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IRS Enforcing 4980H Penalties for 2018 Tax Year

The IRS recently began issuing 226J letters proposing 4980H penalties against Applicable Large Employers (ALEs) for the 2018 tax year. As a reminder, the IRS bases these penalty amounts from two sources – health coverage information reported by ALEs on Forms 1094-C and 1095-C and subsidized exchange enrollment information reported by the Healthcare Marketplace.

2018 Penalty Amounts: For 2018, the 4980H(a) penalty amount is $2,320 ($193.33 per month), and the 4980H(b) penalty amount is $3,480 ($290 per month).

An ALE is subject to the 4980H(a) penalty in any month it did not offer minimum essential coverage (MEC) to at least 95 percent of its full-time employees and dependents (as reported on its Form 1094-C), and at least one full-time employee receives subsidized Exchange coverage. For 2018, the ALE would calculate its monthly 4980H(a) penalty by multiplying $193.33 by its Form 1094-C reported full-time employee count discounted by its ratable share of 30. For example, if an ALE is not part of an aggregated group and reports that it has 50 full-time employees in a month in which the 4980H(a) penalty applies, its monthly 4980H(a) penalty would be $3,866.60 [$193.33 x (50-30)].

An ALE is subject to the 4980H(b) penalty when it did offer MEC to at least 95 percent of its full-time employees and dependents, but at least one full-time employee received subsidized Exchange coverage due to receiving an unaffordable offer, an offer that did not meet minimum value, or no offer. For 2018, the ALE would calculate its monthly 4980H(b) penalty by multiplying $290 by the number of full-time assessable employees identified as receiving subsidized Exchange coverage on Form 14765 within the 226J letter. For example, if 5 full-time assessable employees are identified in month, then its monthly 4980H(b) penalty would be $1450 [$290 x 5].

What’s New: The IRS is now requiring more of certain ALEs when responding to the 226J letter. Specifically, if the IRS determines that an ALE does not qualify for an affordability safe harbor it has reported on a Form 1095-C, the Form 14765 will now show XF, XG, or XH, instead of 2F, 2G, or 2G, respectively. If the ALE disagrees with this determination by the IRS, it must include a computation detailing how it satisfied the specific affordability safe harbor in its written response to Letter 226J.

Per IRS regulations, ALEs are not qualified to report an affordability safe harbor in certain situations, which include: (1) any month in which its Form 1094-C reports it did not offer minimum essential coverage to at least 95 percent of full-time employees and dependents; (2) any month in which the Form 1095-C reports it did not offer coverage to an employee (1H); and (3) any month in which the Form 1095-C reports it offered coverage that only provided minimum essential coverage (1F). See Treas. Reg. § 54.4980H-5(e)(2)(i). Presumably, these are the same situations in which the IRS will make its determination that an ALE is unqualified to use an affordability safe harbor, but the latest version of the 226J letter does not provide these details.

The Big Picture: ALEs should ensure they timely respond to these letters and avoid any unnecessary penalty assessments. A recent Inspector General Audit Report criticized the 4980H compliance process given that the IRS has not previously required much supporting documentation from ALEs when responding to Letter 226J. Given the change in administration and the additional details required related to disputing affordability safe harbors, ALEs should be ready for a potentially more stringent response process going forward.

ETC has partnered with the Law Office of Haff & Raggio in helping employers save more than $100 million in 4980H penalties to date. If you require assistance or would like more information about the services we can provide, please contact us at: appeals@eligibilitytrackingcalculators.com

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