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IRS Audit – Is Your Business ACA Compliant?

Henry Ford once said, “quality means doing it right when no one is looking.” The same applies for your business in matters of compliance. With the IRS beginning audits of Applicable Large Employers (ALEs), and reporting penalties in the millions, it is important to understand the facts and next steps.

Letter 226J

This letter is being sent out to ALEs that the IRS believes were not in compliance with the Affordable Care Act (ACA). It addresses penalties associated with forms filed in 2015. These penalties are also known as Employer-Shared Responsibility Payments (ESRPs) or the “pay or play” penalties. While a first wave of letters have already been sent, another wave is expected to go out during the first quarter of 2018.

Why would your business receive this letter? And, if it does, what are next steps? Keep in mind that ACA compliance is two-fold:

1. Employers must adhere to the Coverage Mandate by offering health insurance of a certain quality to all full-time employees in a timely and affordable manner.

2. Employers must prove they upheld the Coverage Mandate by complying with IRS reporting requirements.

The IRS is first going to determine if an organization has hit the large employer status threshold of 50 full-time employees. This can be a complex process if there are part-time/seasonal employees and if a company is part of an aggregate group of other companies, so it’s important to understand the IRS guidelines.

The IRS is then going to look at Forms 1095-C and 1094-C and its employees’ individual income tax returns in order to determine if a company has been ACA compliant. The IRS will be measuring whether or not minimum essential coverage was made available to at least 95% of full-time employees, minimum value requirements are met, and the plan is affordable. If the company is deemed to have been not in compliance a penalty will be assessed.

So, you received the letter. What are your next steps?

The IRS requires an employer to respond to this letter within 30 days of it being sent out (the response date will be listed on the first page). With that being said, a good approach is for all ALEs to be proactive now to ensure they are prepared for an audit with or without the letter. Waivers of coverage, SPDs and wrap documents should be accounted for back to 2015 and employers should be reviewing 1094-Cs and 1095-Cs as well as their offers of coverage. A third party may be used to assist with the audit request to ensure the IRS is being replied to promptly and properly. The employer will respond with form 14764, the “ESRP Response” form, and either agree with the IRS’ assessment and pay the penalty (ending the exchange) or disagree and provide a revised proposed penalty which can lead to a pre-assessment conference with the IRS Office of Appeals at the request of the employer.

With ACA penalties expected to bring in millions of dollars to the IRS, employers literally can’t afford to be unprepared. However, employers are faced with managing a multitude of top priorities and compliance is just one of them. That’s where our team of experts at Univest Insurance comes in. We can provide the consultation and support needed in the world of ACA Compliance while implementing cost-containment strategies that maintain the value and affordability of your benefits plan, taking care of another one of your top priorities – your employees. Please feel free to give us a call at 215-362-7000.

Insurance products offered through Univest Insurance, Inc. are obligations of the issuing insurance companies, not obligations or deposits of or guaranteed by any bank and are not insured by the FDIC or any other agency of the United States.

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