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The Affordable Care Act (ACA) requires Applicable Large Employers (ALEs)—those with 50 or more full-time employees—to comply with specific healthcare coverage, offer of coverage, and reporting requirements. An ALE must offer affordable minimum essential coverage (MEC) that provides minimum value to its full-time employees and their dependents or face potential tax penalties under the IRS Code Section 4980H.

Reporting Requirements: Forms 1094-C and 1095-C

ALEs must annually distribute Form 1095 to covered and full time employees and transmit a corresponding Form 1094 to the IRS. Form 1094 (B or C) serves as a transmittal form, providing a summary of aggregate employer-level data. Form 1095-B is furnished by an insurer to employees covered under the health plan. Form 1095-C is furnished to each full-time employee and also to covered employees if a self-funded plan. Form 1095-C details the type of coverage offered by month and the employee's share of the lowest cost monthly premium.

IRS Penalties

Failure to comply with ACA requirements can lead to significant penalties. Not offering MEC, for example, triggers penalties under Section 4980H(a), while failing to offer MEC that is affordable and provides minimum value triggers penalties under Section 4980H(b). Additionally, failure to file or provide accurate reporting can result in penalties under Sections 6721 and 6722.

Common Compliance Mistakes

Complying with the ACA is essential to avoid penalties. Common mistakes occur in both the coverage/plan structure arena and the reporting arena.

• Misclassification of Employees
  A frequent error is the incorrect classification of workers as independent contractors or part-time employees when they meet the IRS criteria for full-time status. This misclassification can result in failing to offer health coverage to all eligible employees, thereby triggering penalties.

• Inaccurate Count of Full-Time Employees:
  Employers sometimes err in their method of counting full-time employees, especially when dealing with variable-hour or seasonal workers. This miscount can affect whether an employer is considered an ALE and subject to ACA's employer mandate, leading to compliance issues. It can also impact the offers of health coverage

• Data Errors on Forms 1094-C and 1095-C:
  Simple data entry errors, such as incorrect social security numbers or inconsistent employee information across forms, can lead to IRS penalties.

• Failure to Track and Document Employee Coverage Offers:
  Employers often fail to keep thorough records of the health coverage offered to employees. Documentation should include details of coverage offered, employee eligibility dates, and declination of coverage if applicable. This documentation is important for defending against potential IRS inquiries or penalties.

• Not Offering Coverage for the Entire Duration of Employment:
  Some employers mistakenly do not offer coverage from the date an employee becomes eligible, which can sometimes be immediately upon hiring or after a waiting period of not more than 90 days. Ensuring continuous coverage or offer of coverage for full-time employees is needed to comply with ACA requirements.

• Lack of Understanding of Affordability Thresholds:
  The ACA requires that the health coverage offered must be "affordable" based on one of the IRS safe harbors related to employee wages. Misunderstanding or incorrectly applying these affordability thresholds can result in compliance failures and penalties.

• Inadequate Response to Employee Disputes Over Coverage:
  Employers sometimes neglect to address or formally respond to disputes or questions from employees regarding the affordability or adequacy of the health coverage provided. Active and open communication can prevent misunderstandings and potential non-compliance issues.

• Failure to Report Coverage Offerings:
  Many employers fail to indicate on Form 1094-C that they have offered MEC to at least 95% of their full-time employees, leading to potential penalties. Employers must ensure accurate reporting on Part III, Column (a) of Form 1094-C. Employers should strive to report “yes” for all 12 months of offering 95% of their full-time employees adequate penalties.

• Not Responding to IRS Penalty Letters:
  Ignoring notices from the IRS, such as Letter 226-J or Letter 5699, can lead to large penalties. Immediate action is recommended upon receiving any IRS correspondence regarding ACA compliance. Repeated non-response to the IRS letters results in a penalty assessment which is much more difficult to dispute than an initial inquiry letter.

• Failure to File:
  Despite filing requirements that have been in place for several years, some employers neglect to file ACA forms. The IRS does not look kindly on non-filers. This oversight has become less forgivable as the IRS intensifies its enforcement efforts.

• Errors in Determining ALE Group:
  All the employers within an ALE must file its own 1094-C and 1095-Cs, and disclose other members of the ALE Group on Part IV of Form 1094-C. Not recognizing all group members may lead to compliance mistakes.

• Incorrect Use of Safe Harbor Codes on Form 1095-C:
  Line 16 of Form 1095-C allows employers to indicate reasons why they should not be assessed a penalty for that month. Proper use of "series 2" codes is extremely important for avoiding penalties under Section 4980H. The IRS does not like Line 16 of Form 1095-C to be blank.

Conclusion

To ensure compliance with the ACA, employers must be meticulous in their approach to offering healthcare coverage and fulfilling reporting obligations. Regular audits, thorough reviews of IRS forms, and prompt attention to IRS communications are essential practices. By understanding and addressing these common mistakes, employers can avoid costly penalties and uphold their responsibilities under the ACA.

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