Obamacare IRS Employer Reporting
Attention Employers with 50 – 300 Employees - 586 CPAs Can’t Be Wrong: IRS ACA Penalties Will Be Huge!
We recently co-hosted an ACA IRS Employer Reporting webinar that was attended by 700 CPAs. During the webinar, we polled the audience and asked a few questions pertaining to 1095/1094 reporting. Employers with 50 or more full-time employees (including full-time equivalent employees) that are required to offer health insurance coverage and report enrollment information for their employees under the Affordable Care Act (ACA) file Internal Revenue Service (IRS) Forms 1094 and 1095. Form 1095 provides information about health insurance; the employer sends the completed form to both employees and the IRS. Form 1094 acts as a cover sheet for Form 1095; the employer sends the completed form only to the IRS.
Our highlights follow.
Polling Question #1 – What percentage of employers with 50-300 employees have a 1095/1094 solution?
The choices were 100%, 80%, 60%, under 60% and unsure. 586 CPAs responded.
Not surprisingly, the answers were all over the board. Much to our surprise, however, 32% responded “less than 60%” and only 11% responded “100%.” Assuming there are approximately 450,000 businesses with 50-300 employees, that means at least 150,000 employers lack a 1095/1094 solution (this estimate includes the other responses)
To that end, assuming half of these employers (and their respective service providers) “wake-up” and find a solution, that still leaves half of these employers at risk. Said another way, if the average employer has 100 employees and the non-filing penalty is $260 per employee, that translates to an average penalty of $26,000. This amount is actually doubled, as the fine applies to 1) the actual 1095-C form and 2) the IRS filing vis-à-vis the 1094-C. Hence, the average penalty is actually $52,000, which is not tax deductible.
It is important to note that if these same non-filing entities are also not offering health insurance to ACA eligible employees, the penalties are materially higher! Can you imagine a less productive way to spend the hard-earned money most businesses struggle to realize? I think not. Before we examine how all of this translates for Uncle Sam please allow me to say that the only silver-ish lining here is that this penalty money ultimately helps fund less fortunate American citizens on Medicaid. And now, a glimpse into IRS ACA employer penalty revenue.
As far as IRS penalty revenue goes the math looks like this. 75,000 non-filing employers each averaging a $52,000 penalty conservatively translates to $3,900,000,000 (yes, that’s $3.9 billion). Again, this is a conservative estimate and is actually low. Why? Because the Congressional Budget Office anticipates $9 billion in ACA non-compliance penalties in 2017 based on 2016 activity.
CALL-TO-ACTION – WAKE UP! It is incumbent upon all employers, as well as their respective service providers (accountants, lawyers, health insurance brokers, TPAs, payroll vendors, etc.) to be relentless and SCREAM THIS MESSAGE from the mountaintops: “File or get penalized!” By the way, not only is this a really bad day for the employer, it’s likely an equally bad day for you too as you could get fired for not being proactive enough.
Many of you are likely thinking, while these numbers are startling, “there’s nothing to worry about” as the IRS has not issued any employer penalties yet and will likely not issue any penalties. Think again!
Polling Question #2 – Will the IRS issue penalties?
The choices were: “Yes,” “It is all so unpredictable,” “No, after Q1 2017,” and “Unlikely, ever.” 612 CPAs responded.
Unfortunately, the collective opinions of our CPA responders are a radical departure from your average health insurance broker and payroll outsourcing vendor. How is this possible, you may ask? It’s simple – 42% indicate the IRS will in fact issue penalties in the first quarter of 2017. An additional 18% believe the penalties will be issued after Q1 2017. A mere 7% believe the IRS will never issue penalties. Unlike health insurance brokers and even payroll outsourcing vendors, CPAs understand the power of the IRS and have seen countless penalty letters issued to many of their clients, despite good compliance practices.
Speaking of good compliance questions, the next polling question pertains to the importance of internal controls.
Polling Question #3 – How important are internal controls in the context of 1095 and 1094 processing?
The choices were: Very important, important, not important and unsure. There were 597 CPA responders.
Before we share the responses it’s very important to think about your experience with internal controls. Now, think about how internal controls were utilized in the 1095s and 1094s you care most about. Are you done thinking? Exactly my point. It is highly unlikely that even 5% of 1095/1094 processors applied even a small bit of internal controls. QA was ostensibly non-existent. Now think about “good-faith efforts.” Starting to get the picture? Do you really think good-faith efforts will provide adequate protection? And now back to the polling question summary.
You guessed it – 87% of CPA responders said internal controls are a very important part of the 1095/1094 process. While the 1095-C deadline is fast-approaching (March 2nd) and the IRS filing deadline is about one month away (March 31st) , if we as an industry decide to minimize IRS penalties, it’s time to bring out the ACA 1095/1094 guard and fortify the fort. Said another way, it’s time to:
- Review human capital metrics (e.g., number of recipients compared to employees)
- Confirm that all ACA eligible employees received an offer of coverage
- Confirm that line 14 Offer-of-Coverage codes are accurate
- Confirm that line 16 Safe Harbor codes are accurate
Here’s the bottom line. No one knows with any certainty what’s going to happen. We do know that the ACA IRS Employer Reporting requirements are still in force. Accountants as well as employers have access to 1095/1094 reporting solutions, such as Smart1095, which will effectively and efficiently help employers comply and mitigate material IRS penalties.
Apprising your clients and prospects regarding the 1095/1094 message will help you retain your clients and provide you with peace-of-mind that you’ve delivered the message.
Blog Prepared By:
Howard M. Gerver, President