How to Avoid ACA Filing Penalties

Originally posted by Michael Weiskirch on August 21, 2015 on

The 6055 and 6056 tax filing has many employers and their advisers up in arms for the upcoming tax filing. The increased penalty amounts announced in July are alarming. A single 1095-C form violation could result in a penalty of $500 per form, with no cap if the employer shows intentional disregard — basically skipping out on the filing for 2015. A 500-person firm in this case would pay $250,000 in penalties. The good news is many employers can get a break of some sort for 2015. These are listed below:

Good faith effort

For 2015, employers who file will have protection even if their filing is incorrect or incomplete, as long as they show they made good faith efforts to comply with the ACA reporting requirements. A “good-faith effort” is defined as employer simply attempting to complete the forms. Keep in mind that the good-faith effort for 2015 tax year will disappear in 2016, thus penalties will apply for incorrect information in subsequent years.

Transition relief

Transition relief is designed to shield employers from shared responsibility penalties for all or part of 2015, reducing the exposure of the (A) $2,000 or (B) $3,000 penalties. This relief is not granted automatically and only applies for the 2015 tax year. To take advantage of this relief, the employer needs to complete line 22 of the 1094-C form or line 16 of the 1095-C for non-calendar year plans. With HCM File, we advise our clients to incorporate transition relief into their filing where appropriate. There are four flavors of transition relief, each essentially providing a bye for the months the relief is designated.

1)      Qualifying offer method: Employer who offers MEC which does not exceed 9.5% of the federal poverty level to at least 95% of full-time employees.
2)      4980H  for Employers with 50-99 Employees: Employer averaged between 50-99 employees
3)      4980H  for 100+ Employers: Employer offered coverage to at least 70% of full-time employees
4)      Non-Calendar Year Relief: Employers with plans that renew February-December in 2015.

30-day extension mirroring

The extension process for W2s and 1099s, the IRS will allow a 30-day extension as long as you can demonstrate certain hardship conditions and file Form 8809 by Jan. 31, 2016. Getting the final health plan participation and completing 1095-C forms for each health eligible employees, COBRA and retirees (if self-funded) is a lot to accomplish in a short window. As many employers scramble to complete their end of year payroll and compile the information for 6055/56, a good number of employers are looking to take advantage of the extension especially in the first year. Unlike the good faith effort and transition relief, the 30-day extension can be utilized in any tax year assuming the employer qualifies.

Also see: "Why get involved in ACA reporting?"

While good faith effort, transition relief and 30-day extensions are tools that employers may take advantage of to shield them from potential penalties, they should not be viewed as a method to evade penalties in all situations. Employers should strive for compliant, accurate and penalty-free filing without the support of any safety nets.

Important Transition Relief for Non-Calendar Year Plans

Source: United Benefit Advisors

The January 1, 2014 effective date of the Pay-or-Play requirements under health care reform presents special issues for employers with non-calendar year plans.  Prior to the release of the proposed regulations under the shared responsibility rules, employers with non-calendar year plans would either need to comply with the Pay-or-Play requirements at the beginning of the 2013 plan year or change the terms and conditions of the plan mid-year in order to comply.  Recognizing that compliance as of January 1, 2014 caused a special hardship for non-calendar year plans, the proposed regulations, provide special transition relief.  Employers with non-calendar year plans in existence on December 27, 2012 can avoid the Pay-or-Play penalties for months preceding the first day of the 2014 plan year (the plan year beginning in 2014) for any employee who was eligible to participate in the non-calendar year plan as of December 27, 2012 (whether or not they actually enrolled).  Under this relief, the employer would not be subject to Pay-or-Play penalties for any such employees until the first day of the plan year beginning in 2014, provided they are offered coverage that is affordable and provides minimum value as of the first day of the 2014 plan year.

The relief also provides an employer maintaining a non-calendar year plan with additional time to expand the plan's eligibility provisions and offer coverage to employees who were not eligible to participate under the plan's terms as of December 27, 2012.  If the employer had at least one-quarter of its employees (full and part-time) covered under a non-calendar year plan, or offered coverage under a non-calendar year plan to one-third or more of its employees (full and part-time) during the most recent open enrollment period prior to December 27, 2012, it will not be subject to Pay-or-Play penalties for any of its employees until the first day of the plan year beginning in 2014.   For purposes of determining whether the plan covers at least one-third (or one-quarter) of the employer's employees, an employer can look at any day between October 31, 2012 and December 27, 2012.  Again, this transition relief is dependent upon the plan offering affordable, minimum value coverage to these employees no later than the first day of the 2014 plan year.
This important transition rule raises the question of what is considered to be a plan's plan year.  If a plan is not required to file an Annual Report, Form 5500, as is the case with a fully insured plan with fewer than 100 participants, or the plan has failed to prepare a summary plan description that designates a plan year, the plan year generally will be the policy year, presuming that the plan is administered based on that policy year.  If a policy renews on January 1 and any annual open enrollment changes take effect January 1, the plan year likely will be deemed to start January 1.  If the policy renews on July 1, however, and open enrollment changes become effective on January 1 of each year, the lack of a summary plan description leaves the plan year determination open to question.   The employer in this situation may want the plan year to start on July 1 in order to delay the date on which the plan has to comply with the requirements under health care reform.  If the plan is administered on a calendar-year basis, however, the government could reasonably argue that the plan year is the calendar year.  Employers should be taking steps now to identify the plan year for their group health plan(s) in order to ensure that they are timely complying with the applicable requirements under health care reform.
If the employer has prepared and distributed a summary plan description for its group health plan or the plan files an Annual Report, Form 5500, the plan year has already been identified.  If the employer has not complied with the ERISA disclosure and/or reporting requirements, then additional analysis of the 12-month period over which the plan is administered and operated is needed to identify the plan year.  That analysis should take place now and not when an auditor asks the question.
For employers in this situation, it would be advisable to adopt a plan document to address this issue.  Since insurance companies are not directly subject to ERISA, their policies may not contain all of the provisions necessary to meet ERISA's disclosure requirements.  An insurance policy typically does not contain certain desired provisions describing the relationship between the employer and plan participants.  Such provisions might include the employer's indemnification of its employees who perform plan functions, the employer's right to amend the plan, a description of the plan's enrollment process, and the allocation of the cost of coverage between the employer and participants.  A wrap plan can address these issues, as well as enable an employer to aggregate all its welfare benefits under a single plan so that a consolidated Annual Report, Form 5500 may be filed for all ERISA welfare benefit plans subject to annual reporting obligations.