ACA Play or Pay Enforcement:The Taxman Cometh

These slides were current as of January 2018, reflect proposed and/or interim guidance, and state

general rules that may not apply in all situations. Conditions, exceptions, and qualifications may

apply. You should not rely upon these materials. You should seek the advice of experienced benefits counsel for advice pertinent to you.

Jamie L. LearySteptoe & Johnson PLLC

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Today’s Topics

• Play or Pay Refresher

• What to watch for

• How – and how quickly – you must respond

• What else is to come

Employer Shared Responsibility:Play or Pay Mandate

50+ full-time equivalent employees (“FTEs”)in one calendar year

means you are an Applicable Large Employer (“ALE”)

in the following calendar year

Count:

• Common law employees

• Related employers’ employees

How Do You Count to 50?

First, for each month, count:

A) Number of full-time employees (average 30 hrs/wk)

B) Number of hours* in the month (no more than 120 hrs per EE); for all other EEs, divide by 120A + B = FTEs for the month, rounding to nearest hundredth

Then, add up each month’s total and divide by 12, rounding down.

50 or more FTEs = ALE status for following year49 or fewer FTEs = not an ALE for following year

• Narrow exception may be available concerning seasonal workers

• Transition relief: In 2014 only, can count over a 6-month period

If an employer has 30 ACA full-time employees and 20 part-time employees in 2014, could they have been an ALE in 2015?

a. No – They only have 30 ACA full-time employees, which is under the 50 full-time equivalent employee requirement.

b. No - Each part-time employee counts as half a full-time employee, so you add 30 full-time employees + 10 “equivalent” employees, which equals only 40.

c. Yes – they had a total of 50 employees, which means the employer was an ALE.

d. We cannot know without completing an ALE analysis to verify if the employer meets the 50 FTE (Full Time Equivalent) threshold.

Poll Question #1

Midsize ALEs Got a Break in 2015

If you had 50 to 99 FTEs during 2014, and you:

• Didn’t cut number of employees or hours,

• Didn’t materially reduce health coverage, if any, in place, and

• Did certify compliance in 2016 by filing Forms 1094/95-C for the 2015 year

Play or Pay Mandate

Play by offering minimum essential coverage

(“MEC”) to all full-time employees and

their dependents, which MEC is

affordable and provides minimum value,

or

Pay a penalty if one or more full-time

employee enrolls in Marketplace

coverage and receives a premium tax

credit

ACA Full-Time Employees

Full-time employee = avg 30 hrs/wk =

130 hrs/mo

Two methods:

• Monthly measurement method

• Look back measurement method

Limited ability to use different methods for different employees

Who Counts as Full-Time?

Optional

Who Counts as Full-Time?

Counting Hours

Hours of service include:

• Hours worked and paid

• Hours not worked but paid if paid vacation, paid sick days, paid holidays, etc.

• If using LBMM, special unpaid leave must be counted

An employer used the Monthly Measurement Method to determine ALE full-time status. In July – September of 2015, an employee was out on FMLA for a total of 9 weeks, the first 3 weeks of which the employee used 3 weeks of paid vacation. During the remaining 6 weeks of FMLA, the employee received payments from short term disability insurance the employee purchased independently from Aflac. The employer only counted hours of service for only the first 3 weeks. As a result, the employee’s Form 1095-C reported them as full-time for July and not for August and September. The employer appropriately counted the employee’s hours on leave.

a. True

b. False

Poll Question #2

Special Rules for Certain Industries/Issues

• Non calendar year plans

• Educational institutions

• Temporary workers and staffing firms

• Multi-employer plans, single ER Taft-Hartley plans, MEWAs

• Airline industry, especially layover hours

• On-call hours

• Commissioned salespeople

• Compensation from sources outside U.S.

• Home care industry if clients may be common law ER

• Real estate agents and direct sellers

• Bona fide volunteers for tax-exempt or government entity

What Happens If You Didn’t Play?

4980H(a): Failure to Offer Coverage

a) If you did not offer MEC to at least 95% of full-time employees and their dependents, and

b) At least one full-time employee received subsidized Marketplace coverage,

THEN you pay 4980H(a) penalty x (# full-time EEs - 30)

• Nondeductible penalty: $173.33/mo in 2015

• If you certified eligibility for transition relief, then:

— 70% for 2015

— 80 free EEs for 2015

4980H(b) – Insufficient Coverage

If a full-time employee received subsidized Marketplace coverage because:

(a) he was not eligible for your plan, or

(b) he was eligible for your plan, but

(i) the plan was not affordable, or

• the plan didn’t provide minimum value

THEN you pay 4980H(b) penalty x # full-time EEs with subsidized coverage

• Nondeductible penalty: $260/mo in 2015

• Capped at 4980H(a) amount

Affordable

Affordable: Cost to EE for lowest cost self-only coverage that provides MV must not have exceeded 9.5%* of household income

• Safe harbors available

– Federal poverty level

– Employee’s rate of pay

– Employee’s Box 1 of W-2

• Outside the safe harbor . . .

Minimum Value

Minimum value = Plan must cover at least 60% of the cost of benefits provided under the plan, determined via:

• Online calculator

• Safe harbor design

• Certification by actuary

Mail No One Wants

Play or Pay Enforcement:

Time is of the Essence!

Respond no later than the deadline –

which means you have fewer than 30 days

Letter 226J

• Preliminary calculation of 4980H penalty

• Contains:

– ESRP Summary Table

– Form 14765, Employee PTC Listing

– Form 14764, ESRP response

– Contact information for IRS agent

– Serves as Section 1411 Certification

ESRP stands for…

a. Employer Sponsored Retirement Plan

b. Employer/Sponsor Related Penalties

c. Employer/Sponsor Responsibility Program

d. Employer Shared Responsibility Payment

Poll Question #3

Letter 226J

Check everything, including:

• data from other forms,

• mathematical calculations,

• application of transition relief,

• whether employees are appropriately considered full-time, etc.

Codes from

Lines 14 & 16 on

Form 1095-C

ER may indicate

corrections

Employee PTC Listing

Who SHOULD be listed:

• Employees for whom you filed a Form 1095-C,

• Who were allowed a premium tax credit for one or more months, and

• For whom you did not report ESRP relief

Note: Handle this information with care.

Employee PTC Listing

Gather:

• Copies of the Forms 1095-C filed

• Instructions to Forms 1094/95-C

Review:

• Line 14: Offer of coverage code

• Line 15: Employee share of lowest cost monthly premium for self-only minimum value coverage

• Line 16: Applicable Section 4980H Safe Harbor

Who Will You Call?

• Who prepared Forms 1094/95-C?

• Who has copies of the Forms you filed?

• Who has the underlying enrollment and payroll data?

• Who determined ALE status and employee full-time status?

If There Are Changes/Errors

• Typical rule: ALE files amended forms with IRS and provides same to affected employees

• Here: In its response to the IRS, an ALE notes the corrections on Forms 1094-C or 1095-C that it wishes to make

• Unclear: Whether/when ALE provides amended Forms 1095-C to affected employees

If, after receiving a Letter 226J, you realize there are changes/errors that were on a 2015 Form 1095-C you filed for an employee, you should file a corrected Form 1095-C with the IRS as soon as possible.

a. True

b. False

Poll Question #4

If You Agree With the Assessment

Return Form 14764 by the deadline:

• Signing under penalty of perjury

• Include payment or seek alternative payment options

• If you do not pay the complete amount, the IRS will proceed with Notice and Demand

If You Disagree With the Assessment

Return Form 14764 by the deadline:

• Signing under penalty of perjury

• Include signed statement with explanation and supporting documentation

IRS’s response: Letter 227

• 5 different versions

• Will state its deadline

ALE may request a pre-assessment conferencewith Office of Appeals

How long does an employer have to respond to a Letter 226J?

a. 30 days from the date you received Letter 226J

b. 30 days from the date you filed Form 1094-C

c. 30 days from the date of the Letter 226J

d. 30 days from the postmark on the Letter 226J’s envelope

Poll Question #5

Notice and Demand

Notice CP 220J:

• May be enforced by lien and levy

• Interest accrues from date of CP 220J until paid in full, and penalties may also apply

• If you cannot pay in full, refer to Publication 594 for payment options

Prepare Now So You Can Respond On Time

• May be appropriate to revisit your ALE status and your Play or Pay compliance, knowing now what we may not have known then

• Who has your filing data? Who has the underlying enrollment and payroll data? How quickly can be it accessed?

• Will Letters 226J be routed to the appropriate person? Do they know what to do?

• Watch the calendar: Don’t let deadlines slip past!

• Do you have a relationship with experienced benefits counsel if you desire assistance with responding to Play or Pay assessments?

Any Questions?

Please keep in mind that these slides are only a summary of certain aspects of ACA Play or Pay enforcement, and this is

an area of law still evolving.

Jamie L. LearyOf Counsel

Steptoe & Johnson PLLC1233 Main Street, Suite 3000

Wheeling, WV 26003(304) 231-0471

jamie.leary@steptoe-johnson.com

DISCLAIMER: This presentation has been prepared by Steptoe & Johnson PLLC for informational purposes only, and the contentcontained herein is not offered as legal advice. The author and other attorneys at Steptoe & Johnson PLLC reserve the right toadvocate freely other positions in other forums or settings.

THANK YOU!