2017 Forms 1095-C or 1094-C are incorrect, they encourage them to file a correction as soon as possible.

For now, the employer mandate is still in effect with no immediate changes expected. Large employers should continue to offer minimum value, affordable coverage to full-time employees. And just as important as the offer, an employer must have records documenting the offer, the cost of coverage for affordability purposes, and employee hours. An employer just might need these records to successfully appeal a potential assessment from the IRS.