IRS (Quietly) Announces Procedures for the Assessment and Payment of Excise Taxes under the Affordable Care Act’s Employer Shared Responsibility Rules
The Internal Revenue Service has for some time made available a comprehensive set of Questions & Answers covering the Affordable Care Act’s (ACA) employer shared responsibility rules. (These are the rules that are codified in Section 4980H of the Internal Revenue Code, the compliance with which is reported on IRS Forms 1094-C and 1095-C, etc.) Entitled, “Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act,” this web-based resource provided generally useful information about how the rules worked. Until recently, however, the IRS’ Questions and Answers merely said that the IRS “expects to publish guidance of general applicability describing the employer shared responsibility payment procedures in the Internal Revenue Bulletin before sending any letters to ALEs [Applicable Large Employers] regarding the 2015 calendar year” (Q&A 57). On November 2, that changed. This post explains what happened, and what it means for employers.
Background
In a series of newly revised Questions and Answers, the IRS fleshed out in some detail how it proposes to assess and collect employer shared responsibility payments, beginning with Q&A 55:
- How does an employer know that it owes an employer shared responsibility payment?
The general procedures the IRS will use to propose and assess the employer shared responsibility payment are described in Letter 226J. The IRS plans to issue Letter 226J to an ALE if it determines that, for at least one month in the year, one or more of the ALE’s full-time employees was enrolled in a qualified health plan for which a premium tax credit was allowed (and the ALE did not qualify for an affordability safe harbor or other relief for the employee).
Letter 226J will include:
- a brief explanation of section 4980H,
- an employer shared responsibility payment summary table itemizing the proposed payment by month and indicating for each month if the liability is under section 4980H(a) or section 4980H(b) or neither,
- an explanation of the employer shared responsibility payment summary table,
- an employer shared responsibility response form, Form 14764, “ESRP Response”,
- an employee PTC list, Form 14765, “Employee Premium Tax Credit (PTC) List” which lists, by month, the ALE’s assessable full-time employees (individuals who for at least one month in the year were full-time employees allowed a premium tax credit and for whom the ALE did not qualify for an affordability safe harbor or other relief (see instructions for Forms 1094-C and 1095-C, Line 16), and the indicator codes, if any, the ALE reported on lines 14 and 16 of each assessable full-time employee’s Form 1095-C,
- a description of the actions the ALE should take if it agrees or disagrees with the proposed employer shared responsibility payment in Letter 226J, and
- a description of the actions the IRS will take if the ALE does not respond in a timely manner to Letter 226J.
The response to Letter 226J will be due by the response date shown on Letter 226J, which generally will be 30 days from the date of Letter 226J.
Letter 226J will contain the name and contact information of a specific IRS employee that the ALE should contact if the ALE has questions about the letter.
While the penalties under Code Section 4980H are referred to as “assessable payments,” they are in the nature of an excise tax. The IRS has historically prescribed examination and appeal procedures for excise tax returns, which are explained at length in Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund. These procedures are highly prescriptive and generally cumbersome. While this Q&A does not say so explicitly, it appears that the IRS intends to establish a separate enforcement scheme that is unique to the ACA’s employer shared responsibility provisions. The next Q&A anticipated such a scheme:
- Does an employer who receives a Letter 226J proposing an employer shared responsibility payment have an opportunity to respond to the IRS about the proposed payment, including requesting a pre-assessment conference with the IRS Office of Appeals?
Yes. ALEs will have an opportunity to respond to Letter 226J before any employer shared responsibility liability is assessed and notice and demand for payment is made. Letter 226J will provide instructions for how the ALE should respond in writing, either agreeing with the proposed employer shared responsibility payment or disagreeing with part or all or the proposed amount.
If the ALE responds to Letter 226J, the IRS will acknowledge the ALE’s response to Letter 226J with an appropriate version of Letter 227 (a series of five different letters that, in general, acknowledge the ALE’s response to Letter 226J and describe further actions the ALE may need to take). If, after receipt of Letter 227, the ALE disagrees with the proposed or revised employer shared responsibility payment, the ALE may request a pre-assessment conference with the IRS Office of Appeals. The ALE should follow the instructions provided in Letter 227 and Publication 5, Your Appeal Rights and How To Prepare a Protest if You Don’t Agree, for requesting a conference with the IRS Office of Appeals. A conference should be requested in writing by the response date shown on Letter 227, which generally will be 30 days from the date of Letter 227.
If the ALE does not respond to either Letter 226J or Letter 227, the IRS will assess the amount of the proposed employer shared responsibility payment and issue a notice and demand for payment, Notice CP 220J.
While the tenor of this answer seems reasonable, the 30-day period in which to respond is not. In an organization of any size, it might take a week or more for Letter 226J to reach the right department or person. While the Q&A nowhere mentions extensions of time, one would hope that the Service will be more flexible on this score.
The manner in which an employer will remit the shared responsibility payment is described in new Q&A 57:
- How does an employer make an employer shared responsibility payment?
If, after correspondence between the ALE and the IRS or a conference with the IRS Office of Appeals, the IRS or IRS Office of Appeals determines that an ALE is liable for an employer shared responsibility payment, the IRS will assess the employer shared responsibility payment and issue a notice and demand for payment, Notice CP 220J. Notice CP 220J will include a summary of the employer shared responsibility payment and will reflect payments made, credits applied, and the balance due, if any. That notice will instruct the ALE how to make payment, if any. ALEs will not be required to include the employer shared responsibility payment on any tax return that they file or to make payment before notice and demand for payment. For payment options, such as entering into an installment agreement, refer to Publication 594, The IRS Collection Process.
Where the penalty amounts are small, or where an employer has ample available cash, this procedure seem straightforward—the IRS sends the employer a bill, which the employer timely pays. But where an employer needs to avail itself of “payment options” things could get complicated. The scheme generally envisioned by Publication 594 is as follows:
- If you owe taxes, we will send you a bill. This is your first bill for tax due. Based on your return, we will calculate how much tax you owe, plus any interest and penalties.
- If you don’t pay your first bill, we will send you at least one more bill. Remember, interest and penalties continue to accrue until you’ve paid your full amount due.
- If you still don’t pay after you receive your final bill, we will begin collection actions. Collection actions can range from applying your subsequent tax year refunds to tax due (until paid in full) to seizing your property and assets.
(Emphasis added).
Lastly, Q&A 58 telegraphs the IRS’ intention to begin notifying employers very soon. It reads:
- When does the IRS plan to begin notifying employers of potential employer shared responsibility payments?
For the 2015 calendar year, the IRS plans to issue Letter 226J informing ALEs of their potential liability for an employer shared responsibility payment, if any, in late 2017.
This means that notices will be issued within the next 7 weeks or so week. What is not clear is whether the IRS will publish guidance in the Internal Revenue Bulletin or elsewhere that fleshes out the notification and collection procedures or whether these new Q&As fulfill that role.
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A special note of thanks to Scott S. Colford, Vice President, Cross Agency, Bangor, Maine for calling this item to our attention.