Reporting Affordability Accurately Is Critical in First Year of Reporting Without Good Faith Relief

For all prior tax years in which Form 1094-C and 1095-C reporting has been required, the IRS has offered relief from reporting error penalties under Code Sections 6721 and 6722 when ALEs made good-faith efforts to comply with these reporting requirements. However, big changes are coming that impact how ALEs prepare for the 2021 reporting year.

As background, the IRS issues Letter 226J proposing employer shared responsibility penalties (ESRPs) based on information reported by an ALE on its Forms 1094-C and 1095-C, as well as information reported by the Exchange regarding individuals who have received premium tax credits (PTCs). The good faith relief protection against reporting error penalties has largely served ALEs responding in disagreement with these 226J letters based on incorrect information reported by the ALE on its Forms 1094-C or 1095-C. The IRS has allowed ALEs to request corrections removing or reducing ESRPs without imposing any corresponding reporting error penalties. A June 2020 Inspector General Audit Report was critical of this approach, but the IRS cited back to good faith relief as the basis for not imposing reporting error penalties in these scenarios.

Despite its previous light touch approach with ALEs, the IRS is now moving in a different direction. ALEs preparing for the 2021 reporting year should carefully consider the following developments:

• The IRS will no longer offer good faith relief from penalties under Code Sections 6721 or 6722 for incomplete or incorrect reporting.
• Beginning with 226J letters issued for the 2018 tax year, the IRS started pushing back on affordability information requiring some ALEs to prove they satisfied the affordability safe harbor reported.
• More individuals can qualify for PTCs in 2021 and 2022 due to the American Rescue Plan Act temporarily removing income eligibility limits, which will trigger additional ESRP exposure for ALEs over that same period.

The bottom line for ALEs is that they no longer have a free pass when it comes to reporting inaccurately, and they will likely see an increase in the number of 226J letters being issued in the future. Because the IRS is now more critical of affordability, this is an area ripe for potential reporting error penalty exposure. For the 2021 reporting year, these penalties are generally $280 per form required to be furnished to individuals AND $280 per form filed with the IRS.

As a reminder, ALEs offer affordable coverage during the 2021 calendar year if the employee required contribution for self-only, minimum value coverage does not exceed 9.83 percent of household income, as determined under one of three affordability safe harbors:
1) Federal Poverty Line – Flat Amount (2G)
2) Form W-2 – Current Year W2 (2F)
3) Hourly Rate of Pay – When the offer was made (2H)

Examples: You decide at Open Enrollment to make the plan affordable for everyone making over $25,000 a year. That is $204 per month from EE then anyone making only $22,000 year would have an unaffordable offer of coverage. Or use $10.00 per hour for 1560 hours a year and that contribution cannot exceed $127.79. So, someone making $9.00 per hour is considered to have an unaffordable offer. If you so choose to calculate 9.83% of a person’s wages, you must report the exact amount on your 1095 every month. So, the client needs to determine what is deemed to be an affordable offer and share with the IRS.

For ALEs with non-calendar year plans, they will reference the 2020 affordability percentage (9.78 percent) during the months of the 2021 calendar year that are included in a plan year beginning in the 2020 calendar year. For example, an ALE with a July 1 plan year, would reference 9.78% for January 1, 2021 – June 30, 2021, and 9.83% for July 1, 2021 – December 31, 2021.

Ask your Third-Party provider if you have outsourced your 1095 reporting to assist in the correct reporting and limit your exposure to the new IRS oversight. If you do not have a Third-Party or have not needed this level of legal expertise in years prior, we can help. The ETC Companies has consultants available even if you are not using ETC for your IRS reporting and filing.

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