The robot apocalypse is a ways off (...or isn't it), but the IRS penalty machine is gearing up, and the order from Skynet is guilty until proven innocent. No, really. The more time we spend analyzing the newest IRS guidance and sample forms, the more it appears IRS is going to put employers on the defensive—all at a terrible time of year in the HR calendar and under the gun of short deadlines. Here's why we think that, plus some thoughts on how to prepare.

Penalty Assessment Scenarios

Line 16 Blank for Any One Month

Based on the sample Letter 226J IRS released, IRS is presuming an employer is liable for an employer shared responsibility excise tax (a/k/a pay-or-play penalty) if an employee got subsidized individual coverage on a state or federal exchange and that employee received a 1095-C on which line 16 is blank for any one or more months. So despite the fact that the 2015 Form 1095 instructions and other IRS guidance clearly instructed employers to leave line 16 blank in some circumstances, if the employer did so and the employee got subsidized coverage on one of the exchanges, the employer will very likely receive a penalty assessment notice. 

MEC Column Blank or Checked "No"

IRS systems have been coded such that if the employer left Form 1094, Part III, column (a) ("Minimum Essential Coverage Offer Indicator") blank—whether accidentally or otherwise—then it is presumed to be "No." This scenario should not be common, but it highlights that simple mistakes could result in having to spend considerable energy defending oneself.

No Other Possibilities Considered

Penalty assessments will be purely computer-driven—if this then that. Even if transition relief applies, and even if there's a perfectly acceptable reason for line 16 of Form 1095 to be blank, IRS is going to make the employer mount a defense.

Very Short Response Time

The deadline for responding is tight. Employers don't have 30 days from receipt of Letter 226J to respond; they have 30 days from the printed date of Letter 226J to respond. Based on my experience with IRS correspondence on employee plan issues, that date is likely to be upwards of 5 to 7 days prior to the date the employer receives the letter. Add in a few more days to account for the time it takes the letter makes its way through an employer's internal snail mail system, and you wind up with only about 2 and 3 weeks to respond.

Fortune Favors the Prepared

1. Put Your 1095 Vendor on Notice

Let your 1095 reporting vendor from 2015 know that you'll be needing reports on very short notice. Get the vendor to commit to a reasonable response time.

2. Assemble the Away Team

Determine who will be in charge of the response to IRS and who will assist. Will you require both internal staff and outside experts? These are tax issues, so are your outside experts appropriately credentialed with IRS to work on tax matters?

3. Determine Scope of Your Risk

Put together a report of all instances in 2015 where Line 16 was left blank. This will be a good, quick way to determine the probability of receiving an erroneous penalty assessment. 

4. Do a Dry Run

Take a couple of sample employees from the report, and then run down the information you need from your payroll and benefits administration systems to prove the story you want to tell about that employee. What reports show the information needed to document why no penalty is owed for that employee for that month?

5. Collect Documentation to Back up Transition Relief

The ACA employer mandate regulations contain several important transition rules for 2015, some of which delay when the rules will affect certain employers. Most of them had somewhat complex qualification hoops employers had to jump through. So grab your 2015 Form 1094, find Line 22 and refresh your recollection of the transition relief you claimed. Other transition relief may have been claimed on Line 14 of individual employees' 2015 Forms 1095. (It would be indicated by code 2I.) To the extent there were qualification criteria, gather the documentation needed to support those criteria.

Transition Relief Refresher Course

• 50-99 Transition Relief. In 2015, the ACA employer mandate only applied to employers with at least 100 full-time equivalents. Counting full-time equivalents is actually pretty complicated, so make sure you can prove that you had between 50 and 99 full-time equivalents, as determined under IRS rules. Key thing to remember: full-time equivalent status in 2015 is actually determined by headcount and hours from 6 consecutive months in 2014.
• Fiscal Year Plans Transition Relief. Employers with 100 or more full-time equivalents and a non-calendar plan year (i.e., fiscal plan year) were not required to comply with the ACA employer mandate until the beginning of the plan’s 2015 plan year, as long as the employer has not changed its plan year since 2012, and as long as other offer of coverage criteria are met.
• No Dependent Coverage. To avoid ACA employer mandate penalties, an employer must make an offer of coverage to full-time employees and their dependents. (The ACA does not require employers to offer coverage to the spouses of employees.) In 2015, no penalty will be due for plans that did not then offer coverage to dependents, so long as the plan took steps during 2015 to do so in 2016.
• 70% Margin of Error Instead of 90%. For 2015 only, employers will not face liabilty for the nuclear penalty (a/k/a 4980H(a) penalty, sledgehammer penalty, $2,000 penalty) as long as coverage is offered to at least 70% of all full-time employees. The sample Letter 226J appears to already factor in this transition relief.
• No Penalty for First 80 Employees. In calculating any nuclear penalty, IRS will subtract the first 80 full-time employees. (After 2015, IRS subtract the first 30.) The sample Letter 226J appears to already factor in this transition relief.