Late last week IRS released draft instructions for Forms 1094-C and 1095-C. Changes from the 2016 final instructions are minimal. Most of the changes result from elimination of transition relief provisions that no longer apply. The draft instructions are thus shorter than in prior year, yet they are just as fun to read. (Just a hint of sarcasm there.) 

Changes to Form 1094-C

All changes to Form 1094-C relate to elimination of transition relief that no longer applies. First, both boxes B and C on line 22 are now labeled “Reserved.” These boxes will never apply in 2017 as the transition relief to which boxes B (Qualifying Offer Method Transition Relief) and C (Section 4980H Transition Relief) could have applied are no longer applicable. The second change is to column (e) in Part III of Form 1094-C, which is also now labeled “Reserved,” presumably because column (e) in Part III of the Form 1094-C related to box C on line 22.

New Instructions for Form 1095-C

Penalties and De Minimis Errors

IRS added a new note to its discussion of whether a corrected return needs to be filed because of an error on line 15 of the Form 1095-C, the monthly employee-only premium amount. The draft instructions reference Notice 2017-9, which discusses de minimis errors that may occur on certain tax forms, including the Form 1095-C, that will not result in a penalty. In general, the safe harbor only applies if the line 15 amount does not differ from the correct amount by more than $100. It is not clear whether the $100 limit applies to the sum of line 15 for the entire calendar year or each of the 12 months of the calendar year. To us, the better interpretation is that the $100 total applies to the entire year, not each month. This makes more sense to us because this line reports the employee premium for the lowest-cost employee-only coverage, and taking the view that the $100 limit applies to each month could result in up to a $1,200 difference—hardly de minimis.

Notice 2017-9 is clear that an employer who intentionally misreports a dollar amount or has a pattern of non-compliance will not be able to utilize the de minimis safe harbor. Additionally, the safe harbor would not apply for failure to file or furnish the Form 1095-C to the IRS or the employee even if the employer would otherwise qualify for the safe harbor. Presumably, this also means the Form 1095-C must be timely filed or furnished to utilize the safe harbor. If the safe harbor applies, an employer will not have to file a corrected Form 1095-C with the IRS and employee (or recipient of the Form 1095-C). However, if the employee (or another recipient of the Form 1095-C) asks for a corrected 1095-C, the employer must provide it, and the safe harbor does not apply. For additional details, please review Notice 2017-9.

Should Line 16 Be Blank?

The only other change worth mentioning is a new note before the list of line 16 codes stating, “There is no specific code to enter on line 16 to indicate that a full-time employee offered coverage either did not enroll in the coverage or waived the coverage.” It appears the IRS is trying to clarify that if an employer does not qualify for one of the affordability safe harbor codes (codes 2F, 2G and 2H) and the employee does not enroll in coverage or waives coverage, line 16 should be left blank. This is not a change from previous years. It has always been the case that line 16 could be blank. However, we encourage employers to put a code in line 16 if one applies; leaving line 16 blank could result in assessment of a shared responsibility excise tax that the employer will have to defend with information not on the Form 1095. Using a line 16 code is an employer's best front-line defense (again, assuming a code is available).

Deadlines

Furnishing Forms 1095 to Employees

Unless IRS grants relief, employers must furnish 2017 Forms 1095-C to employees by January 31, 2018. Last year, the IRS provided all employers an automatic 30-day extension, which pushed the deadline to March 2, 2017. IRS has given no indication that it will give a similar extension for the 2017 forms. Form 1095-C is by far the more complicated form, and employers and vendors that are not automating the process will undoubtedly struggle to meet this deadline. 

Unfortunately, while there is an automatic extension allowed for transmitting Form 1094 and 1095 information to IRS, there is no automatic extension of the deadline to furnish Forms 1095 to employees. Any extension of the deadline to furnish Forms 1095 to employees must be requested, and IRS must grant it. To obtain an extension of time to furnish Forms 1095-C to employees, an employer may send 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, 2018, deadline. If the government is lenient—something a prudent employer should not count on—the extension will generally only be granted for 30 days, resulting in an extended due date of March 2, 2018.

Transmitting Forms 1094 and 1095 to IRS

The deadline to file Forms 1094-C and 1095-C with IRS is February 28, 2018, if the employer is filing on paper and April 2, 2018, if filing electronically. (March 31, 2018, is a Saturday.) 

An employer unable to meet the IRS filing deadline can obtain an automatic 30-day extension by submitting Form 8809. With the 30-day automatic extension, the deadline for transmitting Form 1094 and 1095 information to IRS on paper would be March 30, 2018, and the deadline for transmitting it electronically would be April 30, 2018.

Penalties

One big change from previous years is that an employer will no longer be able to make use of the good faith efforts standard to protect itself from inaccurate information. In 2015 and 2016, if an employer filed its Forms 1094-C and 1095-C on time, IRS would 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. So long as the employer used good faith, inaccuracies would be excused. This could change, as it did last year, but as of the publication of this article IRS has not stated that the good faith efforts standard would be available for the 2017 filing season.  

An employer can be penalized $260 per return for failing to file a correct information return (Forms 1094-C and 1095-C filed with the IRS). Similarly, an employer can be penalized $260 per statement for failing to provide a correct payee statement (the Form 1095-C that must be furnished to employees by January 31, 2018). Each penalty is separately capped. This amount has risen to $3,218,500 in 2017 compared to $3,193,000 in 2016. Because the same information is both furnished to employees and transmitted to IRS, this effectively results in double the penalty and double the cap.

Problems with Code 2F Continue

When discussing line 16 code 2F, the W-2 affordability safe harbor code, the draft instructions state, “If an ALE Member uses this safe harbor for an employee, it must be used for all months of the calendar year for which the employee is offered health coverage" (emphasis added). This is a strong statement.

Combined with the “offered health coverage” language, there are only a few line 16 codes that can be entered in the same calendar year with code 2F. The only other codes that could be appropriate with code 2F on a Form 1095-C are codes 2A (employee not employed during that month), 2B (employee not a full-time employee), 2D (employee in a section 4980H(b) limited non-assessment period), or leaving line 16 blank. Importantly, code 2C (employee enrolled in health coverage offered) cannot be used on an employee's Form 1095-C if code 2F is used. This is a problem. The way the instructions are currently written could force an employer to submit a Form 1095-C with an inaccurate narrative for the 12 months on the Form 1095-C. There are many common scenarios that would result in an employer using both 2C and 2F in the same calendar year. We hope the final instructions will address this issue.