The Boston Business Journal, citing unnamed IRS and White House officials, recently reported that the IRS would be issuing employer mandate (a/k/a "pay-or-play") penalty notices in November for coverage offered during 2015. Then, on November 2, IRS updated some of its Q&A guidance to reflect new procedures for how to pay or contest employer mandate penalty assessments. Taken together, it's fair to say IRS is not blowing smoke; this month some employers will receive a demand from IRS that the employer pay for not playing by the ACA's rules in 2015.Why Might IRS Send a Penalty Notice?
There are two possible reasons: either the employer owes a penalty, or IRS thinks the employer owes a penalty based on 1094/1095 data and data from the federal and state exchanges/marketplaces. Remember, back in 2015 many employers were really struggling to combine payroll and benefits data sources into something the IRS 1094/1095 reporting system would accept. It took a few years for both IRS and employers to get their systems ironed out, so there's a high likelihood that IRS will send out a fair number of erroneous penalty assessment notices.How Will the Penalty Assessment Process Work?
If the IRS believes an applicable large employer (an employer that, by itself or together with its controlled group, has 50 or more full-time employees) owes an employer mandate penalty, the employer will first receive IRS Letter 226J, the IRS template for which is here. The IRS plans to provide Letter 226J to each employer that did not qualify for transition or safe harbor relief and had a full-time employee who received a premium tax credit. Letter 226J will include the following items:- An explanation of the penalties assessable under section 4980H;
- A table summarizing the proposed employer mandate penalty for each month including an explanation as to whether the liability is under section 4980H(a) (the nuclear $2,000 penalty) or section 4980H(b) (the $3,000 penalty per employee who received a subsidy);
- An explanation of the table summarizing the proposed employer mandate penalty;
- Form 14765, which will contain a list of each full-time employee who received a premium tax credit for a month that the employer did not qualify for an affordability safe harbor or other relief. Form 14765 will also include the code combinations the employer entered on lines 14 and 16 of the employee’s Form 1095-C;
- A description of the actions the employer should take if it agrees or disagrees with the employer mandate penalty in Letter 226J; and
- A description of what will happen if the employer does not timely respond to Letter 226J.
Once the employer responds to Letter 226J, IRS will acknowledge receipt of the employer's protest with Letter 227, which will describe what further action the employer needs to take. IRS has created five different versions of Letter 227, and the version the employer receives will depend on how it responds to Letter 226J.
If the employer disputes the position IRS is taking in Letter 227, the employer can request a pre-assessment conference with the IRS Office of Appeals. To request a pre-assessment conference the employer will follow the instructions provided in the Letter 227 and Publication 5. The employer must request the pre-assessment conference in writing by the response date shown on the Letter 227, which is generally 30 days from the date on Letter 227.
Once IRS has reached its conclusion, if it determines that an employer owes an employer mandate penalty, the IRS will issue a notice and demand for payment in the form of a Notice CP 220J, which will include the final penalty amount and payment instructions.