By Jeff Chang and Allison De Tal
Within the last few days, we have received a number of emails and calls from public agency clients stating that the IRS wrote them to demand an Employer Shared Responsibility Payment amounting to millions of dollars. Naturally, our clients are surprised and shocked that they are receiving such demands – especially since they all believe that they are in compliance with the requirements of the Affordable Care Act.
Here’s what we think may be happening:
- ESRP is a penalty for large employers’ (at least 50 full-time employees) noncompliance with certain aspects of the ACA. The ESRP is calculated on a monthly basis (but assessed for the entire tax year), and it is imposed in two situations:
- Internal Revenue Code § 4980H(a): An applicable large employer did not offer minimum essential coverage to at least 95 percent of its FTEs (and their dependents), and at least one FTE was allowed the premium tax credit. For example, a large employer with 1,000 FTEs that failed to comply with this rule for the entirety of 2016 would owe an ESRP of $2,095,200 ($180.00 x 12 x 970). (For the purpose of calculating the penalty, the number of FTEs is generally reduced by 30.)
- Internal Revenue Code § 4980H(b): An applicable large employer did offer minimum essential coverage to at least 95 percent of its FTEs, and at least one FTE was allowed the premium tax credit because the coverage was unaffordable, did not provide minimum value, or the FTE wasn’t offered coverage. If five FTEs were offered coverage, but such coverage didn’t provide minimum value, and these FTEs received a premium tax credit during each of the 12 months of 2015, the penalty would be $16,200 ($270 x 5 x 12).
- Ironically, it appears that the clients we have spoken with are offering minimum essential coverage to at least 95 percent of their FTEs. Such coverage meets the minimum value requirements, and — with limited exceptions — satisfies the affordability requirements. Unfortunately, it appears that, in at least one case, there was either a preparer error or software glitch giving rise to the completion of an incorrect IRS Form 1094–C.
- Because Forms 1094-C and 1095-C are filed electronically with the IRS, it is a little bit difficult for some employers to obtain a copy of the forms as filed due to the software used to submit the forms.
- The taxpayer/employer is usually given about a month to respond to the IRS letter. The response would normally include a Form 14764 (ESRP Response), explanation of the error, and an indication of who (the employer or its designated representative) is handling the matter.
We’ll be left wondering what is prompting these letters in situations where clients have offered ACA compliant coverage until someone in the 4980H Response Unit is available for assistance. If you are experiencing these issues, contact us.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org or (916) 329-3685.
Allison De Tal is of counsel at Best Best & Krieger LLP who focuses on tax and employee benefit matters. She can be reached at email@example.com or (916) 551-2846.