ACA Reporting on Forms 1094-C and 1095-C, AIRTN500 Error Messages, and Incorrect and Missing Taxpayer Identification Numbers (TINs)—What’s an Employer to Do?
Employer-sponsored group health plans and health insurance issuers (or carriers) are subject to information reporting requirements under the Affordable Care Act (ACA), including the obligation to report taxpayer identification numbers (TINs) of covered employees and their spouses and dependents. But how should employers and carriers respond when notified that a TIN is either missing or incorrect? The regulators have on more than one occasion provided an answer, most recently in a proposed regulation issued July 29, 2016 and published in the Federal Register on August 2, 2016. This post endeavors to explain how employers and carriers ought to handle missing or incorrect TINs under these proposed rules.
Background
The ACA generally provides “applicable large employers” (i.e., employers with 50 or more full-time and full-time equivalent employees on business days during the previous year) the choice between offering group health plan coverage to substantially all full-time employees and paying an assessable payment to the government. These rules, which take the form of amendments to the Internal Revenue Code, are referred to generically as the ACA’s employer shared responsibility rules. The ACA imposes information reporting requirements—using IRS Forms 1094-C and 1095-C—which provide the IRS with information necessary to enforce the employer shared responsibility requirements. (We provide a comprehensive explanation of the ACA employer shared responsibility rules and the reporting rules in prior posts.) Penalties are imposed for failure to timely file the required information returns, failure to timely furnish statements, failure to timely file a corrected information return, or failure to timely furnish a correct statement to an affected individual.
Under a separate set of rules, the ACA obligates providers of “minimum essential coverage” to report coverage information by filing an information return with the IRS, on Form 1094-B, and furnishing a statement to individuals, on Form 1095-B. “Minimum essential coverage” includes coverage under an employer-sponsored group health plan. In the case of a fully-insured plan, the carrier is usually the reporting entity; but in the case of a self-funded group health plan, the plan sponsor is typically the reporting entity. While these two sets of information reporting requirements are technically separate, they are commingled in the case of a self-funded plan, since the information ordinarily provided on Form 1095-B is instead reported in Part III of Form 1095-C. Whether reported on Form 1095-B or 1095-C, filers are required to report taxpayer identification numbers (TINs) for the covered employee and any other covered individuals (e.g., spouse and dependents). Thus, the proposed regulations apply only to Form 1095-B and Part III of Form 1095-C.
To facilitate information reporting under the employer shared responsibility rules, the IRS created a new electronic filing system, referred to as the AIR system. (We describe this system in a previous post.) The AIR system has not been without its challenges. One particularly common error code, AIRTN500, advises filers that an individual’s name and taxpayer identification number (TIN) does not match the IRS’s records. Maddeningly, the AIR system’s error message merely advises that there is a problem with an employee TIN; it does not identify which employee or dependent TIN is causing the error message. (It will in most cases be a dependent TIN.)
Recognizing that the information reporting under the employer shared responsibility rules might pose a challenge, the Treasury Department and the IRS previously announced a good faith compliance standard for 2015. In addition, penalties for failing to timely file or correct information returns or for failing to furnish statements or corrected statement to individuals may be waived where “the failure is due to reasonable cause and not due to willful neglect.” This requires the employer to demonstrate “that it acted in a responsible manner and that the failure is due to significant mitigating factors or events beyond the reporting entity’s control.”
The preamble to the proposed regulations explains the connection between acting in a responsible manner, on the one hand, and the need to properly solicit TINs on the other. Penalties can be waived where a reporting failure is due to reasonable cause and not due to willful neglect. To qualify for relief under this standard, a reporting entity must demonstrate that it “acted in a responsible manner and that the failure is due to significant mitigating factors or events beyond the reporting entity’s control.” A reporting entity is treated as acting in a responsible manner for this purpose if it complies with prior rules [§ 301.6724–1 of the Treasury Regulations] for handling missing and incorrect TINs.
But does the failure to promptly correct missing or incorrect TINs mean that an employer forfeits the right to the waiver of penalties? As we explain below, the answer is likely “no” provided the employer follows a prescribed TIN solicitation process. Also, does the receipt of an AIRTN500 notice itself trigger the obligation to file a corrected form and issue a corrected statement? Again, and as we also explain below, the answer is (or at least appears to be) no.
The TIN Solicitation Process
The prior law penalty waiver rules referred to above were adopted before the ACA, and they were intended principally for financial institutions. Under these rules, a reporting entity is deemed to act in a responsible manner in soliciting a TIN if the reporting entity makes (1) an initial solicitation when an account is opened or a relationship is established, (2) a first annual solicitation by December 31 of the year the account is opened (or January 31 if the account is opened in December), and (3) a second annual solicitation by December 31 of the following year. Thus, this regulation does not fit neatly into the group health plan context: one opens a brokerage or bank account; one enrolls in a group health plan. Notice 2015–68 addresses this disconnect. It provides that, pending the issuance of additional guidance, reporting entities will not be subject to penalties for failure to report a TIN if:
(1) The initial solicitation is made at an individual’s first enrollment or, if already enrolled on September 17, 2015, the next open season;
(2) The second solicitation (the first annual solicitation) is made at a reasonable time thereafter; and
(3) The third solicitation (the second annual solicitation) is made by December 31 of the year following the initial solicitation.
As a consequence, carriers and self-funded plans may satisfy the requirement for the initial solicitation by requesting enrollees’ TINs as part of the application for coverage.
The Proposed Regulations
The proposed regulations retain the approach taken by Notice 2015-68 with some important changes and some useful transition relief. The regulation also complicates matters by distinguishing between and providing different rules for, missing vs. incorrect TINs.
The initial solicitation
The proposed regulations follow Notice 2015-68 by treating an account as opened “at the time the reporting entity receives a substantially complete application for coverage (including an application to add an individual to existing coverage) from or on behalf of an individual for whom the reporting entity does not already provide coverage.” An employer or carrier satisfies the initial solicitation requirement with respect to already enrolled individuals if TINs were requested at any time before July 29, 2016. According to the preamble to the proposed regulation, an employer of carrier that failed to make an initial solicitation before July 29, 2016 should make the solicitation within a reasonable time of July 29, 2016. In addition, and consistent with Notice 2015-68, a filer is deemed to have satisfied the initial, first annual, and second annual solicitations for an individual whose coverage was terminated before September 17, 2015.
First annual solicitation
Under existing rules, the first annual solicitation must be made by December 31 of the year the account is opened (or January 31 if the account is opened in December). The proposed regulation modifies this rule in the case of missing, but not for incorrect, TINs.
- A TIN is “missing” if the employer or carrier fails to obtain a TIN for a covered individual. In the case of missing TINs, the first annual solicitation must be made on or before the seventy-fifth day after the original receipt of the application for coverage (or, in the case of retroactive coverage, the seventy-fifth day after the determination of retroactive coverage is made). The period from the date on which the reporting entity receives an application for coverage to the last day on which the first annual solicitation may be made is the “first annual solicitation” period. For 2016, the initial solicitation was required to the made by July 29, which means that the first annual solicitation should be made by October 12, 2016.
- To ensure that reporting entities that make the initial solicitation and first annual solicitation are eligible for relief in the correct period, the proposed regulations make a further modification. The initial and first annual solicitations relate to failures for the year that includes the day that is the first effective date of coverage for a covered individual. The preamble to the propose regulation helpfully points out that, the existing rule if not modifies “could provide relief for the wrong year when combined with the proposed definition of account opening under section 6055.” For example, if the initial solicitation and the first annual solicitation, which is 75 days later, both occurred in year one, there would be no relief in year two. This special rule is not necessary nor is it provided in the case or incurred TINs.
- A TIN is “incorrect” where the IRS notifies employer of an incorrect TIN through a Form 972-CG or a Form 1095 filing AIRTN500 error message (indicating that a TIN and name provided on the return do not match IRS records). In the case of an incorrect TIN, the existing rule is unchanged. The first annual solicitation must be made on or before December 31 of the year in which the employer was notified of the incorrect TIN unless the employer was notified of the incorrect TIN in December in which case the employer’s solicitation must be made by January 31 of the following year.
Second annual solicitation
In the case of a missing TIN, the second annual solicitation must be made by December 31 of the year following the year of the initial solicitation TIN. (This result is mandated under the prior law rules [Treas. Reg. § 301.6724–1(f)]). In addition, the special timing rule described above to ensure that relief is provided in the proper year applies as well to the second annual solicitation. The rules for the second annual solicitation for an incorrect TIN remain unchanged. The second annual solicitation must be made by December 31 of the year following the year of the initial solicitation.
AIR System Messages
A footnote in the preamble appears to address the question of whether the receipt of an error message triggers the obligation to file a corrected reporting forms and issue corrected statements. It reads:
A filer of the information return required under § 1.6055–1 may receive an error message from the IRS indicating that a TIN and name provided on the return do not match IRS records. An error message is neither a Notice 972CG, Notice of Proposed Civil Penalty, nor a requirement that the filer must solicit a TIN in response to the error message.
There is some disagreement among the commentators as to what this footnote means, exactly. The problem is that the 2015 Instructions for Forms 1094-C and 1095-C appear to support the categorical position that the employer is not required to file a corrected return. Our sense is that this statement is incomplete. That is, the employer must still comply with separate rules governing missing or incorrect TINs. (For a thoughtful discussion of this footnote, the statement in the Instructions, and other guidance, please see, R. Moulder, Proposed Regulations Clarify TIN Responsibilities and Create New Important Questions available here.) So what steps must an employer or carrier take when confronted with an AIRTN500 error message? It strikes us that there is no requirement to add an additional solicitation or immediately file a correct form, but there is a requirement to follow the process laid out in the proposed regulations (or the process laid out in Notice 2015-68) for missing and incorrect TINs.