Tag Archives: Affordable Care Act

The Affordable Care Act’s Employer Mandate: Part 2

September 18, 2019


Determining Full-Time Employees

This article is Part 2 in a series intended to provide an overview of the Employer Shared Responsibility provisions (also known as the “employer mandate”) under the Affordable Care Act (ACA). The employer mandate generally requires employers known as applicable large employers (ALEs) to offer medical coverage to full-time employees and certain dependents in order to avoid potential penalties.

We covered how to determine whether an employer is an ALE in Part 1. This Part 2 will address how to determine who is an ACA-defined full-time employee (FTE). This article assumes an employer has already determined it is an ALE, and we will be using the terms ALE and employer interchangeably throughout.

Full-Time Employee Status Matters

Although ALE status is determined using both full-time employees and full-time equivalent employees (described in Part 1), the employer mandate penalties only take full-time employees into account. This is why it is so important to be able to identify the full-time employees. This article does not attempt to address all of the nuances that apply under the ACA’s measurement rules.

What’s in a Name?

Continuing from Part 1, the employer mandate is filled with many defined terms, including:

  • Full-time employee (FTE) – An employee who is reasonably expected to work at least 30 hours per week on average and/or who does average at least 30 hours of service per week over the course of a measurement period.
  • Part-time employee (PTE) – An employee who is not reasonably expected to work at least 30 hours of service per week on average and/or who averages less than 30 hours of service over the course of a measurement period.
  • Variable-hour employee – A new employee with a flexible or uncertain work schedule preventing the employer from determining whether the employee will reasonably average more or less than 30 hours of service per week. Factors the employer should consider when classifying an employee as a variable-hour employee include:
    1. Whether the individual is replacing an employee who averaged 30 or more hours of service per week;
    2. Whether employees in the same or comparable position typically average 30 or more hours of service per week; and
    3. How the position was advertised (i.e., as a full-time or part-time position).

Please do not confuse a short-term or high turnover position with the definition of variable hour employee. If we know the employee will average 30 or more hours per week, the employee is not a “variable-hour employee” (but he or she might be a “seasonal employee”).

Note: The term “variable-hour employee” only applies to the look-back measurement method (describe later in this article). Technically, an employee is only a variable-hour employee when initially hired. The variable-hour employee will subsequently measure and be classified as an FTE or PTE thereafter.

  • Seasonal Employee – An employee hired into a position customarily needed for six months or less and related to staffing needs that recur around the same time each year. These are not the same as temporary employees who are hired as needs arise throughout a year. A seasonal employee can be subject to measurement even if reasonably expected to average at least 30 hours of service per week, and the idea is the seasonal employee will be gone before having to be treated as an FTE for ACA purposes.

Note: The term “seasonal employee” only applies to the look-back measurement method.

  • Hour of service – Each hour for which an employee is paid for duties performed or entitled to payment for periods during which no duties are performed (i.e., vacation, holiday, illness, incapacity, disability,[1] layoff, jury duty, military duty, or leave of absence).
  • Break in service – A period of consecutive weeks in which the employee is not credited with an hour of service.
  • Limited Non-Assessment Period (LNAP) – A period during which an ALE will not owe an employer mandate penalty without regard to whether an FTE was offered coverage. LNAPs include:
    • January through March of the first calendar year in which an employer is considered an ALE, but only for employees not offered coverage during the prior year.
    • A waiting period before coverage is effective.[2]
    • An employee’s first calendar month of employment if hired after the 1st of the month.
    • An employee’s initial measurement period and initial administrative period under the look-back measurement method (described later in this article).
    • If an employee in an initial measurement period transitions to a known FTE position, the three full calendar months following the transition qualify as an LNAP. In the real world, many employers will transition the employee to FTE status faster than the rules require.

Different Strokes for Different Folks Possible
Employers may use different measurement methods for the following categories – or combination of categories – of employees:

  1. Salaried employees and hourly employees;
  2. Employees located in different states (but not within the same state);
  3. Collectively bargained employees and non-collectively bargained employees; and
  4. Employees subject to different collectively bargained agreements.

In other words, an employer can use a different measurement method for salaried, non-collectively bargained employees than it uses for hourly, collectively bargained employees. This rule also permits an employer to use measurement periods that differ in length and/or their beginning and end dates for different categories of employees when using the look-back measurement method.

Monthly Measurement Method (MMM)

Under the MMM, an employer measures an employee’s actual hours of service at the end of each calendar month. If an employee averages 30 or more hours of service per week (130/month) for a calendar month, the employee was an FTE for that month. Since coverage cannot be offered retroactively, an employer may be exposed for failing to offer coverage to an employee determined to be an FTE after-the-fact unless an LNAP applies. If an employer does not select a measurement method, the ACA rules default the employer to the MMM.

Weekly Rule: The MMM rules also permit employers to measure hours of service using a “weekly rule” method. Under this method, the employer can use the number of work weeks used for payroll purposes during a calendar month. This can result in some months having 4 weeks and others having 5 for measurement purposes.

  • 4-week months ->TE = 120+ hours
  • 5-week months ->TE = 150+ hours

Look-Back Measurement Method (LBMM)

Under the LBMM, an employer can make certain employees[3] wait until the end of a measurement period to determine if they were FTEs after-the-fact. The employee’s FTE or PTE status is then locked in for a corresponding stability period. Unlike the MMM, an employer can avoid potential penalties by prospectively offering coverage during an FTE’s corresponding stability period.

An employee who is locked in as an FTE during a corresponding stability period cannot lose that status during the stability period while employed by the employer, even if the employee’s hours are reduced.[4]

Remember: An employee’s FTE status is protected prospectively during a stability period because the employee retroactively measured as an FTE. Also, an employee who is reasonably expected to average 30 or more hours of service per week is a known FTE and should not be made to wait for measurement to determine FTE status.

Under the LBMM, there are separate measurement rules for new employees and ongoing employees.

New Employee
An employee who has been employed for less than one complete standard measurement period (defined below).

Ongoing Employee
An employee who has been employed for at least one complete standard measurement period or who was present when the first standard measurement period was implemented.

New Employees

Initial Measurement Period (IMP)

  • The employer may determine the months in which the IMP begins and ends
  • The IMP can be 3 – 12 months in length (but the minimum ISP is 6 months)
  • IMP used to determine whether new employees measure as FTEs or PTEs

The IMP may begin on the date of hire or the first of the following month

The IMP may also begin on the first payroll date that occurs between the date of hire and first of the following month

Initial Stability Period (ISP)

  • The ISP can be 6 – 12 months, but it cannot be shorter than the employer’s IMP
  • During the ISP, the employee is treated as either:
    • An FTE for employer mandate purposes, or
    • A PTE and no coverage must be offered to avoid penalties

For new variable hour and seasonal employees, the ISP must begin immediately after the IAP

For those who are determined to be FTEs, The ISP must be the same length as the SP for ongoing employees

Initial Administrative Period (IAP)
The period of time during which the employer finishes measurement, determines whether coverage should be offered, and conducts enrollment.

  • The employer is permitted to select an IAP of up to 90 days.
  • The IAP may include a period beginning before and after the IMP. This allows an employer to begin the IMP on the first of the following month or next payroll period instead of the date of hire. The remaining IAP may be used after the IMP and before the ISP begins.
  • The IMP and the IAP combined may not exceed 13 months and a fractional month from the date of hire. In other words, the ISP cannot begin later than the 1st day of the 14th month after the date of hire.

Ongoing Employees

Standard Measurement Period (SMP)

  • The employer may determine the months in which the SMP begins and ends
  • The SMP can be 3 – 12 months in length (but the minimum SP is 6 months)
  • An employer can administer the SMP to coincide with a calendar year, a non-calendar plan year, or a different 12-month period (i.e. an annual enrollment event)
Standard Stability Period (SP)

  • The SP can be 6 – 12 months, but it cannot be shorter than the employer’s SMP
  • During the SP, the employee is treated as either:
    • An FTE for employer mandate purposes, or
    • A PTE and no coverage must be offered to avoid penalties

The SP must begin immediately after the AP.

Standard Administrative Period (AP)

The period of time during which the employer finishes measurement, determines whether coverage should be offered, and conducts enrollment.

  • The employer is permitted to select an AP of up to 90 days.
  • The AP begins immediately after the SMP ends.

NOTE: The AP cannot exceed 90 days, and nearly all 3-month time frames will exceed the maximum period allowed for an AP in any given year (e.g. using all of October, November, and December results in an AP of 92 days).

Putting it Together – The LBMM and When a New Employee Becomes an Ongoing Employee

Click here to view the graphic

A Quick Side-by-Side of Some Remaining Items

Monthly Measurement Method Look-Back Measurement Method
Easy for an employer whose workforce is made up entirely or almost entirely of known FTEs and PTEs Better suited for employers with a more flexible workforce and/or a workforce with a less certain FTE/PTE status
Less record keeping Generally best to hire a vendor and/or use specific software for measurement
Employer can adjust quickly for changes from FTE to PTE status Employee is “locked in” as an FTE (or PTE)[1] for the corresponding stability period
Handling a break in service is straightforward.

  • If an FTE has a break in service less than 13 weeks (26 for educational institutions), the employee is considered a continuing FTE and cannot be subject to a new waiting period upon returning to work. Coverage must be reinstated by the first of the month following the return.
  • If the break in service is 13 weeks or more (or 26 for educational institutions), the returning employee can be treated as a new employee and subjected to another waiting period.
Breaks in service are modified by special rules

  • If an FTE has a break in service less than 13 weeks (26 for educational institutions), the employee resumes their prior stability period. Coverage must be reinstated by the first of the month following the return.The employee generally earns 0 hours of service during the break in service for measurement purposes.
  • If the break in service is due to FMLA, USERRA, or jury duty, the employee does not have a break in service, and the employer must account for this leave period in the measurement period by either:
    • revising the measurement period to exclude this leave; or
    • using the employee’s weekly average hours of service during the rest of the measurement period for this leave period

Note: If the FMLA, USERRA, or jury duty is concurrent with other paid leave, the employee is already accruing hours of service.

Full-time determination is at the end of the month, leaving exposure without a remedy Rules vary depending on whether the employee is hired as full-time or non-full-time. The MMM is running in the background during the first measurement period

About the Authors:

Jennifer Stanley is a Compliance Consultant in the Employee Health & Benefits Compliance Center of Excellence for Marsh & McLennan.

Christopher Beinecke is the Employee Health & Benefits National Compliance Leader for Marsh & McLennan Agency.

[1] Again, in the real world, many employers will transition the employee to FTE status faster than the rules require.

[1] Paid disability leave generally counts toward hours of service unless solely paid for after-tax by the employee or provided through a workers’ compensation program.

[2] The waiting period rules vary between the monthly measurement and look-back measurement methods.

[3] These are variable hour, seasonal, and part-time employees.

[4] Similarly, PTE status cannot generally be affected either. In the real world, many employers will transition the employee to FTE status faster than the rules require.

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Texas Federal Court Rules ACA Unconstitutional

December 18, 2018


Given the heavy media attention, you are probably aware that a Texas federal district court issued a decision on December 14, 2018, declaring the entire Affordable Care Act (ACA) unconstitutional. The final outcome will take a while, and the ACA remains in effect as this case moves through the appeals process. Employers (and their group health plans) should continue to comply with the ACA in the meantime.

2018 FORM 1094/1095 REPORTING.

Texas v. Azar

In its 2012 National Federation of Independent Businesses (NFIB) v. Sebelius decision that preserved most of the ACA as originally written,[1] the U.S. Supreme Court held that Congress had the authority to implement the individual mandate and its penalty under the taxing power given to it by the U.S. Constitution. The individual mandate penalty was reduced to zero effective January 1, 2019, by the Tax Cut and Jobs Act of 2017 triggering the Texas v. Azar lawsuit over the continuing constitutionality of the ACA. This case was ultimately joined by thirty-six states and the District of Columbia giving it a distinctive red versus blue feel.

In his decision, Judge O’Connor determined that the elimination of the individual mandate penalty meant the individual mandate itself could no longer be viewed as a valid exercise of Congress’ taxing power. Judge O’Connor also determined that the individual mandate was so essential to and inseparable from the ACA that this renders the entire ACA unconstitutional.

Predicting the Future

Judge O’Connor’s ruling did not include an injunction, meaning the ACA is still in effect pending the appeals process. This fact was verbally repeated by the Trump administration. It is probably foolish to attempt to predict the future of Texas v. Azar, but if we had to:

    1. The 5th Circuit – This is a coin flip, but the U.S. Court of Appeals for the 5th Circuit overrules the district court opinion. While the court agrees that the individual mandate is unconstitutional, the 5th Circuit is unable to conclude that the individual mandate cannot be severed from the rest of the ACA. Whatever the outcome, the side that comes up short appeals to the U.S. Supreme Court.
    2. Congress – If the 5th Circuit finds the ACA unconstitutional, lawmakers work in earnest to draft legislation preserving ACA protections that are popular with voters and to avoid massive disruption in the insurance industry. One of these bills will have enough bipartisan support to be enacted by Congress and signed into law by the President should the Supreme Court declare the ACA unconstitutional.
    3. The Supreme Court The U.S. Supreme Court agrees to hear the case and preserves the ACA again by holding that the individual mandate is severable from the remainder of the ACA and/or for other reasons. Remember, the appointments of Justices Gorsuch and Kavanaugh notwithstanding, the five justices who ruled in favor of the ACA in NFIB v. Sebelius in that 5-4 opinion are still present.

We’ll keep you updated as this progresses.

[1] If you’ll recall, the mandate for all states to participate in the Medicaid expansion was struck down.

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PCORI Fee Deadline Approaches

June 20, 2018


The annual Patient Centered Outcomes Research Institute (PCORI) fee is due by July 31, 2018. The fee was created by the Affordable Care Act to help fund the nonprofit Patient-Centered Outcomes Research Institute which supports clinical effectiveness research. Typically only employers with self-funded health plans, including health reimbursement arrangements (HRAs), must calculate and pay the fee. Health insurance companies will pay the fee on behalf of employers with fully-insured health plans.

Plan sponsors will use IRS Form 720 (Quarterly Federal Excise Tax Return) to report the fee. The fee amount changes annually and is tied to the plan year. The amount due each year is calculated by multiplying the applicable fee by the average number of covered lives in the plan. Employers have several methods available to calculate the average number of covered lives including the actual count method, snapshot method and Form 5500 method. For plan years ending in January 2017 through September 2017, the fee will be $2.26. For plans ending in October 2017 through December 2017, the fee will be $2.39.

For more information on how to calculate and pay the PCORI fee, please contact your service team.

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Upcoming 1094/1095 Deadline

February 22, 2018


Two 1094/1095 deadlines are quickly approaching for applicable employers. Employers filing paper copies of Forms 1094/1095 have until February 28, 2018 to mail them in to the IRS. Only those employers filing less than 250 informational returns are allowed to file paper copies and it must be sent via First-Class mail. The forms must be sent in a flat mailing (not folded) with no paperclips or staples. If sending the forms in multiple packages, write the employer’s name on each package, number them consecutively and place Form 1094-C in the first package. Where to send the forms depend on where the employer’s principal business office or agency is located.

The second deadline is on March 2, 2018. Employers have until then to distribute copies of Forms 1095-B or 1095-C to individuals. This deadline was originally January 31st but the IRS extended it in December 2017. Employers can provide these forms electronically (email or posting on employer’s website) but employees must specifically consent to the electronic distribution. Consent may be given on paper or electronically. If consent is given on paper, the individual must confirm the consent electronically.

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What the 2017 Tax Reform Actually Means for Employers

January 5, 2018


On December 22nd President Trump signed the 2017 Tax Cuts and Jobs Act, marking his administration’s first successful modification to the Affordable Care Act (ACA). Two core aspects of the ACA are the employer mandate and in the individual mandate. The individual mandate requires U.S. citizens have minimum essential coverage for each month, qualify for an exemption, or face a tax penalty. Contrary to popular news, the tax act did not repeal the individual mandate. Rather, it took the teeth out of the law by making the individual mandate penalties $0 as of 2019. Individuals will still need to either have qualifying coverage or pay a penalty for the 2017 and 2018 filing seasons.

The employer mandate was left untouched by the bill. Applicable Large Employers (ALEs) will still need to offer affordable, minimum essential coverage providing minimum value to their full-time employees and their dependents. This means employers likely won’t be affected until 2019 when healthy individuals may decide to forgo coverage absent a penalty. Some speculate employers may have adverse enrollment effects as a result of losing healthier employees.

There’s been some uncertainty if Congress will launch another repeal effort in 2018. Senate Majority Leader Mitch McConnell suggested in late December that the Senate will give up ACA repeal efforts in 2018 due to the difficult odds of repealing and replacing with a 51-49 Senate party division. But other Republicans, including Senator Lindsey Graham (R-S.C.) and House Speaker Paul Ryan (R-Wis.) expressed support for another attempt at reform. Ultimately employers will need to wait to see if Congress will pass other changes to the ACA.

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IRS Gives an Early Present to 1094/1095 Filers

December 22, 2017


Today the IRS announced in Notice 2018-06 they will be extending due dates and good faith filing relief to 2017’s 1094/1095 reporting requirement. Under the Affordable Care Act, Applicable Large Employers (ALEs) are required to complete Form 1095-C for each of their full-time employees. In addition, issuers of coverage must report on all those enrolled in their plans with Form 1095-B. The original deadline to provide a copy of these forms to individuals was January 31, 2018. The IRS extended the deadline to provide the 1095-C and 1095-B forms to March 2, 2018. However, employers will still need to send copies with the IRS by February 28, 2018 or by March 31, 2018 if filing electronically. In addition, the 30 day extension will not be available to the new March 2, 2018 deadline but it will still be available for the IRS filing deadlines by using Form 8809.

As we’ve previously mentioned, the IRS will not require tax filers to submit copies of their Form 1095-B or 1095-C with their tax returns. Instead, filers will certify health insurance coverage by checking certain boxes on their returns.

The notice also extended the good faith filing relief that was available last year. This means the IRS will not impose penalties on reporting entities if they can show they made a good-faith effort to comply with the information-reporting requirements. This relief applies to incorrect and incomplete information reported on the forms. No relief is available to employers who do not timely file the forms.


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Health Care Reform Update

December 19, 2017


If you were unable to attend the Health Care Reform Update Webinar last Friday, you can view a recording of the presentation here. You can access the presentation slides via this link.

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IRS Employer Mandate Penalties

December 6, 2017


The IRS recently updated the Questions and Answers section of its website which addressed the employer shared responsibility requirements of the Affordable Care Act (ACA). These requirements are commonly referred to as the employer mandate.

Beginning in 2015, the ACA required employers to offer full-time employees health coverage or face two different potential penalties:

  1. No Coverage – $2,080 per full-time employee minus 30 full-time employees (in 2015, 80 FT employees could be excluded). This penalty applies if the employer fails to offer substantially all of its full-time employees and their dependent children minimum essential coverage (MEC) and at least one full-time employee purchases subsidized Marketplace coverage.
  2. No Minimum Value or Unaffordable Coverage – $3,120 for each full-time employee who receives a premium tax credit for Marketplace coverage. This penalty only applies if the employer offered the wrong type of coverage (it did not meet the Minimum Value or Affordability requirements) and that employee subsequently purchases subsidized coverage in the Marketplace.

The exposure under the “no coverage” penalty is significantly greater to most employers because the penalty is applied to all full-time employees less the first 30 (80 in 2015).  The “wrong type of coverage” penalty only applies to the individual full-time employee who is not offered Minimum Value/Affordable coverage, and who subsequently purchases subsidized coverage in the Marketplace.

Recently, the IRS announced that it would begin sending letters to employers notifying them of employer mandate penalties for 2015. The IRS expected to begin sending those letters in late 2017. The letters are the first step in the process for assessing the penalties. Each step in the process is outlined below.

  1. Issuance of the penalty letter, called Letter 226J. It will include two additional forms:
    • Form 14765 – A table that indicates all of the employer’s full-time employees who purchased subsidized coverage in the Marketplace.
    • Form 14764 – The employer response form. This allows employers to affirm or dispute the penalties being assessed. Employers have 30 days to respond to Letter 226J with this Form.
  2. If an employer submits Form 14764, they will receive a response Letter 227 from the IRS. There will be several versions of Letter 227 that will indicate whether the IRS plans to assess a penalty against the ALE.
  3. If the employer disagrees with the IRS response in Letter 227, it can follow the instructions provided in Letter 227 and Publication 5 to request a pre-assessment 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.
  4. If the employer fails to respond to Letter 226J or Letter 227, the IRS will automatically assess the applicable proposed penalty against the employer. The IRS will issue a notice and demand for payment (Notice CP 220J). That Notice will include a summary of the penalty, and will reflect payments made, credits applied, and the balance due, if any. The Notice will instruct the employer on the process to make a payment. Employers are not required to include the penalty on any tax returns or make any payments before receiving Notice CP 220J. Employers may have the ability to make payment installments, as described in Publication 594.

Employers need to keep an eye out for Letter 226J. It will likely be sent to the contact listed on the 2015 1094-C the ALE submitted in 2016.

 Letter 226J

The IRS has posted a full sample copy of Letter 226J online.

The first page will look like this:


The Proposed ESRP is the penalty amount the IRS calculated for the 2015 ACA employer mandate. The letter provides a description of both potential penalties and Forms 14765 and 14764, which will be included with the letter. The letter recommends that an ALE have their 2015 Forms 1094-C and 1095-Cs available, to use as a reference when reviewing the letter and accompanying forms.

The letter also provides further instructions:

An employer that agrees with the proposed penalty can indicate their agreement on Form 14764 and include payment (full or partial) when returning the form to the IRS. An employer that doesn’t pay the entire amount will receive a bill in the form of a notice and demand for payment.

An employer that does not agree with the proposed penalty must complete Form 14764 and include a signed statement to dispute all or a portion of the penalty. If corrections to the Employee PTC listing (Form 14765) are necessary, those changes must be identified in the signed statement.  Also, changes should directly be made on the Employee PTC listing by using the indicator codes one would use on Forms1094-C or 1095-C.  There is no requirement to file corrected statements (i.e., Forms 1094-C or 1095-C) with the IRS. Instead, those corrections should be noted in the signed statement and made on the PTC list.

Letter 226J will also include a table called the ESRP Summary Table that shows the months in which penalties apply and explains the penalty calculation:

Letter 226J provides a detailed explanation of each column in the summary table to help employers understand how the penalty amounts were calculated. It will include a number of references to IRS publications to aid in the employer in understanding the penalty determination.

Form 14765

Every Letter 226J should include Form 14765, a sample of which can be found online.

This form is called the Employee Premium Tax Credit Listing:

It will include all full-time employees who received a tax credit to purchase subsidized coverage in the Marketplace, whose 1095-C Form did not include a safe harbor code or any other relief code from the tax penalty.

The Letter 226J includes instructions on how to make changes to the Employee PTC listing:

The IRS reminds employers to ensure that their statement is signed and that the tax year and EIN are entered at the top of the form.

 Form 14764

Letter 226J should include Form 14764. A sample of the Form 14764 can be found here.

Employers should complete the ESRP Response Form (Form 14764) and indicate if they agree or disagree with all or part of the proposed penalty. The first part of the form includes the due date of the response. If an employer needs more time to respond, they may call the IRS to request additional time.  Employers should include the contact information and best times to reach an individual responsible for discussing the matter with the IRS.

If an employer disagrees with the penalty amount, they should include the following when returning the form to the IRS:

  • A signed statement explaining why the employer disagrees with all or a portion of the penalty.
  • Any additional documentation that supports the employer’s contention that penalties should not apply.
  • If an employer made corrections to the Employee PTC listing (Form 14765), include an explanation of the changes in the signed statement.

The Form also permits employers to pay all or a part of the proposed penalty. An employer can select “no payment”. An employer may also choose “partial payment” and the IRS will issue a demand for payment to the employer if there is an agreement that at least a portion of the penalty applies.

Finally, the form allows an employer to designate another authorized contact on page 2. This is optional. An employer may want to designate an additional contact if the primary contract is difficult to reach via phone.

Letter 227

At this point, the IRS has not released a sample of Letter 227. However, the Questions and Answers posted on the IRS website indicate that there will be at least five versions of Letter 227.  Letter 227 will be used as a response to an employer who disagrees with any penalty assessed.  It may also request more information that supports the employer’s position. The IRS, in Letter 227, may also disagree with the employer’s response and indicate that the IRS intends to levy the penalty.

Request for Conference

If the employer maintains the position that the penalty should not apply despite the IRS explanation in Letter 227, the employer can request a pre-assessment conference with the IRS Office of Appeals.

Letter 227 will include instructions for requesting a conference. The employer can also reference IRS Publication 5 for more details. The IRS Publication 5 can be found via this link.

Employers will have 30 days from the date of Letter 227 to request the conference with the Office of Appeals.

Concluding Thoughts

These penalty notices could not come at a worse time for most employers. Many are working through open enrollment issues, getting ready to issue W-2s, and 1095-Cs and preparing for the holidays.

It is critical that employers address this letter shortly after receiving it. Timing is tight.  Employers will have only 30 days to respond and may need that time to make specific arguments as to why a certain penalty amount may not apply.

It is also important to remember that a significant amount of transitional relief was available in 2015. It is not clear if the IRS will take this into consideration when proposing penalties.  However, employers can reference the transitional relief when challenging the penalty determination.

Be prepared to respond to IRS Letter 226J. The IRS did not provide any further details on when these letters would be mailed, other than late 2017.  Employers may want to make sure that they have access to their Forms 1094-C and 1095-C submitted to the IRS in 2016. These forms will be necessary when investigating any proposed penalties.





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New ALEs Subject to Employer Mandate on Calendar Year Basis

November 14, 2017


The Affordable Care Act’s employer shared responsibility provisions require Applicable Large Employers (ALEs) to offer affordable, minimum value coverage to their full-time employees or face a penalty. In previous years, the IRS extended transitional relief to ease the burden of the employer mandate. For example, non-calendar year plans with part of their 2015 renewal falling in 2016 wouldn’t be subject to the employer mandate for those months in 2016 despite their ALE status. Unfortunately, the government has declined to extend any more transitional relief.

ALE status is determined by calculating the average number of Full Time Equivalent (FTE) employees during the prior calendar year. Because ALE status and the employer mandate apply on a calendar year basis, employers who are on the brink of becoming ALEs due to employee growth will need to monitor their full time equivalent count. If an employer grows substantially during the second half of a year, it may cross the 50 FTE threshold for that year and need  to comply as of January 1st of the following year. This can pose a problem for non-calendar year plans that may be left scrambling to comply with the law in the middle of their plan year.

Luckily the final regulations still contain some relief for those first-time ALEs. The employer mandate imposes two potential penalties for non-compliance. However, first-time ALEs will not be subject to a subsection (a) penalty for failing to offer full-time employees coverage as long as they offer coverage by April 1st of the first year following ALE status. If the employer does not offer coverage to the full-time employee by April 1st, the employer may be subject to the subsection (a) penalty for those months (January-March) in addition to any subsequent calendar months for which coverage is not offered. The first-time ALE will also not be subject to a subsection (b) penalty if the coverage offered on April 1st provides minimum value. If the employer does offer coverage by April 1st but the coverage does not provided minimum value, the employer may be subject to the subsection (b) penalty for those initial calendar months (January-March) in addition to any subsequent calendar months for which the penalty may apply. This transitional relief is only available for the first year in which an employer is an ALE. ALEs will not be able to rely on it for subsequent years if their employee counts fluctuate over and under the 50 FTE threshold.

In sum, employers with non-calendar year plans on the verge of being ALEs should be prepared to offer “full-time” employees coverage on January 1st the first year they are an ALE.

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Employer Mandate Penalties

November 7, 2017


The Affordable Care Act’s (ACA) employer mandate imposed many new requirements on employers. One that has been particularly cumbersome is the IRS reporting requirement and the 1094 & 1095 forms used to complete it. Although Applicable Large Employers (ALEs) have been completing these forms since 2015, the IRS has not assessed the shared responsibility payments (aka employer mandate penalties) to non-compliant companies. According to recent updates to the IRS employer mandate web page, however, that is about to change.

As this client-alert indicates, the IRS will begin notifying employers who owe penalties in 2015 “in late 2017” using Letter 226J. It will contain an itemized explanation of the proposed penalty by month, a list of employees who received subsidized marketplace coverage and a description of the steps an employer should take to appeal the proposed penalties. Employers will likely have 30 days to respond.

We will share more information as it becomes available and we will cover this in greater detail in our Healthcare Reform Update on December 15, where we will also discuss the 1094 / 1095 reporting for 2017. Click here to register.

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Where is Health Care Reform Headed?

July 26, 2017


“Roads? Where we’re going, we don’t need roads.” Back to the Future. (1985).

Yesterday, the Mitch McConnell-led Senate voted to open debate on the American Health Care Act (AHCA), the House of Representatives’ bill which repeals and replaces the Affordable Care Act (ACA). During the ensuing 20 hour debate, Senators will consider and vote on many amendments to the AHCA that will repeal or modify part or all of the ACA. There’s no roadmap for this process, and no identified final destination. But apparently where the Senate is going, they don’t need roads.

The Senate has already held one vote on one version of the Better Care Reconciliation Act (BCRA), which included amendments from Senator Cruz and Senator Portman. It was rejected 57-43. The Senate is anticipated to vote on several other amendments in the coming days. It’s impossible to predict what will happen during the debate process or the “vote-a-rama” that follows it, during which Senators can propose and vote on possibly hundreds of amendments.

There should be some clarity on the ACA’s likelihood of survival in the coming days. Until then, the situation is incredibly fluid and it’s anyone’s guess what will come out of the Senate.

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Senate Health Care Bill Released

June 22, 2017


*Updated June 27, 2017*

The long-awaited Senate version of the House of Representatives’ American Health Care Act (AHCA) was released June 22. The Better Care Reconciliation Act retains many of the AHCA’s provisions and modifies others. The following provisions are noteworthy:

  • Phases out federal funding for Medicaid expansion under the ACA;
  • Cuts Medicaid spending;
  • Caps Medicaid block grants to states;
  • Cuts federal funding of Planned Parenthood for one year;
  • Repeals many Affordable Care Act (ACA) taxes on corporations and wealthy individuals;
  • Delays the Cadillac Tax until 2026 (currently scheduled to take effect in 2020);
  • Allows insurers to charge older adults up to five times more than the lowest premiums charged to younger adults for individual or small group plans (current ratio is 3:1);
  • Allows states to apply for waivers to essential health benefits so that insurers can offer plans with more limited coverage;
  • Allows children to stay on their parents’ plans up to age 26 (current ACA provision);
  • Eliminates the employer mandate penalty;
  • Eliminates the individual mandate penalty.

Unlike the ACA or the AHCA, the Better Care Reconciliation Act would not require Medicaid to cover mental health services after 2019. It also reduces the availability of federal subsidies available to purchase insurance. Currently, subsidies are available for those with incomes up to 400% of the federal poverty level; the Better Care Reconciliation Act reduces the threshold to 350%.

Of all the proposed changes to current law, however, the most notable for employers is the elimination of the employer mandate penalty. While Applicable Large Employers would still have an obligation to offer minimum value, affordable coverage to full time employees and dependents, there would be no consequence for ignoring those requirements.

The Senate is expected to vote on the Better Care Reconciliation Act next week.

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