Weighing Software Automation Against Human Expertise in Reporting
Heather C Garcia, ETC Partner
Since 2015, the Affordable Care Act (ACA) has required certain employers, health coverage providers, and insurers to report healthcare coverage provided to employees and other covered individuals. This reporting supports IRS administration of the ACA’s employer mandate and premium tax credit eligibility for individuals. In recent years, federal subsidies under the ACA—including those enhanced by the Inflation Reduction Act—have totaled roughly $60 billion annually. The Congressional Budget Office projects that maintaining these subsidies could cost over $335 billion over the next decade. Given this significant funding, the IRS must maintain strict enforcement to ensure accuracy. Employers fulfilling their responsibilities under the Employer Shared Responsibility Rules must report accurate information to assist the IRS in verifying coverage for employees receiving subsidized plans.
ACA reporting is an essential tool for IRS enforcement, so the question for employers becomes: how accurate can you be in your initial submissions of your 1094-C and 1095-C forms to minimize enforcement time and effort?
While technology can streamline 1095 reporting, it also brings potential risks. Employers should evaluate their unique needs and in-house resources to determine the best approach for IRS filings.
Here’s a breakdown of key steps and considerations:
1. Determine ALE Status: Step one for all employers is determining their ALE (Applicable Large Employer) status. This calculation is based on payroll hours from the previous tax year and applies to all members of a controlled group. The IRS treats separate employers as a controlled group when there is a sufficient degree of common ownership, and employers typically cannot rely on carriers to assist them with this complex determination. Carriers not only lack insight into an employer’s structure of affiliated entities with shared ownership to be able to determine ALE status accurately, but they also do not have the necessary payroll hours for calculations.
2. Choose a Reporting Method: Upon determining it is an ALE; an employer must decide whether to use technology alone or incorporate professional support for IRS filing. Here are critical factors to consider:
Complexity of IRS Compliance Requirements: ACA reporting requirements vary and must be accurately configured in the reporting system. Standard software may struggle with accurately capturing and reporting unique cases or employing the necessary flexibility to meet nuanced detailed IRS regulations, while professional support offers expertise and adaptability to meet legal standards and reduce compliance risks.
*Data Entry and Management Errors: Software relies on precise data entry and regular updates to meet IRS standards. Errors in data entry or system setup can result in incorrect filings, fines, and auto-generated submissions to the IRS. In previous years, the IRS sent many ACA penalty communications (i.e. 226J letters) in error to employers stating that they owed an employer shared responsibility payment (ESRP) due to incorrect information reported by the ALE’s reporting vendor on their 1094 and 1095 forms. Often, these reporting errors were caused by mistakes in setup or a lack of user knowledge when verifying the Standard Measurement Period time frames alongside the measurement method of Lookback or Monthly Measurement as just a few examples. Professionals can audit and verify data accuracy, catching discrepancies that software may overlook.
*Audit Support and Issue Resolution: If the IRS identifies discrepancies or penalties, professionals can provide rapid assistance, while technology solutions often direct users to reference materials for self-resolution. Professionals offer direct support to handle IRS inquiries and protest assessed fines and penalties effectively and may be able to directly represent the employer before the IRS depending on their qualifications.
*Handling Non-Standard Cases: Software solutions generally handle standard reporting scenarios well for a typical single employer whose workforce has predictable hours, but they may lack flexibility for complex cases such as multiple employer welfare arrangements (MEWAs), retiree coverage, individual coverage HRAs (ICHRA), or controlled group arrangements. Professionals can adapt to these unique cases, assist with ACA reporting strategy and ensure accuracy across various employee groups.
*Staying Updated on Regulatory Changes: The IRS regularly updates ACA reporting rules, which may not be reflected promptly in software platforms. Professionals stay current on these updates, ensuring accurate, compliant submissions.
*Cost of Non-Compliance: While technology alone can save initial costs, penalties for non-compliance, errors, or employee claims may quickly surpass these savings. Professionals help prevent potential errors before submission, providing a reliable path to compliance and avoiding costly penalties.
In summary, while technology offers cost-effective convenience, professional support adds essential expertise, especially for complex ACA reporting needs. The goal is to simplify the process and ensure IRS accuracy. For companies with limited time or intricate reporting requirements, combining technology with professional guidance can assist employers in not only fulfilling their ACA reporting obligations but also reduce compliance exposure resulting in the most effective solution.