Our guest blogger, Jeff Curl from Summit Benefit & Actuarial Services, Inc., explains what employers should know about The Affordable Care Act. This is part one of a two-part discussion on the topic.
Right now, employers are overwhelmed by the new Affordable Care Act IRS reporting requirements. Under these new regulations large employers are required to file health coverage information returns to their full-time employees and the IRS. This first article of a two part series will address these reporting responsibilities explaining which entities have a reporting obligation, which employees must be reported, what must be reported on these employees, and when these reports are due.
Applicable Large Employers
Applicable Large Employer Members (ALEM) must report information on their Full-time Employees.
Applicable Large Employers (ALE) are entities that employ, on average, 50 or more full-time and full-time equivalent employees per month in the prior calendar year. In other words, an analysis must be made using the previous year’s hours of service information by month on each employee to determine the employer’s status for the current year. An ALE can be a single entity or multiple entities of a control or affiliated service group. Even entities with one employee are considered members of the ALE (Applicable Large Employer Member) if the total of all full-time and full-time equivalent employees of the control or affiliated service group is 50 or more.
Think of it like this: Who is the ‘Employer’? The “Employer” is all entities in the control or affiliated service group; or a single entity if there is no common control or affiliated service group. Then the question becomes: Is the Employer an Applicable Large Employer? To make this determination, the regulations require an analysis of the employees’ hours of service in the prior calendar year. If the sum of the full-time and full-time equivalent employees of all of the individual entities adds up to 50 or more, then the employer is considered an Applicable Large Employer. Each separate entity of the ALE is an ALE Member (ALEM).
Each ALEM must comply with the Affordable Care Act (ACA) by offering to its full-time employees (and their dependents) affordable health insurance for each calendar month and must meet the IRS’s reporting requirements or pay penalties. An employee, in this context, does not include 2% or more shareholders of an S-Corp, partners in a partnership, or a sole proprietor. All employees of C-corporations are employees regardless of their ownership.
The Reporting Requirements
The IRS has the responsibility of enforcing the Affordable Care Act and assessing payments to individuals and employers who have failed to meet their responsibilities under the law. The IRS has two primary mechanisms of enforcement: required reporting and audits. The ACA reporting requirements are extensive and will allow the IRS to assess payments of individuals and large employers who clearly have not met their responsibilities under the law. The reporting will also trigger the IRS to ‘inquire’ whenever there is inconsistent reporting. Individuals, large employers, insurers and the Exchanges all have reporting requirements under the law. Mandatory reporting from multiple players in this process allows the IRS to cross check and verify each player’s reports. When the reports are inconsistent, the IRS will issue an inquiry. You can expect that the ‘inquiry’ will feel more like an allegation with the employer bearing the burden of proof that it either met its responsibility, or didn’t have that responsibility.
The Affordable Care Act requires reporting from individuals via their IRS Form 1040 and 8962 (if receiving a premium tax credit), from the Market Place / Exchange via IRS Form 1094-A, from insurers (insurance companies and businesses that self-insure) on IRS Forms 1094-B and 1095-B, and from Applicable Large Employer Members via IRS Forms 1094-C and 1095-C. Large Employers must comply with IRC 6056 when meeting their reporting responsibilities, and with IRC 4980H when determining which of their employees are entitled to an offer of health insurance coverage.
An ALEM must issue an IRS Form 1095-C to its “full-time employees” and file IRS Form 1094-C. IRC 4980H governs the definition of ‘Full-time employee’, and is beyond the scope of this article. We will note, however, that the regulations specify two- and only two- methods for determining if an employee is ‘full-time’ and therefore entitled to a benefit offer. These methods are solely focused on the employee’s hours of service. Employers may not use any other method than those two prescribed in the regulation to make these determinations.
When the ALE is a control or affiliated service group, each of the ALEMs has their own individual compliance and reporting requirements. Some ALEMs have no employees and do not have reporting requirements. But any ALEM with even one employee in even one month of the year must meet the reporting requirements.
EXAMPLE: Bob is the sole owner of Bob’s Foods, Bob’s Trucking, and Bob’s Management. Bob’s Foods has 35 employees, Bob’s Trucking has 20 employees and Bob is a full-time employee of Bob’s Management which does not employee any other employees. Bob’s Management is an S-Corp. Since all entities are members of a control group, and in aggregate, the control group employs over 50 full-time and full-time equivalent employees, which means each entity is an Applicable Large Employer Member. Bob’s Management will not have to file a 1094-C since Bob is not considered an employee for these purposes. Entities that have full-time employees have to issue 1095-C forms to their employees. Since Bob is the only full-time employee of Bob’s Management, and since, Bob is not considered an employee of Bob’s Management (despite his w-2 wages), Bob’s Management does not have any employees (who must be provided with a 1095-C). The other entities, Bob’s Trucking and Bob’s Management do have full-time employees, and will have 1095-C filing obligations.
CAUTION: IRS Forms 1094-C requires the disclosure, by EIN, of all other members of the ALE (i.e. the other entities in the control or affiliated service group). Bob’s Trucking’s 1094-C will list Bob’s Foods and Bob’s Management. Bob’s Foods will list Bob’s Trucking and Bob’s Management. Bob’s Management can expect an IRS inquiry as to why it did not file a 1094-C. There is no harm in filing 1095-Cs on all employees – even those the employer has no obligation to file on. It may be easier (cheaper / less hassle) for Bob’s Management to file a 1095-C on Bob, and file 1094-C to avoid the inevitable inquiry and required response.
IRS Inquiries – plan now and avoid later expense
When the IRS reconciles the reports from the various ACA players and uncovers any discrepancy that might indicate that an employer has failed to meet its responsibilities under the law, the IRS will issue an inquiry. This inquiry, we expect, will require the employer to demonstrate that it has either met its responsibility to offer coverage to a specific employee for a specific period of time, or it has demonstrated that the employer did not have this responsibility by showing that this particular employee’s hours of service history did not meet the 4980H definition of a ‘full-time’ employee. Remember, the employer’s obligation is to offer affordable coverage – so to have a signed form showing what was offered, what the employee portion of the premium was, when the offer was made, and the employee’s signature, accepting the offer, or declining it.
EXAMPLE: John works for Bob’s Trucking as a driver. Bob’s Trucking offered John coverage, but John thought he’d get a better deal at the exchange. In the application process at the marketplace / exchange, John was asked if his employer had offered him “affordable health insurance that met the Minimum Essential Coverage (MEC) and Minimum Value (MV) requirements of the Affordable Care Act.” John answered ‘NO’ to the question, believing that what Bob’s Trucking had offered him certainly wasn’t as affordable as what the exchange was offering him, particularly with the subsidy available from the exchange. Based on John’s application, he received coverage and a subsidy. THE PROBLEM – The Reports to the IRS will not be consistent: John will complete his 1040 and the new IRS Form 8962 (the application for the Premium Tax Credit – to justify the advanced payment of the premium tax credit – aka subsidy – that John received from the exchange). John’s 1040 will indicate that he met his responsibility of having coverage. His application for the premium tax credit and his Form 8962 will indicate he was not offered affordable coverage by his employer. (If he had been, John would not be eligible for the premium tax credit.) Bob’s Trucking will issue John a 1095-C (and submit form 1094-C with the same information to the IRS) indicating that John was in fact offered affordable coverage. This will, we expect, trigger an inquiry from the IRS to both John and Bob’s Trucking. Bob’s Trucking’s response will be rather painless if they can easily access the signed form showing John declined affordable coverage. John can expect to return the premium tax credit at a minimum.
A more difficult situation for Bob’s Trucking would be if they did not have the obligation to offer coverage to John. In this scenario, Bob’s Trucking will have to demonstrate that John’s hours of service did not satisfy the requirements of ‘full-time’ employee under 4980H. This demonstration is beyond the scope of this article, but will require the application of one of the only two methods allowed for defining who is entitled to a benefit offer: the Monthly Measurement Method (MMM), or the Look Back Measurement Method (LBMM). No other method of making this determination is permitted. Again, just as keeping the signed form where John declined the offer is ‘best practice’ so too would be the procedure whereby John was notified by Bob’s trucking that he was not a ‘full-time’ employee for the period, showing John the method used,–John’s relevant hours of service. Giving John this form at the time would make it clear to John why he was not being offered coverage. Getting John to sign this form acknowledging that his hours of service were accurate and keeping this form handy will again, make responding to the IRS inquiry far less painful than it might otherwise be.
1095-C and 1094-C
The remainder of this article will focus on the ALEM’s reporting requirements.
IRS Form 1095-C must be issued to employees no later then January 31, 2016 for the 2015 reporting year. The form has three parts. Part I is self-explanatory, containing information one would expect on an IRS form. Part III is to be used by employers who are self-insured and must comply with IRC 6055 – which is beyond the scope of this article, but simply includes the other members of the employee’s household covered by the insurance. Part II is where most employers need help.
Part II requires the employer to report by calendar month the status of the employee’s coverage. The IRS needs to know if coverage was offered, who it was offered to – i.e. employee only, dependents and / or spouse (even though the employer is not required to offer to a spouse, the details of the offer – i.e. was it MEC, MV?) And if the offer was “affordable” based on one of the three optional safe harbors, as well as the amount of the employee portion of the lowest cost of employee only coverage (even if the employee chose a different offer).
For each of these items of information, there is a code to be entered in either Line 14 or 16 of the Form 1095-C. Line 15 is used for the premium amount.
In making heads or tails of the codes, it’s best to start by remembering that the IRS is trying to determine if the:
- Employer met its employer mandate responsibilities
- Employee was offered affordable coverage – which would satisfy the employer’s responsibility and eliminate the individual’s eligibility for a premium tax credit from the Exchange. This is necessary information for the IRS and the Exchanges to manage the Premium Tax Credit (aka premium subsidies) portion of the ACA.
In other words, the IRS needs this information to assess the payments (think of them as penalties) to individuals and employers who have not met their responsibilities under the law, and to give the appropriate subsidies to individuals who qualify for them. The IRS will get all of the necessary information from the new reporting requirements.
Next, answer a few questions about the coverage your plan is offering.
- Does your plan provide Minimum Essential Coverage?
- Who do you offer MEC to?
- Employee only
- Employee and dependents
- Employee and spouse
- Employee, dependents and spouse
- Does the coverage you offer provide Minimum Value? If so, who do you offer MV coverage to?
- Employee only
- Employee and dependents
- Employee and spouse
- Employee, dependents and spouse
- Is the coverage you offer Affordable?
- Is the employee only monthly premium less then 9.5% of the employee’s w-2 box 1 (compensation after pre tax deferrals) divided by 12?
- Is the employee only monthly premium less then 9.5% of the federal poverty line ($11,770) divided by 12?
- Is the employee only monthly premium less then 9.5% of the employee’s hourly rate of pay multiplied by 130?
Answering these questions, will help you narrow down the list of codes you will use in Line 14 to a manageable list. Line 14 is all about your organization’s offer (mostly questions 1-3 above).
For example, if you offer MEC / MV coverage to employees, dependents and spouses, and the employee only pays an amount equal to or less than to $93.18 (9.5% of the Federal Poverty Line, $11,770 for 2015) then you will use Code 1A for the employees that you offered this coverage to.
If you offer MEC / MV to employees, and at least MEC to dependents, then use Code 1C
See the table below and identify which Line 14 Code you will use to the employees who receive an offer.
Line 15 is pretty straightforward. Firstly, you only use Line 15 if you offer your employees MEC and MV coverage – i.e. you use Codes 1B, 1C, 1D, or 1E in Line 14. If you do not offer MEC and MV coverage then leave Line 15 BLANK. Otherwise, enter the amount of the employee’s portion of the employee only premium offered to the employee – EVEN if the employee elected another option or declined the offer.
Line 16 is a bit of a hodgepodge. It could have been three lines actually, but essentially the codes come down to:
- Was the employee covered? If yes, use Code 2C
- Did your organization NOT have the responsibility to offer coverage because the employee was
- Not an employee: Code 2A
- Not a full-time employee: Code 2B
- Employee was in a limited non assessment period: Code 2D
You’ll note that after you eliminate employees who were covered, and employees the organization didn’t have the obligation to offer to, the only kind of employee left is those not covered, who the employer DID have the responsibility of making the offer to. These employees will either be those that you didn’t offer to (Line 14 Code 1H (no offer), and a blank Line 16, this would trigger an IRS inquiry / Assessable Payment), or that you offered and the employee declined (Line 14 Codes 1A-E for MEC / MV offer or 1F for MEC only offer, Line 16 Codes 2F, 2G or 2H could be used to demonstrate the offer’s affordability, but no other Line 16 Codes would be appropriate).
If the employee was offered affordable MEC / MV coverage, or accepted MEC coverage (even if it wasn’t affordable or didn’t provide MV) then that employee and is eliminated from eligibility for the Premium Tax Credit. These employees’ offer status was already addressed in Line 14, so the only remaining question is: Was the offer Affordable? This is where the remaining codes come into play:
- Codes 2F, 2G and 2H are used to indicate if the employer has chosen one of the Affordability Safe Harbors to demonstrate that the offer was affordable
- W-2 Box 1: Code 2F
- Federal Poverty Line: Code 2G
- Rate of Pay: Code 2H
Use of the Affordability Safe Harbors is optional, but presumably will reduce the number of IRS inquiries.
If your organization does not offer any sort of coverage at all, then completing the forms will be easy (albeit expensive!). Not offering coverage or not offering Minimum Essential Coverage to your full-time employees results in:
- Line 14: Code 1H
- Line 15 will be blank
- Line 16 will be blank unless the individual employee was either not:
- An employee for that particular month: Code 2A
- A full-time employee: Code 2B
If, at the other end of the spectrum, your organization offers MEC and MV coverage to employees, spouses and dependents then again, the reporting is straight forward:
- Line 14: Code 1E
- Line 15 will be the amount the employee would pay for the employee only insurance, even if the employee actually selected another option,
- Line 16 would depend on the employee’s situation, as stated above:
- Covered: Code 2C
- Not Covered but no obligation to do so:
- Not an employee: Code 2A
- Not a full-time employee: Code 2B
- Employee was in a limited non assessment period: Code 2D
- Offered, but Not Covered, may use optional Affordability Codes
- 2F – w-2
- 2G – Federal Poverty Line
- 2H – Rate of Pay
If, the employer only offered MEC and MV coverage to the employee, and MEC (but not MV) to dependents, and did not offer coverage to spouses, then the codes would be:
- Line 14: Code 1C
- Lines 15 and 16 – same as Example 2
As mentioned earlier in the article, the reporting is by employee by month the above examples are simplistic and represent a situation on a monthly bases or a situation where an employee’s employment and status does not change throughout the year.
If John, an employee of Bob’s Trucking, is hired in April, then Line 14 will use Code 1H, and Line 16 will use Code 2A for the months January – March. In April, John is hired as a part-time employee and works less than 130 hours in the months of April, May and June. Line 14 will use Code 1H, Line 15 will be blank and Line 16 will use Code 2B. In July, John is scheduled for more hours and is offered Affordable, MEC, MV coverage. Line 14 will use Codes 1A-E (depending on Bob’s Trucking’s policy to offer to dependents and spouses). Line 15 will show the amount John would pay for the employee only premium – even if he selected a coverage option that also covered his dependents and / or spouse. Line 16 will use Code 2C. John’s situation continues for August and September and the employer would use the same codes indicated as in July. In October, John’s spouse changes jobs and gets offered better coverage than John receives at Bob’s Trucking. John drops coverage. Bob’s Trucking will now report Line 14 using Code 1A-E (the same as it has reported since July because they are still offering coverage to John). Line 15 would still be the amount John would pay for the employee only coverage offer. Line 16 will now use Code 2F, 2G or 2H, depending on which Affordability Safe Harbor Bob’s Trucking chose to use (the use of these codes and the safe harbors is optional). If Bob’s did not wish to use an Affordability Safe Harbor it would leave Line 16 blank. In November, John is transferred from Bob’s Trucking to Bob’s Foods. Bob’s Foods will now have to issue John a 1095-C (and report John’s information on their 1094-C filing). For the months January through October, Lines 14, 15, and 16 will be blank on Bob’s Food’s version of the 1095-C because Bob’s Trucking had reporting responsibility in those months. In November, the situation becomes reversed and Bob’s Trucking will show blanks on lines 14, 15 and, 16, while Bob’s Foods will have reporting responsibility. John was not happy with the transfer and quit mid November. Bob’s Foods will report Line 14 using Code 1A-E, Line 15 will be the same used since July. Line 16 will now use Code 2B. In Bob’s Trucking, Lines 14, 15, and 16 will be blank. For December, either Bob’s Foods or Bob’s Trucking (but not both) should use the following: Line 14 Code 1H, Line 15 Blank, and Line 16 Code 2A
There are situations where multiple uses of Codes for Line 16 are possible. In these situations, the regulations prescribe a priority of use. The table below indicates the priority when multiple codes could be used.
When first attempting to understand the reporting requirements of the Affordable Care Act, it is understandable that the employer would be overwhelmed with the complexity of the task. Breaking that task down into smaller bites, and understanding the overall purpose of the reporting requirement, will help the employer meet the new 1095-C and 1094-C reporting requirements.
In part two of this article, we will discuss the details of the 1094-C requirements as well as how to submit them to the IRS.
Jeff Curl is a graduate of the United States Military Academy at West Point where he received a Bachelor of Science degree, a graduate of the University of Oregon where he received his Masters of Business Administration, and is a retired Special Forces United States Army Captain. For over twenty years he has been the co-owner and Chief Operating Officer of Summit Benefit & Actuarial Services, Inc. which in addition to offering retirement plan administration is now offering ACA IRS reporting and administration. You can email him at firstname.lastname@example.org.