The Affordable Care Act’s Reporting Requirements for Carriers and Employers (Part 1 of 24)
Alden Bianchi, Chair of the Employee Benefits & Executive Compensation Practice, will provide a weekly installment on the complex reporting obligations outlined by the Affordable Care Act for health insurance carriers and employers. In this 24-week series, Alden will explain key requirements as he counts down to the January 2016 ACA reporting deadlines. Below is the first installment.
The Affordable Care Act (ACA) reporting rules that apply to health insurance carriers and to employers that sponsor group health plans are complicated and demanding. Proper compliance will require collecting, collating and organizing information month-by-month from disparate sources that will test the operability of even the most advanced software solutions. While some hold out hope for “simplification,” we think this hope is naïve at best and reckless at worst. These rules are “a thing” that carriers and employers will need to deal with.
There is no shortage of commentary on two particular reporting requirements introduced by the ACA that affect group health plans. They are:
- Internal Revenue Code § 6055
Internal Revenue Code § 6055, which requires carriers and sponsors of self-funded group health plans to provide statements to individuals to whom they provide minimum essential coverage and to transmit copies to the IRS. (“Minimum essential coverage” is coverage that fulfills an individual’s obligation to have health coverage under the ACA’s individual mandate. In the context of employment, minimum essential coverage is generally provided under a group health plan that is either fully-insured or self-funded.) The first reports are due for 2015. Statements to covered individuals must be provided by January 31, 2016, with copies to the IRS together with a transmittal form by February 29, 2016 if filed on paper (March 31, 2016 if filed electronically).
The information to be provided to covered individuals is included on new IRS Form 1095-B, and transmitted to the IRS on new IRS Form 1094-B. Both the Code § 6055 reporting obligations, as well as those under Code § 6056 explained below, track the approach for reporting an employee’s wages. Form W-2 includes the information to be provided to the employee, and Form W-3 is the form that the employer uses to transmit information to the IRS. Where the two regimes differ is in the level of complexity. Forms 1094-B and 1095-B, and their Code § 6056 analogs, Forms 1094-C and 1095-C, are exponentially more complicated.
The IRS has provided a helpful set of questions and answers explaining the Code § 6055 reporting requirements that is available here.
- Internal Revenue Code § 6056
Internal Revenue Code § 6056, which requires “applicable large employers” (i.e., employers with 50 or more full-time and full-time equivalent employees on business days during the previous calendar year) to furnish statements to (and transmit copies to the IRS along with certain transmittal information) each individual who was a full-time employee for at least one month, to disclose whether each such full-time employee and his or her spouse and/or dependents were offered health coverage, and, if so, to report the lowest cost of individual coverage available to the employee. In addition, the employer must report similar information with respect to part-time employees who are offered and who accept coverage. The first reports are due for 2015. Statements to covered individuals must be provided by January 31, 2016, with copies to the IRS together with a transmittal form by February 29, 2016 if filed on paper (March 31, 2016 if filed electronically).
An employer’s status as an applicable large employer is determined based on all entities under common control. Each separate legal entity in the controlled group is referred to as an “applicable large employer member.” Thus, an employer cannot divide itself up into multiple, smaller entities without changing the ownership structure and hope to evade the ACA’s employer shared responsibility rules. While the rules governing common ownership can be daunting to apply, most employers are already familiar with them since similar rules have applied for decades to 401(k) and other tax-qualified retirement plans. The reporting obligation under Code § 6056 applies at the level of the applicable large employer member. (Operating and business units that are not separate legal entities are not separate applicable large employer members.)
The information to be provided to covered individuals is generally included on new IRS Form 1095-C, and the transmittal to the IRS is on Form 1094-C. There is, however, an exception to the general rule in the case of a self-funded plan that is maintained by an applicable large employer. For these plans, the information that would ordinarily be included on Form 1095-B is instead reported in a separate section of Form 1095-C. Small employers (i.e., those with fewer than 50 full-time and full-time equivalent employees on business days during the previous calendar year) that sponsor self-funded plans report the offer of minimum essential coverage on Form 1095-B and transmit on Form 1094-B. They do not provide or file Form 1095-B or C.
The IRS has provided a helpful set of questions and answers explaining the Code § 6056 reporting requirements that is available here.
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Penalties for non-compliance with either requirement are steep. Until recently, the penalty for failure to file an information return generally was $100 for each return for which the failure occurs—i.e., per covered individual. And the total penalty imposed for all failures during a calendar year was capped at $1,500,000. But the recently enacted Trade Preferences Extension Act of 2015 increased these penalties to $250 per day and an annual cap of $3,000,000.
For a more thorough treatment of both the Code § 6055 and Code § 6056 reporting requirements please see Information Reporting Under the Affordable Care Act: I.R.C. §6055 and §6056, an article I recently wrote in the Bloomberg/BNA Tax Management Compensation Planning Journal.
Much of the commentary surrounding Code § 6055 and Code § 6056 dwells on and bemoans its complexity. Some hold out hope for simplification, either from Congress or from the IRS. We think this hope is misplaced. The complexity of the reporting rules appears to us to reflect the complexity of the underlying rules.
At the core of Form 1095-C are three questions (lines 14, 15 and 16) that solicit information about three disparate ACA provisions. Line 14 asks about offers of coverage relating to the ACA individual mandate (Code § 5000A); line 15 asks about the amount of the employee contribution for purposes of assessing an individual’s eligibility for premium tax credits (Code § 36B); and line 16 relates to the applicable large employer’s compliance with the employer shared responsibility rules (Code § 4980H). Moreover, compliance in each case is determined by month. The responses to the questions in lines 14 and 16 are in the form of indicator codes. There are nine separate codes for each, for a total of 18 different codes corresponding to 18 different compliance profiles, options, and situations. Perhaps these forms could be simplified if the information about the individual mandate and/or eligibility for premium tax credits was stripped out, but that would likely require yet another form.
There is a silver lining here, if only a fleeting one. The IRS has announced that for 2015, it will apply a good faith compliance standard. No penalties will be imposed in the case of incomplete or inaccurate information if the reporting entity makes a good faith effort to comply. Of course, this less burdensome standard is not available to an employer that fails to file. But it’s terrific news for employers that are endeavoring in earnest to comply. This relief is particularly welcome since many employers will be relying on third-party vendors who are just now developing their software solutions. No matter how expertly designed and executed, all reporting for 2015 will, in essence, be beta testing. No one has ever done this before for real.