Takeaway Message: The IRS has recently concluded that the Affordable Care Act’s (the “ACA”) employer mandate is an ongoing tax liability which cannot be extinguished with the passage of time. In other words, the IRS has no time limit for assessing employer mandate tax penalties against large employers who do not comply in a particular tax year. Plan sponsors should consider maintaining records demonstrating compliance on an indefinite basis given this development.
Background: On a high level, Internal Revenue Code Section 4980H requires applicable large employers (employers with at least 50 full-time employees, including full-time equivalent employees, on average during the prior calendar year) to offer specified health coverage to their full-time employees (and dependents) or risk having to pay a potential tax penalty. This is often referred to as the “employer mandate” or the “pay or play” provision under the ACA. A more detailed explanation of the employer mandate can be found here in our January 2020 article addressing individual coverage health reimbursement arrangements. Employer mandate penalty assessments started with the 2015 tax year.
In a recent memorandum, the IRS concluded that the ACA’s employer mandate has no “statute of limitations,” meaning that the IRS is not bound by a time limit by which it must assess tax penalties or the liability is extinguished. It is an open-ended liability according to the IRS. Many in the industry believed that the IRS only had three years after the filing of Forms 1094-C and 1095-C to assess tax penalties. The IRS has now expressly declined to follow this position.
Example: ABC Company (a large employer subject to the employer mandate) determined that it did not fully comply with the employer mandate during the 2015 calendar year and, as a result, recognized that it had a potential liability for tax penalties for the 2015 tax year. ABC Company timely filed its Form 1094-C and Forms 1095-C for the 2015 tax year in June 2016. ABC Company never received a letter from the IRS concerning its liability and now over three years have passed since the filing of the 2015 tax forms. The IRS may still assess employer mandate tax penalties against ABC Company for this 2015 liability – now and, theoretically, in perpetuity.
Practical Insight: In our experience, the IRS appears to be issuing proposed employer mandate assessments in chronological order. It seems that the IRS started with the 2015 tax year, closed out the 2015 tax year, went on to the 2016 tax year, closed out the 2016 tax year, and is now in the process of closing out the 2017 tax year. Practically speaking, this may mean it is unlikely that the IRS will go backwards and issue assessments relating to the 2015 tax year. However, the IRS has the right to do so according to this new memorandum. In addition, employer mandate exposure may arise as part of an audit. This will cause complications in mergers and acquisitions as the years go on, since buyers may be assuming a potential employer mandate liability that stems as far back as the 2015 tax year.
Tips for Large Employers: Large employers should consider reaching out to service providers, vendors, and administrators to confirm that adequate records will be maintained on an indefinite basis, starting with the 2015 tax year. Some examples include:
- Health Plan Document. Dating back to the 2015 calendar year, a large employer should consider preserving the health plan document in effect for each plan year. As plan documents are routinely amended and restated, a large employer may want to preserve prior versions of the plan so it has proof that the plan document in effect in prior plan years contained eligibility criteria consistent with the ACA’s definition of “full-time” employee.
- Premium Rate Structures. To demonstrate to the IRS that an offer of health coverage was “affordable” per ACA rules, it would be wise to preserve documentation indicating how much employees had to contribute toward the cost of coverage for each year, starting with the 2015 calendar year.
- Enrollment Data. Large employers may want to maintain records of employees who enrolled, or were offered coverage but declined enrollment, in their health plan, starting with the 2015 calendar year. This could be in the form of summary data maintained by an insurance carrier or a third-party administrator. This could also be in the form of individual benefit election summaries that confirm the elections made by each employee during open enrollment, typically maintained by benefit administrators.
Conclusion: This is bad news for large employers and further emphasizes the importance of complying with the employer mandate and maintaining records of compliance.
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