In a surprising memo from the IRS Office of Chief Counsel, the IRS concluded that there is no statute of limitations period on the Employer Shared Responsibility Payments (“ESRP”) under the Affordable Care Act. The IRS reasoned that the filing of Forms 1094-C and 1095-C (“ACA Returns”) does not start the statute of limitations period because such forms do not satisfy the requirements to be considered a tax return.
The Affordable Care Act imposes penalties on employers with at least 50 full-time (or equivalent) employees that do not offer health benefits coverage meeting certain minimum value and affordability standards to at least 95 percent of its full-time employees if one employee qualifies for the ACA’s premium tax credit. The Internal Revenue Code generally provides a 3-year statute of limitations that runs from the later of the date a tax return is filed or the tax return’s due date.
In reaching its conclusion that ESRP assessments are not subject to the general statute of limitations period, the IRS relied on a four-prong test established by the U.S. Supreme Court in Beard v. Commissioner to conclude that the Forms 1094-C/1095-C are not tax returns. According to the IRS memo, the ACA Returns do not satisfy the first prong of the Beard test, requiring that there be sufficient data on the purported form to calculate the tax liability, because neither Form includes information regarding the employee’s eligibility for the premium tax credit. ESRP assessments are not triggered unless at least one full-time employee receives an ACA premium tax credit. Since the IRS uses both the information provided on the ACA Returns and information contained on the employee’s Form 1040 to determine an employer’s liability for ESRP, the memo explains, the employer generally does not know whether it has a potential ESRP liability at the time it files the ACA Returns and would have no way of calculating the amount owed. Because there is no return that contains the necessary data to calculate the amount of ESRP, and because Code Section 4980H does not have a separate statute of limitations period, the IRS concluded that there is no statute of limitations for ESRP.
WHAT SHOULD EMPLOYERS DO?
Considering that the IRS could assess ESRP at any time, employers should consider taking the following actions to limit liability:
- Keep the following records indefinitely (starting with 2015 records):
- Records on how full-time status is determined (using monthly or look-back measurement period);
- Records that are used to determine when an employee qualifies for the health benefits plan;
- Records of waiting period, if any, used before health coverage is offered, and records that coverage was offered at the end of the waiting period;
- Records that offers of minimum essential coverage were made to employees;
- Records demonstrating that the health coverage was affordable and provides minimum value.
- Review service provider agreements. Employers who rely on outside vendors to prepare and file Forms 1094-C and 1095-C should review their service provider agreements to confirm that the employer has an ongoing right to access records held by the vendor and a right to a copy of that information at the time the service agreement terminates. If the employer has outsourced all or a substantial portion of the data collection used to prepare its ACA Returns, it may have issues if it does not have a right to access this information in future years.
- Ensure that Forms 1094-C and 1095-C are timely filed with the IRS and timely furnished to employees. Employers are subject to penalties for failing to file the ACA Returns with the IRS and for failing to furnish the returns to employees.