Nearly once a week, I receive a frantic call or email from a current or potential client who has received a proposed or final assessment from the IRS related to Affordable Care Act (“ACA”) reporting. So-called “Applicable Large Employers” (“ALEs”) with 50 or more full-time and full-time equivalent employees have been required to annually report to the IRS information about offers of minimum essential group health coverage (“MEC”) to their employees starting in 2015. In the years since, I have handled hundreds of cases with the IRS regarding allegations of failure to offer coverage and failure to submit forms in a timely manner.

There are a number of mistakes—some simple and some not-so-simple—that employers should avoid to prevent receiving a panic-inducing assessment letter from the IRS.

Mistake #1: Failure to Indicate that Minimum Essential Coverage Was Offered to Full-Time Employees

One of the most common issues that I see is failure to indicate to the IRS that an offer of MEC was actually made to at least 95% of the employer’s full-time employees and their dependents. This will lead to an assessment of financial penalties under Internal Revenue Code (“Code)” Section 4980H.

On Form 1094-C, Part III, Column (a) should be completed to indicate whether such an offer of coverage was made for all 12 months or for certain months during the year.

Frequently, I have found that payroll companies will automatically default to checking the “no” box on the 1094-C, or leaving this box blank when preparing the 1094-C for their clients. Many organizations submit this Form 1094-C without carefully reviewing it, which appears to have been exacerbated with electronic filing. I offer to review the 1094-Cs and spot-check 1095-Cs for my clients to ensure these seemingly insignificant oversights do not result in significant penalty assessments.

For instance, if an ALE in 2024 has 300 full-time employees, and a failure to make an offer of coverage penalty is triggered under Code Section 4980H(a), the penalty would be $801,900, which typically comes in the form of a proposed assessment from the IRS on a Form 226-J.

Make sure that if your company is undertaking the expense to make appropriate offers of coverage to its full-time employees and dependents, that it is properly reporting this coverage to the IRS to avoid this penalty.

Mistake #2: Ignoring Correspondence from the IRS

Whether it is Letter 226-J with proposed penalties, or Letter 5699 indicating a failure to file forms altogether, a mistake I see over and over is employers simply ignoring proposed penalties and assessments from the IRS until they become asserted civil penalties. Employers should ensure that everyone at their organization knows to call an experienced benefits practitioner right away if IRS forms asserting penalties having to do with the ACA are received at any time.

Mistake #3: Failure to File Altogether

Despite filing requirements having been in place since 2015, many ALEs continue to simply not file ACA Forms. Sometimes, this is because there was a change in internal personnel or external payroll providers, or sometimes, it is because of a mid-year acquisition resulting in an employer becoming an ALE for the first time. I have had a few employers tell me that they did not file because they thought the ACA would be repealed anyway.

Given that we are now entering the ninth ACA compliance season, the IRS is becoming less and less forgiving about missed filing deadlines.

Mistake #4: Failure to Show Reasonable Cause

Speaking of forgiveness, the IRS used to be a lot more flexible about ALEs failing to file in a timely manner if they could make a colorable argument that the failure was due to “reasonable cause” under Treasury regulations at 26 CFR 301.6724-1. These regulations primarily have two sets of requirements.

The first set of requirements is that the ALE must have acted in a “responsible manner” both before and after the failure to file in a timely manner. This includes (but is not limited to): requesting extensions, attempting to prevent impediments, and rectifying the failure as soon as possible.

In the second set of requirements, the ALE must have either “significant mitigating factors” or the failure was “due to events beyond the ALE’s control.” Significant mitigating factors include but are not limited to, the first time being subject to the requirement or good compliance history. Events beyond the filer’s control may consist of actions of the IRS or an agent, economic hardships that prevented electronic filing, or unavailability of business records due to disasters or unavoidable absences (e.g., death or serious illness).

Previously, I have found that if an ALE even had a colorable argument for failure to file, the IRS would accept the excuse. In the last two years, however, the IRS has been rejecting these claims. This is especially the case when ALEs ignored numerous letter from the IRS without responding. The IRS frequently points to this in their rejection correspondence, another reason for ALEs to timely respond to IRS inquiries. Even when rejected, there is an opportunity to appeal to the IRS Independent Office of Appeals. Appeals officers have tended to be more forgiving of these penalties but will likely become less and less likely to abate assessed penalties as these reporting requirements become even more entrenched.

To provide context for the size of these potential penalties, for an employer with 300 employees, a failure to file a penalty in 2024 could result in a total penalty of approximately $186,000. Therefore, the stakes are significant.

Mistake #5: Failure to Consider All Entities of an “ALE Group”

One of the anti-abuse provisions of the ACA is intended to prevent business owners from reducing headcounts by simply creating different companies and transferring employees to those companies so that there would be many smaller companies, none exceeding the 50 full-time threshold, and therefore not an ALE. This rule relies on the controlled group and affiliated service group rules applicable to retirement and health and welfare plans under Code Sections 414(b), (c), (m), and (o) that treat certain related employers as a single aggregated employer. For ACA purposes, this is referred to as an “ALE Group,” and each member is referred to as an ALE Member or “ALEM.”

Each ALEM in an ALE Group is required to file their own 1094-C and 1095-Cs, and then must disclose other members of the ALE Group on Part IV of the 1094-C. Many organizations fail to know the members of their ALE Group or fail to update their filings to reflect mid-year acquisitions or dispositions. Further, I have seen numerous circumstances where employers failed to report altogether because they did not understand that an employer with fewer than 50 full-time employees might have a reporting obligation because it is part of a larger ALE Group.

Mistake #6: Not Using Safe Harbor Codes on 1095-C Line 16

On the 1095-C where individual offers of coverage are reported for each employee, employers can enter a “series 2” code on Line 16 to provide a reason why the employer should not be assessed a penalty for that month. While Line 16 can be left blank, employers seeking to avoid penalties under Code Section 4980H ought to check it carefully to reflect various circumstances, including:

• If the employee was not employed during the month (Code 2A);
• If the employee was not a full-time employee (Code 2B);
• If the employee was in a Limited Non-Assessment Period (a “waiting period”) (Code 2D); or
• Whether an affordability safe harbor might apply (Codes 2F, 2G, and 2H).

Conclusion

Penalties for failure to file or failure to offer coverage can add up quickly. I have seen many assessments in the millions of dollars and some in the tens of millions of dollars. Building out a systematic process for ACA compliance is critical to avoiding mistakes, and integrating human resources, payroll, and benefits counsel into a cohesive team for addressing reporting is an integral part of that process. Employers should also consider engaging with a third-party ACA reporting specialist, who often surpasses payroll providers in terms of sophistication of ACA reporting knowledge and ability to manipulate raw data to complete the forms.

The IRS is becoming less and less forgiving about making reporting mistakes related to the ACA.

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