Affordable Care Act compliance became more complicated recently when federal and state government insurance exchanges began sending notices to some employers advising they may be liable for a payment to the IRS.

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Exchange Subsidy Notices: New ACA Compliance Complexity

Mon Aug 22, 2016

This notice informs you that your employee was found eligible for APTC or CSRs and that, if various conditions are met, you may have to pay an employer shared responsibility payment to the Internal Revenue Service (IRS) in the future.   –Health Insurance Marketplace Notice to Employer

Affordable Care Act compliance became more complicated recently when federal and state government insurance exchanges began sending notices to some employers advising they may be liable for a payment to the IRS.

These notices inform employers that an employee has qualified for government “Advanced Premium Tax Credit” (APTC) or “Cost-Sharing Reduction” (CSR) subsidies to help lower their insurance premiums or deductibles for exchange-based health coverage, thus making the employer potentially liable for IRS penalties.

The Centers for Medicare and Medicaid Services (CMS) has provided Frequently Asked Questions about the notices program.

Background

The Affordable Care Act employer “play or pay” mandate requires “applicable large employers” (employers with 50 or more full-time employees) to offer affordable and minimum value health coverage to full-time employees or face IRS penalties, known as employer shared responsibility payments.

Penalties can be triggered, however, only if a full-time employee qualifies for a premium tax credit or cost-sharing reduction subsidy. In short, no employee subsidy; no employer penalty.

What disqualifies an employee from an exchange subsidy?

According to IRS Publication 974, page 10,  a full-time employee is generally not entitled to an exchange subsidy in two circumstances:

  1. His or her employer offers affordable health coverage that provides minimum value—whether or not the employee enrolls in such coverage; or
  2. The employee enrolls in another employer-sponsored health plan, even if that plan is not affordable or does not provide minimum value.

In other words, it’s possible that an employee receiving a government subsidy to help pay for exchange-based health coverage is not entitled to it. Bear in mind that the exchanges rely initially on information provided by employees in determining eligibility for APTC or CSR subsidies.

Employer Appeal Rights

The exchange subsidy notice makes clear that an employer has a right to appeal the determination of potential liability for an employer shared responsibility payment. “You may file an appeal to the Marketplace if you believe there’s been a mistake regarding the employee’s eligibility for APTC or CSRs.” Employers have 90 days from the date of the notice to request an appeal.

The notice cautions, however, that “filing an appeal won’t necessarily affect whether you have to pay an employer shared responsibility payment to the IRS, because the IRS will determine independently whether you have to pay.” 

This is key in an employer’s decision whether to appeal the HHS marketplace’s preliminary determination of possible liability. IRS, not HHS, has authority under the Affordable Care Act to impose employer shared responsibility payments. 

Only after IRS has evaluated information in the employee’s Form 1040 tax return and the employer’s Form 1095-C health coverage report can it make a determination whether the employee was eligible for an APTC or CSR subsidy and whether an employer shared responsibility payment is owed. IRS is expected to send these “Section 1411 Certification” notices to employers later this year.

What to do about an Exchange Subsidy Notice?

Taking all this into account, and after consulting with legal counsel, what might employers do about these notices?

  • Some employers will appeal. Based on a review of their records, including the Forms 1094-C and 1095-C filings, employers may wish to correct inaccurate information the exchange may have about their health benefits, including whether affordable coverage providing minimum value was offered to the employee. For example, Line 15 of Forms 1095-C will indicate the employee’s share of the lowest cost monthly premium for self-only coverage while Line 16 will indicate the applicable Section 4980H safe harbor the employer used to determine affordability.
  • Some employers will elect not to appeal after review of their records and health coverage reports.  They may decide that the information on which the exchange based its determination is accurate. Or the employer may wish to keep its powder dry until after IRS issues a formal 1411 certification. And no doubt some employers may opt not to challenge employee subsidies until IRS certifies a formal penalty.

Conclusion

Exchange subsidy notices represent a next-step evolution in government administration of ACA employer shared responsibility and in proactive employer ACA compliance. Six years after enactment but only one year since the employer mandate became effective for employers with 100 or more full-time employees (in tax year 2015), employee eligibility for APTC or CSR subsidies will likely begin triggering employer “play or pay” penalties.

As a matter of ACA compliance, therefore, applicable large employers will take the exchange subsidy notices seriously, put a process in place to evaluate the information provided and consult with legal counsel to decide whether to appeal.