Summary Of Employer Shared Responsibility Payments (“ESRPs”)
By Melissa Shimizu
Under the Affordable Care Act (ACA), applicable large employers (ALEs) are required to offer full-time employees minimum essential health care coverage that is affordable and provides minimum value. If they do not, and a full-time employee receives a premium tax credit to purchase individual coverage through a marketplace, the employer may be assessed an employer shared responsibility payment (ESRP). The amount of the penalty depends on the number of full-time employees to which the ALE made an offer of coverage.
If an ALE makes an offer of coverage to fewer than 95 percent of its full-time employees, and one or more full-time employees receive a premium tax credit, the ESRP in 2015 is generally equal to the number of full-time employees minus 80 (because there was transitional relief available in 2015), multiplied by $2,260. This is called the subsection (a) penalty because it comes from Section 4980H(a). For plan years beginning on or after January 1, 2016, the aforementioned transitional relief was not available and the ESRP calculation will only be reduced by 30 employees, rather than 80.
If, however, it makes an offer of coverage to at least 95 percent of its full-time employees, and one or more of its full-time employees receives a premium tax credit, the ESRP is calculated for each month. This is called the subsection (b) penalty because it comes from Section 4980H(b). For 2015, the amount of the ESRP for any given month is equivalent to the number of full-time employees who received a premium tax credit for that month multiplied by one-twelfth of $2,080.
Background Leading Up to Proposed ESRP Calculations
At the end of 2016, the IRS began notifying employers that they may not have successfully complied with their ACA reporting obligations. These IRS letters provided an opportunity for employers to file ACA returns if they had not met their obligation to do so. In the alternative, employers could inform the IRS that they were not an ALE, or inform the government that they already filed their returns. Additionally, marketplaces began sending notices to employers of their right to appeal the determination that allowed employees to receive premium tax credits.
On March 30, 2017, the Office of Chief Counsel for the Internal Revenue Service confirmed that employers are still subject to ESRPs until the ACA is modified or repealed by Congress.
In late 2017, the Tax Cuts and Jobs Act (“Tax Act”) eliminated the individual mandate penalties, but did not touch ESRPs.
Letter 226J: Proposed ESRP Calculations
Towards the end of 2017, employers began receiving Letters 226J proposing penalties. These letters calculated proposed ESRPs that employers owed for 2015 subsection (a) penalties.
Upon reviewing Letters 226J, it appears the IRS has taken the information that employers submitted on their Forms 1094-C along with information about which of the employer’s employees have received a premium tax credit (“PTC”). Using that data, they have calculated proposed penalties.
Employers typically have 30 days to respond to the Letter 226J. If it agrees with the assessment, it can pay the amount in full. If it does not agree, it can provide a statement explaining why it disagrees; describe any applicable errors on the Form 1094-C which could impact the calculation; edit information the IRS has provided on any employees who received a PTC; and provide any supplemental documentation to support its position. It is important for employers to respond within the applicable time frame because if they do not, then a Notice and Demand letter will follow. This is especially important because employers who checked an incorrect box on the 2015 Form 1094-C may have been assessed seven-figure penalties, when they should not owe anything.
What Does This Mean For Employers?
Employers should respond to any Letter 226J timely, if they do not agree with the calculation.
Further, if you improperly received a Letter 226J for your 2015 filings, it is quite possible you made the same mistakes on your 2016 filings. You may want to reach out to legal counsel to discuss whether you should file corrected 2016 Forms.
You should keep documentation and plan on complying with the ACA. This includes having the necessary information for timely ACA reporting.
Melissa Shimizu is an associate in the Irvine office of labor and employment law firm Fisher Phillips. She can be reached at [email protected].