Last month the IRS released the final instructions to the 2016 Forms 1094-C and 1095-C, which will be filed in first quarter 2017. I wrote on some key issues raised by the draft instructions a while back (see here and here). The final instructions do not change much of substance, and so the points I made in each of those articles remain valid. (If you haven't read those posts, you should do so.) In this post, I'll emphasize some of the technical issues illuminated by the final instructions and provide a few final takeaways before the reporting season begins in earnest.
Technical Issues Illuminated
Look-Back Measurement Method OK for 1094-C, Part III, Column (b)
First, when discussing Form 1094-C, Part III, column (b) the final instructions make it clear that an employee should be counted as a full-time employee for the purpose of that column if he/she satisfies the definition of a full-time employee under the monthly measurement method or the look-back measurement method (emphasis added). Previous iterations of the instructions did not made it clear that the look-back measurement method could be used for the calculation. It was a logical conclusion, no doubt, but we always appreciate it when the IRS provides clarification.Code 1G: All 12 Months or Not at All
The final instructions also added a clarifying note under the code 1G for line 14. The note makes it abundantly clear that the code 1G can only be entered for all 12 months or not at all. This was discussed elsewhere in the draft instructions but is further emphasized in the final instructions in a note under the code 1G. If the code 1G is inserted on line 14 for all 12 months, both lines 15 and 16 should not be completed.Do Not Use Affordability Safe Harbor Codes if Coverage Not Offered to 95% or More of Full-Time Employees
Another addition made by the final instructions is a note following the 2H code. The new note clarifies that none of the affordability safe harbor codes, 2F, 2G, or 2H, should be entered if an ALE member did not offer minimum essential coverage to at least 95 percent of its full-time employees and their dependents. This addition to the instructions did not create a new rule as this requirement is clearly laid out in the final regulations for section 4980H (see section 54.4980H-5(e)(2)(i)).What Is the "VOID" Box For?
With surprising brevity, the IRS tells employers what the "VOID" box is for at the top of Form 1095-C: nothing. The final instructions simply state that the “VOID” box at the top of the Form 1095-C should not be used by employers.Guidance for Substitute Forms
The IRS makes it clear in the final instructions that if an employer elects to use substitute forms and file using paper with the IRS, the forms must be printed in landscape format. If an employer (or more likely a form printing vendor) is spending time creating its own substitute forms, we hope the employer or vendor is sophisticated enough to create and print the Forms in the landscape setting. The IRS emphasized this point twice in the final instructions so clearly some folks are trying to use portrait-formatted forms and clearly the IRS is telling them to stop.My Big 5 Takeaways
1. Penalties
The biggest change from last year's Forms 1094-C and 1095-C is that an employer will no longer be able to use the good faith efforts standard to protect itself from filing information returns or payee statements with inaccurate or incorrect information. For 2015 forms (filed and sent in 2016), if the employer filed and sent its Forms 1094-C and 1095-C on time the IRS did not assess a penalty for filing an information return or payee statement with inaccurate or incorrect information so long as the employer made a good faith effort. Employers won't have this crutch this filing season.The IRS can impose on an employer a penalty of $260 per information return (that is, the Form 1094-C and the "copies" of Forms 1095-C that the employer files with the IRS). Similarly, the IRS can impose on an employer a penalty of $260 per statement for failing to provide a correct payee statement (that is, the Form 1095-C that employers must furnished to employees by January 31, 2017). There are two, separate penalties, and each penalty is separately capped at $3,193,000. However, the IRS can lift the caps if there is intentional disregard for the filing requirements.
Employers use the same information to populate both Form 1094 and Form 1095, and the Forms 1095 sent to the IRS are the same as the Forms 1095 furnished to employees. So one piece of bad information can lead to two separate penalties. In the case of bad Forms 1095, the penalty is actually $520 per return.
2. Deadlines
As far as actual changes to the Forms, no change will be more burdensome than the tighter filing deadline. Last year, Notice 2016-4 extended the filing deadlines for the Forms 1094-C and 1095-C as well as the deadline to furnish the Form 1095-C to certain employees. The tightest deadline an employer will face is the deadline to furnish the 2016 Form 1095-C to certain employees by January 31, 2017 (compared to March 31, 2016 for the 2015 Form 1095-C). The Form 1095-C is by far the more complicated of the two forms and providers who are not automating the process will undoubtedly struggle to meet this deadline.The deadline to file the Forms 1094-C and 1095-C with the IRS is February 28, 2017, if the employer is filing on paper. If an employer is filing electronically, the deadline is March 31, 2017. Last year, the deadline for filing on paper was May 31, 2016 and the deadline for filing electronically was June 30, 2016. These deadlines are going to put pressure on employers and providers.
3. Extensions
Not only did Notice 2016-4 prolong the filing deadlines for the 2015 forms, but it also took away the possibility of extensions. In 2016, the employer has the possibility of utilizing the extensions discussed in the final instructions. Unfortunately, there is no automatic extension for the tightest deadline of furnishing the Form 1095-C to certain employees by January 31, 2017. An employer may, however, request an extension of time to furnish the statement by sending a letter to the IRS with the filer’s name, TIN, address, the type of return for which the extension is being requested, a statement that the extension request is for providing statements to employees, the reason for the delay, and the signature of the filer or authorized agent. This extension request must be postmarked by or before the January 31, 2017 deadline. If the government is lenient, something an employer should not anticipate, the extension will generally only be granted for 30 days bringing the new due date to March 2, 2017.If an employer completes the Form 8809, it will receive an automatic 30 day extension for filing the Forms 1094-C and 1095-C with the IRS. With the 30 day automatic extension, the deadline for filing on paper is March 30, 2017. With the 30 day automatic extension, the deadline for filing electronically is April 30, 2017. However, April 30, 2017 is a Sunday. Therefore, employers filing electronically with the benefit of the extension would have until May 1, 2017 to file the Forms 1094-C and 1095-C with the IRS.
4. Eliminated and New Codes
The IRS eliminated code 1I (read: "one aye") from line 14. Similarly, it eliminated code 2I (read: "two aye") from line 16. Both codes 1I and 2I are marked as “Reserved” and should never be entered on the Form 1095-C. The 2016 Form 1095-C has two new codes that were both created to cover a conditional offer of coverage to an employee’s spouse (and I expect these to be rare). A conditional offer of coverage is an offer of coverage that is subject to one or more reasonable, objective conditions such as the employee’s spouse only being eligible for coverage if the spouse is not eligible for coverage through the spouse’s employer.Code 1J should be entered if minimum value (MV) minimum essential coverage (MEC) is offered to an employee and at least MEC is conditionally offered to the employee’s spouse. If code 1J is used, it means MEC is not offered to the employee’s dependents. Code 1J is similar to code 1D. If an employer is entering code 1J, the employer is falling short of the employer shared responsibility (a/k/a "pay or play") standard because the employer is not offering coverage to the employee’s dependents. Therefore, a 1J code entry could lead to a section 4980H penalty.
Code 1K should be entered if MEC providing minimum value is offered to an employee, at least MEC is offered to the employee’s dependents, and at least MEC is conditionally offered to the employee’s spouse. Code 1K is similar to code 1E. If either new code is entered on line 14, the employer is responsible for completing line 15.