Penalties Double for Failure to File New IRS Information Returns Under the ACA

Penalties for failure to satisfy the complex IRS filing requirements resulting from the Affordable Care Act (ACA) have just doubled.  With filing deadlines approaching, employers should act quickly to ensure they are prepared.

Starting in February 2016, the ACA requires employers and healthcare providers to file new IRS information returns in connection with employer-provided healthcare coverage, and provide a copy of the applicable return to each employee.  The annual information returns are designed to enable the Internal Revenue Service to enforce the ACA by disclosing whether an employer or an individual is subject to non-compliance penalties and whether an individual is eligible for a premium tax credit when purchasing healthcare coverage on a state or federal Marketplace Exchange.  

The information collection requirements for the new information returns will require a substantial amount of data on each employee and dependent from the employer’s HR and payroll departments and possibly from its insurance providers and third-party administrators.  The penalties for failing to comply with the reporting requirements are steep and are scheduled to double in 2016.  The IRS will apply a “good faith effort” standard to information reporting for 2015, and the IRS has stated that no relief will be provided for employers that make no effort to file. 

Generally, the IRS is seeking three pieces of information about employer-provided health coverage: (1) employment information about each employee (e.g., whether the employee works full-time); (2) whether the employee and dependents, if applicable, received an offer of healthcare coverage from the employer; and (3) enrollment information about the employee (and dependents, if applicable).  The information is conveyed on the new information returns using alpha-numeric codes.

Under the ACA, each employer with at least 50 full-time equivalent employees is required to report the employment information and offer of coverage information for each employee on Form 1095-C (Employer-Provided Health Insurance Offer and Coverage).  In addition, for a self-insured healthcare plan, the employer is required to report enrollment information on the same Form 1095-C for each employee.  For an insured healthcare plan, the insurer, rather than the employer, is required to report enrollment information on Form 1095-B (Health Coverage). 

For employers with fewer than 50 full-time employees, different rules apply.  The information reporting is made on Form 1095-B regardless of whether the plan is insured or self-insured.  For an insured plan, the insurance provider is responsible for filing Form 1095-B.  For a self-insured plan, the employer is responsible for filing Form 1095-B.

Although the employer is responsible for reporting enrollment information on Form 1095-C (or, if fewer than 50 full-time employees, on Form 1095-B), the employer may not actually have any enrollment data.  This may occur, for example, where employees enroll for coverage online and, for privacy purposes, the employer does not capture enrollment information.  Accordingly, the employer may have to communicate with its third-party administrator to obtain the enrollment information that it needs to complete Form 1095-C.  It should be noted that although employers with at least 50 full-time equivalent employees but fewer than 100 are exempt from the employer shared responsibility penalties for 2015, such employers are not exempt from the reporting rules.

Depending on an employer’s facts and circumstances, abbreviated filing may be available under one of three information reporting safe harbors, including the Qualifying Offer Method, the Qualifying Offer Method Transition Relief, and the 98% Offer Method, which are described in more detail in the Instructions to Form 1094-C.  Absent being eligible to use one of these information reporting safe harbors, an employer must follow the general reporting requirements.

The general reporting requirements are summarized in the chart below.

Forms 1095-B and 1095-C are transmitted to the IRS in batches using Forms 1094-B (Transmittal of Health Coverage Information) and 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns), and each employee must receive a copy of the applicable Form 1095-B and 1095-C reporting his or her information.  The penalties for failing to file apply both to the forms provided to the IRS and to the forms provided to individuals.

The filing deadlines for 2015 on Forms 1095-B and 1095-C are February 29, 2016 (if filing paper forms) or March 31, 2016 (if filing electronically); however, draft instruction just issued by the IRS state that filers may obtain an automatic 30-day extension to file these forms by completing Form 8809 (Application for Extension of Time to File Information Returns) and filing it with the IRS on or before the due date for Forms 1095-B and 1095-C.  A copy must also be provided to each employee no later than February 1, 2016.

As already referenced, a new law recently doubled the penalties for the failure to file correct information returns, including Form 1095-C.  Beginning in 2016, the penalty for failure to file correct information returns will increase from $100 to $250 per return.  Because the penalty applies separately to the Form 1095-C filed with the IRS and the copy furnished to the employee, employers may be subject to penalties of up to $500 per return.  The maximum total annual amount that may be imposed will be raised from $1.5 million to $3 million.  For a form corrected within 30 days, the existing penalty of $30 will be raised to $50, and the maximum total amount will be increased from $250,000 to $500,000. 

The reporting rules apply to expatriate health plans (covering both in-bound and out-bound employees) for the period commencing July 1, 2015, although, until the issuance of IRS regulations, expatriate plans are exempt from most other ACA requirements.  While employee consent is generally required before Form 1095-C may be provided electronically to an employee, Form 1095-C may be provided to expatriates electronically without obtaining consent.  A non-US company is required to file either Form 1095-C if the non-US company employs at least 50 full-time equivalent employees in the US, or Form 1095-B if it employs fewer than 50 full-time equivalent employees in the US.  Additionally, if a non-US company provides health benefits to a full-time employee who is a US citizen working outside of the US, the non-US company may be required to file even if it employs no employees in the US.  The reporting obligation in that case may depend on whether the non-US company is required to issue a W-2 with respect to such an employee.  The determination of the number of employees employed by an employer is made on a controlled group basis, although the number thresholds are based on hours of service worked in the United States.