Background
On August 2, 2016, the IRS published proposed regulations, which, among other things, attempt to clarify the confusion regarding an employer's obligation to solicit taxpayer identification numbers (TIN). This is the government’s third attempt to clarify the issue since the ACA was enacted. The IRS made its first attempt in the preamble to the final regulations for employer reporting. In an attempt to bring greater clarity and to gather further comments on the issue, the government issued Notice 2015-68, which states an employer will not be subject to penalties for failure to report a TIN if the entity follows the regulations set forth at section 301.6724-1(e) with these additional modifications:
- The initial solicitation is made at an individual’s first enrollment or, if already enrolled on September 17, 2015, the next open enrollment;
- The second solicitation is made at a reasonable time thereafter; and
- The third solicitation is made by December 31 of the year following the initial solicitation.
The Notice is not a model of clarity, and this issue has only been exacerbated by the number of AIRTN500 error messages employers received when submitting their Forms 1095-C.
Proposed Regs Explained
With that as a backdrop, the government is once again trying to clarify an employer’s solicitation obligation through proposed regulations. The proposed regulations only apply to the Form 1095-B and to Part III of the Form 1095-C (the Part that is used for employers that sponsor a self-insured plan). The proposed regulations do not affect Parts I or II of the Form 1095-C. This article focuses on the proposed regulations as they relate to Part III of the Form 1095-C. However, most of the concerns discussed in this article could be applied to the Form 1095-B.
Recall that an employer submitting a Form 1095-C is subject to the penalty provisions of section 6721 and section 6722 for failure to timely file a correct information return or failure to timely furnish a correct statement to the individual. The penalties under both section 6721 and section 6722 may be waived if the failure to timely file (or furnish) a correct information return (or statement) was due to reasonable cause and not due to willful neglect. An employer may meet this standard by showing it acted in a responsible manner and that the failure was the result of events beyond the employer’s control or there were mitigating factors. An employer in danger of violating section 6721 and section 6722 as a result of a missing or incorrect TIN can follow the procedures laid out in specific sections of the regulations to fulfill the "reasonable cause" standard.
The proposed regulations did a good job distinguishing between missing TINs (discussed at section 301.6724-1(e)) and incorrect TINs (discussed at section 301.6724-1(f)). Treasury and the IRS agreed with commenters that some modifications needed to be made to the solicitation process for missing TINs. However, the proposed regulations leave unchanged the regulations set out for incorrect TINs.
Missing TINs
One of the problems commenters complained about with regard to missing TINs is that the proposed regulations did not adequately define the term “opened,” which is relevant to determine when the initial solicitation needed to be made to satisfy the regulations. This is important because an initial solicitation for a missing TIN must be made at the time an account is “opened.” Prior to the existence of the Form 1095-C, missing TIN solicitations were typically performed for financial accounts. These accounts are generally considered “opened” on the first day the account is available for use by the owner. However, this understanding of the term “opened” does not translate well to health insurance coverage.
To rectify this problem, the proposed regulations provide that for the purposes of the Form 1095-C an account is considered “opened” on the date the employer receives a substantially complete application for new coverage or to add an individual to existing coverage. The proposed regulations indicate the initial solicitation for a missing TIN can be satisfied by requesting the enrolling individual’s TIN as part of the application process.
If the initial solicitation for a missing TIN does not produce a TIN, the first annual solicitation under the proposed regulations must be made no later than 75 days after the date on which the account was “opened” or, if the coverage is retroactive, no later than 75 days after the determination of retroactive coverage is made. The second annual solicitation for a missing TIN remains unchanged from the current regulations and must be made by December 31 of the year following the year the account is opened. It is important to note an employer may continue to rely on the rules discussed in Notice 2015-68 or may follow the proposed regulations until the final regulations are published.
Additional relief is provided by the proposed regulations for a missing TIN. For any individual enrolled in coverage on any day before July 29, 2016, the account will considered to be opened on July 29, 2016. An employer will have satisfied its initial solicitation obligation with respect to an individual who is already enrolled so long as the employer requested the enrolled individual’s TIN as part of the application process for coverage or in any other appropriate fashion before July 29, 2016.
Consistent with Notice 2015-68, the first annual solicitation would need to be made within a reasonable time after July 29, 2016 if the initial solicitation did not produce a TIN. An employer who performs the first annual solicitation within 75 days (before October 11, 2016) will be treated as having made the first annual solicitation within a reasonable time. In this situation, if the first two solicitations (the initial solicitation and the first annual solicitation) do not produce a TIN, the second annual solicitation would need to be made by December 31, 2017.
Incorrect TINs
The proposed regulations do not change the solicitation process for incorrect TINs. Therefore, for an incorrect TIN, the first annual solicitation must be made on or before December 31 of the year in which the employer was notified of the incorrect TIN unless the employer was notified of the incorrect TIN in December in which case the employer’s solicitation must be made by January 31 of the following year (see section 301.6724-1(f)(1)(ii)). Similarly, the rules for the second annual solicitation for an incorrect TIN remain unchanged. Therefore, if the employer is notified in any following year after the first annual solicitation that an employee’s (or other dependents’) TIN is incorrect, a second annual solicitation must be made on or before December 31 of the year in which the employer was notified of the incorrect TIN unless the employer was notified of the incorrect TIN in December in which case the employer’s solicitation must be made by January 31 of the following year (see section 301.6724-1(f)(1)(iii)).
Incorrect TINs and the Dreaded AIRTN500 Error
The current regulations state that an employer may be notified of an incorrect TIN by the IRS or by a penalty notice issued by the IRS under section 6721 (see section 301.6724-1(f)(1)(ii)). Employers are being notified of an incorrect TIN on Part III of the Form 1095-C with an AIRTN500 error message. We were under the assumption that this would trigger the TIN solicitation obligation. However, footnote 2 of the proposed regulations appears to call this into question. Footnote 2 states:
A filer of the information return required under section 1.6055-1 may receive an error message from the IRS indicating that a TIN and name provided on the return do not match IRS records. An error message is neither a Notice 972CG, Notice of Proposed Civil Penalty, nor a requirement that the filer must solicit a TIN in response to the error message.
This footnote could be interpreted several ways. One possible reading is that the IRS says an employer has no solicitation obligation despite the fact an employee’s Form 1095-C triggered an AIRTN500 error message. Alternatively, this footnote could be read to mean that the IRS says an employer who received an AIRTN500 error message may, but in some cases may not, be required to make a solicitation. Whether or not the error triggers a solicitation obligation under the alternative view would depend on how many prior solicitations the employer has made.
The ambiguity of this new IRS guidance is not easily resolved. In part 2 of this series, I'll offer some guidance. (Sneak peak: I got verbal confirmation from an IRS representative of what the agency's current thinking is.)