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IRS Raises the Stakes: New Trade Law Increases Penalties Applicable to Affordable Care Act Reporting Requirements

August 03, 2015

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The Affordable Care Act ("ACA") imposes new IRS reporting requirements that apply to large employers and sponsors of self-insured health plans. Beginning next year, applicable large employers (or "ALEs," meaning employers with an average of at least 50 full-time and/or full-time equivalent employees) must report to the IRS whether they have offered full-time employees and their dependents coverage that meets the ACA requirements for "affordability" and "minimum value."

The Trade Preferences Extension Act of 2015 ("Trade Act"), enacted on June 29, 2015, significantly increased the penalties that apply to a failure to timely and correctly file various IRS information returns and provide statements to affected individuals, including these new ACA reports.

New IRS Reports and Employee Statements Required under Internal Revenue Code Section 6056

Under new Internal Revenue Code ("Code") section 6056 and related Treasury regulations, ALEs must annually file with the IRS a separate report for each full-time employee that shows whether the employee, and his or her dependents, were offered ACA-compliant coverage during each month of the prior year. The ALE must also report the employee's required contribution for self-only coverage under the lowest-cost minimum value coverage option offered by the employer.

The IRS will use the reports to administer the "employer shared responsibility" penalties, also known as "pay or play" penalties, that apply to ALEs who don't offer ACA-compliant health coverage. Like the "pay or play" penalties, the reporting requirements apply to all large employers, including those that are non-profit and governmental entities. Governmental employers, however, may designate another governmental entity to be responsible for their reporting, if the designee agrees in writing in accordance with ACA regulations.

The IRS will also use the reported information to determine an individual's eligibility for a premium tax credit towards the cost of coverage on a state insurance exchange (e.g., Covered California).

Generally, compliance with the reporting requirements will be similar to filing W-2 Forms with the IRS, and furnishing copies to employees. ALEs must file and furnish the ACA reports using new IRS Form 1095-C. The IRS recently issued a draft 2015 version of Form 1095-C, which is substantially similar to the previously issued version.

Employers who offer self-insured health coverage to full-time employees must also report monthly coverage information for each enrollee, including coverage information for the full-time employee's spouse or dependent child(ren), and must provide that information on the employee's copy of Form 1095-C. This reporting is required under new Code section 6055, which applies to health insurance issuers and sponsors of self-insured plans. For fully-insured plans, the insurance carrier will comply with the Code section 6055 reporting requirements (but not the Code section 6056 requirement, which is the employer's responsibility). The IRS will use this information to administer the "individual mandate" penalties.

The first Form 1095-C statements, regarding coverage offered in 2015, are due to employees by February 1, 2016, and the forms must be filed with IRS by February 29, 2016 (or March 31, if filing electronically; an ALE who is required to file 250 or more returns must file electronically).

Penalties for Failure to File Returns and Furnish Statements

ALEs that fail to meet the ACA reporting requirements are subject to penalties under Code section 6721 for a failure to timely file a correct information return with IRS, and section 6722 for a failure to timely furnish a correct statement to an affected individual.

Prior to the enactment of the Trade Act, each failure under Code sections 6721 and 6722 was subject to a penalty of $100 per return, not to exceed an annual maximum of $1.5 million. The Trade Act more than doubled the applicable penalties. Effective January 1, 2016, each failure to file a return with the IRS is subject to a penalty of $250, not to exceed $3 million per year. Likewise, each failure to furnish a required statement to an affected individual is subject to a penalty of $250, not to exceed $3 million per year.

The Trade Act also revised the maximum penalty amounts that apply when a failure is intentional, and the lower amounts that apply if a failure is timely corrected. The chart below shows the current and new penalty amounts that will apply as of January 1, 2016.

Time of Filing Current Penalty Amounts Penalty Amounts Effective 1/1/16
General penalty
(filed after Aug. 1 or not at all)
$100 per return / $1.5M max. $250 per return / $3M max.
Not more than 30 days late $30 per return / $250,000 max. $50 per return / $500,000 max.
31 or more days late
but before Aug. 1
$60 per return / $500,000 max. $100 per return / $1.5M max.
Intentional disregard for filing requirement $250 per return / no max. $500 per return / no max.

Relief for 2015 if Good Faith Compliance Effort is Made

For 2015 only, the IRS will not impose these penalties if an ALE can show it made a reasonable, good faith effort to comply with the ACA reporting requirements, even if the reports contain incomplete or incorrect information. This relief from penalties is not available, however, if an ALE fails to timely file the required forms with the IRS or furnish employee statements. Employers who are eligible for this penalty relief could still be subject to employer shared responsibility penalties if reports are inaccurate.

Other Issues and Next Steps

The IRS has issued guidance on how to report coverage for retirees and COBRA beneficiaries. There are also rules for electronic distribution of employee statements, reporting coverage for full-time employees who terminate mid-year, and a host of other issues. Most importantly, employers need to start now to assess their readiness to comply with the new reporting requirements.

For more information, please contact:

Elizabeth Masson

415-995-5106 Direct Phone
415-995-3593 Fax

Email Attorney

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Anne Hydorn

415-995-5893 Direct Phone
415-995-3404 Fax

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