With the Internal Revenue Service’s (IRS) extension of the Affordable Care Act (ACA) reporting deadlines for the 2015 tax year, published on December 28, 2015, businesses now have more time to meet the requirements of the Employer Shared Responsibility (ESR) provisions. Employers should use this extra time wisely, making sure they fully understand what’s required of them and the actions they need to take to avoid penalties.
In today’s economy, accountants that understand how these regulations impact their clients’ businesses—and can offer strategic guidance—are in great demand. Business owners continue to rely on CPAs to provide valuable information regarding Employer Shared Responsibility requirements. With that in mind, here’s a rundown of the essential ESR details.
A Brief Overview
Under the ESR provisions of the ACA, certain employers must offer affordable health insurance coverage that meets the established minimum essential coverage and minimum value requirements to full-time employees or risk a potential penalty. If you are considered an applicable large employer, you'll need to provide detailed informational reporting to the Internal Revenue Service (IRS) at tax time.
Need-to-Know Information for ESR Reporting
Is my client subject to the law?
In general, an applicable large employer (ALE) is any employer with an average of 50 or more full-time employees, including full-time equivalents (FTEs) during business days of the previous calendar year. A full-time employee is one who works an average of 30 hours per week or 130 hours per month. In general, ALEs with 50 to 99 full-time employees, including FTEs, may qualify for relief from penalties for not offering affordable and adequate insurance to their full-time employees until 2016, or the beginning of their 2016/2017 plan year if they meet certain conditions and certify in their informational reporting that they qualified for relief.
In general, ALE status for 2015 is based on workforce hours from 2014. A new employer (an employer that didn’t exist in the previous calendar year) will be considered an ALE if the business reasonably expects to employ and does employ an average of 50 or more full-time employees, including FTEs, in the current calendar year.
Keep in mind, rules that determine the size of a business under health care reform are applied at the “controlled group” level, with a special standard applied to government entity employers. Generally, controlled groups are those that are tied together through direct or overlapping (common) ownership. When determining if an employer is an applicable large employer, all member entities within a controlled group or an affiliated service group (under Code Section 414(b), (c), (m), and (o)) must be aggregated.
Last, as part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, employers should not include employees who are military veterans and have coverage through TRICARE or the Department of Veterans Affairs when determining ALE status. Once ALE status is determined, veterans are treated the same as any other employee when determining full-time status, offers of coverage, and 1095-C filing.
Which employees could subject my client to penalties if not offered coverage?
According to the ESR provisions, employees working an average of 30 or more hours of service per week, or 130 hours of service per month, are considered full-time employees. In order to determine full-time employee status for each employee during the tax year, the employer may use either the monthly measurement method or look-back measurement method. Each method identifies, per month, the full-time or part-time status of each employee. Employees considered full-time for at least one month of the year must receive a 1095-C from their employer.
What are the coverage requirements my client needs to meet?
The ESR provisions require ALEs to have offered minimum essential coverage to at least 70 percent of full-time employees and their dependents (relief for covering dependents is available if certain conditions are met) in 2015 to avoid one of the potential penalties. In 2016, they will need to make these offers to 95 percent (or all but five) of full-time employees and their dependents. Keep in mind that the employer can be assessed another penalty for not offering coverage that meets minimum actuarial value or affordability requirements to all full-time employees if any of those employees not offered adequate and affordable coverage receive a premium tax credit.
What do my clients need to know about minimum essential coverage, minimum actuarial value, and affordable coverage?
Minimum essential coverage. Health insurance coverage must meet the minimum benefits standard of the small- or large-group market within the state to qualify as minimum essential coverage. This includes most broad-based medical coverage typically provided by employers. It would not include certain specific coverage, such as accident or disability income, standalone dental, or vision coverage.
Minimum actuarial value. A plan must cover at least 60 percent of the total average costs of medical expenses to qualify as meeting the minimum actuarial value requirement.
Affordable coverage. The IRS has offered three optional safe harbor methods to help you determine this amount:
- Form W-2 safe harbor
- rate of pay safe harbor
- federal poverty line safe harbor
For specifics about the three affordable safe harbors, see question 19 under “Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act” on the IRS website.
What forms do my clients need to complete?
There are forms that must be filed with IRS, and forms that must be sent to full-time employees. In general, organizations must file paper forms 1094-C and 1095-C by February 28th of the filing year. For 2016, the original deadline was February 29, 2016 (or March 31, 2016, if you file electronically). Even if an employer is a member of a controlled ownership group, or an “Aggregated ALE Group”, each separate Federal ID must file their own 1094-C and employee 1095-Cs. Any employer filing 250 or more 1095-Cs must file electronically.
In general, organizations must provide all full-time employees with copies of form 1095-C by January 31 of the filing year. For 2016, the original deadline was February 1 because January 31 fell on a Sunday. The form details what type of coverage employees were offered and for which months, as well as the cost of the least expensive employee contribution to employee-only option offering minimum essential coverage and minimum actuarial value.
What are the new dates associated with the Automatic Extension of Deadlines for 2015 filing?
On December 28, 2015, the IRS announced an automatic extension for 2015 tax year due dates for all required filers. The new deadlines are:
- March 31, 2016, to deliver the 2015 Forms 1095-B and 1095-C to affected employees
- May 31, 2016, to manually file the 2015 Forms 1094-B, 1094-C, 1095-B, and 1095-C with the IRS — for employers who are eligible for paper filing and are filing the forms on paper
- June 30, 2016, to electronically file the 2015 Forms listed above with the IRS
Per the IRS announcement, there will be no further extensions granted beyond these dates. Employers who fail to furnish or file by the extended deadlines may be subject to penalties from the IRS.
What penalties are my clients at risk of?
If an organization fails to offer adequate and affordable coverage to its full-time employees and their dependents per requirements of the ESR provisions of the ACA, it may face potential penalties in the form of excise taxes as high as $2,080 ($2160 for 2016 and adjusted for inflation thereafter) for every full-time employee employed during the tax year, in general after the first 80 in 2015 (30 in 2016 and beyond). Organizations may also face penalties for not filing accurate returns on time, starting at $50 per form for both those furnished to the employee and those filed with the IRS, if an accurate return is filed within 30 days after the due date, and escalating from there (certain limitations apply).
What about my clients that qualified for transition relief from penalty assessments in 2015?
ALEs of 50 to 99 employees that may qualify for transition relief from penalty assessments for 2015 must still file the relevant tax forms.
Even with the extension, ESR filing deadlines will be here before you know it. Now is the time for CPAs to provide their clients with valuable information to help ensure they are best positioned to successfully meet the ESR reporting requirements.
Eric Enser is the product manager for Insurance Solutions at Paychex, Inc., a leading provider of integrated human capital management solutions for payroll, HR, retirement, and insurance services nationwide. He is participated in multiple Digital CPA Webcasts to inform the profession on updates on ACA.