The IRS recently issued draft 2015 Instructions for Forms 1094-C and 1095-C (“2015 Instructions”). These are the forms that employers with 50 or more full-time employees (including full-time equivalent employees) in the previous year—i.e., Applicable Large Employers (“ALEs”)—use to report their compliance with the Affordable Care Act’s (“ACA”) rules governing employer shared responsibility. Where an ALE consists of more than one commonly controlled entity, reporting is required at the level of the controlled group member (or “ALE Member”). The employer shared responsibility rules are codified in § 4980H of the Internal Revenue Code (“Code”), and the corresponding reporting requirements are set out in Code § 6056.
The draft 2015 Instructions do not deviate radically from the 2014 Instructions. They do, however, contain some important clarifications. This post examines the highlights. (For a comprehensive treatment of the ACA reporting-related requirements please see Information Reporting Under the Affordable Care Act: I.R.C. §6055 and §6056.)
(1) Extensions and Waivers
The Code § 6056 compliance deadline is fast approaching. While this reporting requirement mirrors the reporting and transmittal of wages scheme of Forms W-2 and W-3, respectfully, the reporting rules under Code § 6056 are exponentially more complicated. Moreover, while wage reporting relies on data from payroll, reporting under Code § 6056 requires ALE Members to access and collate information from multiple sources, including payroll, HRIS, COBRA administration, and leave-of-absence administration.
It gets worse. As we reported in the second installment of this series, the IRS has announced that it will not impose penalties where ALE Members can show that “they have made good faith efforts to comply with the information reporting requirements.” The relief is available, however, only where compliance is timely. (Other relief is available in the case of untimely compliance, but is less generous and less certain.) Thus timeliness is of the essence.
The 2015 Instructions clarify that:
“You can get an automatic 30-day extension of time to file by completing Form 8809, Application for Extension of Time To File Information Returns. . . . However, you must file Form 8809 by the due date of the returns in order to get the 30-day extension. Under certain hardship conditions you may apply for an additional 30-day extension. See the instructions for Form 8809 for more information.”
Similar relief is provided in the case of requests for extensions of time to furnish statements to recipients.
(2) Increased Penalties
As we reported previously, the Trade Preferences Extension Act of 2015 includes a provision that increases penalties for incorrect information returns, including those required by the ACA, to $250 per day (from $100 per day) with an annual cap of $3,000,000 (up from $1,500,000). The 2015 Instructions reflect this change.
(3) Clarification of 98% Offer Method
Eligibility for the “98% Offer Method” as an alternative to the general method requires an employer to certify that the employer offered affordable health coverage providing minimum value to at least 98% of its employees “for whom it is filing a Form 1095-C employee statement, and offered minimum essential coverage to those employees’ dependents.” The benefit of this method is that the employer is not required to identify which employees (for whom it is filing) were full-time employees.
There has apparently been some confusion about how to apply the 98% Offer Method relating to how one treats an employee in a limited non-assessment period. For example, assume ALE Member offers affordable minimum value coverage to all of its employees, full-time and part-time, and to their dependents in each month from January 2015 to July 2015. On August 15, ALE Member hires 5 new full-time employees to whom coverage is offered as of December 1, 2015 following the plan’s waiting period (or “limited non-assessment period” in the parlance of the Code § 4980H final regulations). Is the 98% Offer Method available in this instance? That is, does this ALE Member offer coverage to 98% of its employees from August to November? The 2015 Instructions answer this question in the affirmative, saying:
“To be eligible to use the 98% Offer Method, an employer must certify that taking into account all months during which the individuals were employees of the employer and were not in a Limited Non-Assessment Period, the employer offered, affordable health coverage providing minimum value to at least 98% of its employees for whom it is filing a Form 1095-C employee statement, and offered minimum essential coverage to those employees’ dependents.”
To drive the point home, the 2015 Instructions offer the following example of an arrangement that complies with the 98% Offer Method:
“Employer has 325 employees. Of those 325 employees, Employer identifies 25 employees as not possibly being full-time employees because they are scheduled to work 10 hours per week and are not eligible for additional hours. Of the remaining 300 employees, 295 are offered affordable minimum value coverage for all periods during which they are employed other than any applicable waiting period (which qualifies as a Limited Non-Assessment Period). Employer files a Form 1095-C for each of the 300 employees (excluding the 25 employees that it identified as not possibly being full-time employees). Employer may use the 98% Offer Method because it makes an affordable offer of coverage that provides minimum value to at least 98% of the employees for whom Employer files a Form 1095-C. Using this method, Employer does not identify whether each of the 300 employees is a full-time employee. However, Employer must still file a Form 1095-C for all of its full-time employees. . . .”
(4) “Plan Start Month” Indicator Box
On Form 1095-C, there is a new box, entitled “Plan Start Month,” that is optional for 2015. This box is required to take account of a difference in the manner in which affordability is determined for purposes of an individual’s eligibility for premium tax credits versus affordability for purposes of Code § 4980H. The issue is explained in a previous post. For purposes of determining an individual’s eligibility for premium tax credits, the indexing of the ACA’s original 9.5% affordability threshold is done on the basis of the plan year, not the calendar year (see IRS Revenue Procedure 2014-37, § 5.02). Thus, the IRS needs to know the plan year for purposes of enforcing the premium tax credit rules.
(5) Multiemployer Plan Relief
The 2014 Instructions direct ALE Members to not enter a code in Part II, line 14 of Form 1095-C (offers of coverage) for health coverage that is not actually offered. Line 14 must instead reflect the coverage actually offered to the employee. The multiemployer safe harbor provided under the Code § 4980H final regulations, though available for purposes of Form 1094-C, Part III, column (a) (relating to whether the employer offered minimum essential coverage to at least 70% of its full-time employees (95% after 2015)) does not apply here.
Getting enrollment and disenrollment information from the multiemployer plan to the employer requires a level of cooperation heretofore rarely encountered in the multiemployer plan environment. And even if the multiemployer plan is willing to provide the information, the HIPAA privacy rules may prevent them from doing do. Enrollment and disenrollment information has something of a tortured history under HIPAA. It is protected health information or “PHI,” except when it isn’t. Overgeneralizing, enrollment and disenrollment is not PHI in the hands of an employer, but it is PHI in the hands of a plan/covered entity. While making this call is not always easy, in the multiemployer plan context it’s pretty simple: The information is in the plan’s hands, so it is in all likelihood PHI. (The extent to which this result is counterintuitive is beyond the scope of this post.) Nor do there appear to be any available exemptions under which the multiemployer plan could obtain this information, short of getting signed authorizations from each and every plan participant and beneficiary.
Recognizing the reporting challenges that employers and multiemployer plans face, the 2015 Instructions provide transition relief. For reporting offers of coverage involving multiemployer arrangements for 2015, an ALE Member is directed to:
“[E]nter code 1H on line 14 for any month for which the employer enters code 2E on line 16 (indicating that the employer was required to contribute to a multiemployer plan on behalf of the employee for that month and therefore is eligible for multiemployer interim rule relief).”
Thus, under this transition rule, Code 1H may be entered without regard to whether the employee was eligible to enroll in coverage under the multiemployer plan. This solution had previously been proposed by a handful of software vendors who are developing expert systems to assist with compliance. This relief is both welcome and necessary.
(6) Offers of COBRA Coverage
Following the recent revisions to its FAQs relating to reporting under Code § 6506 (see Q&As 16, 17 and 18), the 2015 Instructions provide rules for handling offers of COBRA coverage. Generally, an offer of COBRA coverage that is made to a former employee upon termination of employment is reported as an offer of coverage only if the former employee enrolls in the coverage. If the former employee does not enroll in the coverage (even if a spouse or dependent of the former employee independently enrolls in the coverage), the ALE Member is directed to use code 1H (no offer of coverage) for any month for which the offer of COBRA continuation coverage applies. An offer of COBRA continuation coverage that is made to an active employee (e.g., in the case of a reduction in the employee’s hours that resulted in the loss of plan eligibility) is reported in the same manner.
(7) Smoothing of Employee Premiums
Where minimum value coverage is offered, an employer using the general reporting method reports on Form 1095-C, line 15 “the amount of the employee share of the lowest-cost monthly premium for self-only minimum essential coverage providing minimum value that is offered to the employee.” The 2015 Instructions clarify that, for purposes of determining the monthly employee contribution, “an employer may divide the total employee share of the premium for the plan year by the number of months in the plan year to determine the monthly employee contribution for the plan year.” The 2015 Instructions offer the following example:
“For example, if the plan year begins January 1, the employer may determine the amount to report for each month by taking the total annual employee contribution for all 12 months and dividing by 12. If the plan year begins April 1, the employer may determine the amount to report for January through March, 2015 by taking the total annual employee contribution for the plan year ending March 31, 2015, and dividing by 12, and may determine the amount to report for April through December, 2015 by taking the total annual employee contribution for the plan year ending March 31, 2016, and dividing by 12.”
(8) ALE Determination Transition Rule
The 2015 Instructions include an express reference to a transition rule set out in Section XV.D.3 of the preamble to the Code § 4980H final regulations. For 2015, an employer may determine its status as an ALE by reference to a period of at least six consecutive months during 2014 rather than the entire 2014 calendar year.
(9) Breaks in Service/Leaves of Absence
The treatment of unpaid leaves of absence received little attention in the Code § 4980H final regulations other than in the relatively narrow context of special unpaid leaves. The 2015 Instructions change that by enunciating the following broad principle:
“In certain circumstances, an employee may have a break in service (including a break in service due to a termination of employment) during which the individual does not earn hours of service, but upon beginning to earn hours of service again the employer must treat the individual as a continuing employee rather than a new hire for purposes of certain rules under the section 4980H regulations.”
We addressed the underlying issues in a previous post. Consistent with the Code § 4980H final regulations, the 2015 Instructions emphasize that “[t]hese rules do not impact whether the individual was an employee during the break in service, so the individual should only be treated as an employee during the break in service for purposes of reporting if the individual remained an employee during that period (and had not terminated employment with the employer).” Thus, for example, an employee on unpaid leave during the break in service would be treated as an employee for reporting purposes during the break in service, while a former employee whose employment had been terminated during the break in service would not.
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