ACA compliance is not just an HR problem anymore

Applicable large employers (ALEs) have just completed the third year of Affordable Care Act (ACA) reporting. Until now ACA compliance activities such as tracking employees, offering appropriate benefits, and reporting to the IRS have generally fallen on HR departments. In many instances, employers may receive assistance from a trusted advisor like a benefits broker or CPA.

However, a significant step to the ACA compliance cycle has been introduced that concerns and requires the attention of more than just the HR department. 

The issuance of Letter 226-J by the IRS, which began late last year, has put the ACA on the radar of CFOs and financial executives. Letter 226-J explains that an ALE is subject to an Employer Shared Responsibility penalty. These penalties can be assessed because an employer did not offer minimum essential coverage (MEC) to the required percentage of ACA full-time employees or because the coverage that was offered did not meet minimum standards, including affordability. Either way, these penalties can be quite substantial if triggered.

The IRS is now assessing these penalties for the 2015 filing year, and you can be sure that letters will soon be coming for the 2016 filing year as well. 

Who needs to get involved?

Employer Shared Responsibility penalties have significant tax implications and likely require financial and budgetary considerations. For this reason, company executives responsible for financial and tax planning now must roll up their sleeves and dive into the ACA compliance abyss.

Imagine receiving one of these letters, in which the IRS is estimating that you have a tax liability of $150,000. Was your company prepared to get this letter? Did you set aside budget for the penalty in advance or create plan on how you would financially deal with this blow to your company’s bottom line? Do you understand the tax implications? The answer to most of these questions is often, No.

The reality is that this is a new and evolving compliance process. Sure, most people involved could have foreseen that the IRS would one day come to enforce these regulations, but it wasn’t made entirely clear how or when that would be done until recently.

The best thing a responsible organization can do now is try to get ahead of the curve. So, how do you do that?

Audit, respond, adjust

It may or may not be too late to prepare for potential 2015 filing liability, but it is absolutely not too late to prepare for 2016 and beyond.

Employers should begin by auditing their previous filings to assess any potential liabilities. This can be done by evaluating the data that was reported on the 1095-C and 1094-C forms and looking for potential issues. For example, if a full-time employee’s form lists the indicator code 1H in line 14 and line 16 of the form is left blank, this is a clear red flag of a potential penalty. Essentially this tells the IRS that the employer likely had an obligation to offer coverage to this employee, but failed to do so.

An employer can then proactively prepare a response and explanation to any potential issues (when applicable) that may be flagged by a Letter 226-J. Ultimately a response may prompt the IRS to reduce or even eliminate the estimated penalty.

Employers should also assess their current compliance plan. How effective is the plan if you are receiving a penalty letter that indicates non-compliance with the regulations? Adjusting your compliance plan to ensure future compliance is critical. In the meantime, understanding real or potential liabilities can assist key executives in financial and tax planning for the organization. 

Taking the steps of auditing, responding, and adjusting your filings and compliance plan can be complicated and requires a solid understanding of the ACA regulations. To assist with this complex process, it’s recommended you work with an advisor or utilize specialized reporting and compliance software.

An employer’s evaluation, response, and adjustment is only effective if the individual or tool handling it fully understands the rules and regulations and can account for them in their analysis. No matter how you choose to do it, it’s clear that now is the time to get ahead of the curve!