Business and International Tax Blog

The Employer Reporting Improvement Act (the “Act”) has filled a glaring hole in the realm of Affordable Care Act (“ACA”) compliance.[1] In its previous form, there was no discernable statute of limitations for the lookback period in which the Internal Revenue Service (“IRS”) could audit an employer’s treatment of “employer shared responsibility payments.” This left employers susceptible to surprise assessments for years following an incorrect disclosure. The Act has cleaned this up by explicitly providing for a six-year lookback period under Section 6065 of the Internal Revenue Code.

The Act was signed into law to provide employers—especially small business owners—relief from the inconsistent practices of the IRS. It does not take much imagination to understand the impact of non-existent time restraints on the IRS’s audit power over an employer’s ACA-related filing. This, paired with the fact that the IRS may not even review a return until years after its filing, created a burdensome environment for employers subject to ACA-related filings. Such an environment was further exacerbated for employers bringing on new employees as a result of a merger or acquisition.  Given the niche nature of some employment relationships or ownership structures, it can be difficult to discern whether an employer is required to provide minimum essential coverage (“MEC”) under Section 4980H.

Under the ACA, applicable large employers (“ALEs”) are required to provide insurance that meets MEC requirements. To qualify as an ALE, an employer must employ 50 full-time, or full-time equivalent, employees during the prior year.  The water can get murky when determining whether an employer is actually an ALE.  For example, a full-time employee is an employee who provides at least 30 hours of service per week. Then, there are full-time equivalent employees. Here, an employer must aggregate all the part-time hours worked in a month (not to exceed more than 120 hours for a single part-time employee), then divide the total part-time hours by 120 to calculate full-time equivalent employees. Not too complicated. But what about cases when you have two employers with a common owner? Here, you combine all employees providing services to employers under the common owner. If Company A (0 employees) owns all the stock in Company B (30 employees) and Company C (45 employees), then B and C’s total employees (75) qualifies them both as ALE members for the next year. Thus, an acquisition of Company B comes with an obligation of employer shared responsibility payments for the next year. Even though, on its face, it appears Company B would be exempt from MEC requirements. This concept is further complicated by the fact that the ALE status is also determined using the controlled group rules of Internal Revenue Code Section 414 which broadly encompass several ownership structures such as parent-subsidiary ownership, brother-sister ownership, and affiliated service groups. Because of this, a “common owner” structure may be present, but not always immediately identifiable.

Assessments arising under Section 4980H pertain to errors or omissions on employer-submitted Forms 1094-C or 1095-C. Form 1095-C details the specifics of the employer-provided health insurance coverage and is sent to employees and the IRS. On the other hand, Form 1094-C acts as a coversheet for 1095-C and is sent only to the IRS. Prior to the Act taking effect, employers were subject to penalty for violations under 4980H indefinitely. Moving forward, all returns due after December 31, 2024, enjoy an eventual reprieve under the new statute of limitations. The six-year clock begins to run upon the due date of the applicable return or when the return is submitted—whichever is later.  It is important to note that the Act will not apply retroactively, and errors or omissions from and prior to December 31, 2024 are still subject to penalty by the IRS for an indefinite period. It is imperative that employers retain all documents related to employee coverage under the ACA and copies of Forms 1094-C and 1095-C.

            The Act also extends to 90 days an employer’s window to respond to an IRS Letter 226-J—the IRS letter sent to employers who allegedly violated Section 4980H. This change gives employers 60 more days to formulate a response to the IRS’s alleged ACA-related penalty. Any Letter 226-Js sent to an employer on or after January 1, 2025, including those pertaining to returns filed prior to 2025, are subject to this 90-day response period. These changes to the code section afford a more reasonable response period and allow employers to stop looking over their shoulders once the statute of limitations period has run.

[1]  H. R. 3801 - Employer Reporting Improvement Act