United States

IRS starts assessing employer shared responsibility payments


The IRS intends to start assessing large employers with shared responsibility payments if their health plans are not compliant with the Affordable Care Act (ACA). The IRS expects to send letters to employers before Dec. 31, 2017, to assess payments for 2015.

A company is a large employer if it averaged at least 50 full-time employees (including full-time equivalents) during the preceding calendar year, or was part of an aggregated group that met the 50-employee threshold. In order to avoid this “pay or play” penalty, a large employer must offer employee health coverage that meets three ACA requirements: (1) minimum essential coverage, (2) minimum value and (3) affordability. 

To meet the minimum essential coverage requirement, an employer must offer health coverage to at least 95 percent of its full-time employees and their dependents. If a large employer failed to meet this requirement in 2015, it could be assessed a penalty of $2,080 for each full-time worker. This penalty is triggered if any employee purchased health insurance through the Health Insurance Marketplace (also known as the exchange) with premium tax credits. 

The minimum value standard requires the health plan to cover a certain percentage of all medical expenses incurred by employees. The affordability standard is met if employees are paying less than 9.5 percent (adjusted for inflation) of their wages for self-only coverage. A health plan that did not meet the minimum value or affordability standards in 2015 can trigger an employer penalty of $3,120 for each employee who enrolled in Marketplace health insurance in 2015. Since 2015 was the first year employers needed to comply with these ACA standards, several transition rules apply.

The IRS uses information from employers’ Forms 1095-C and 1094-C, plus employees’ Forms 1040, to determine which employers owe the penalty. The IRS will mail Letter 226J to employers to notify them of the penalty amount. Employers will have 30 days to respond and can either pay the penalty or explain why they disagree with the assessment. The IRS will acknowledge the employer’s response via Letter 227, and may continue to impose a penalty. Employers that want to dispute the penalty can ask for a conference with the IRS Office of Appeals. If the IRS subsequently determines that the penalty still applies, it will send a notice and demand for payment (Notice CP 220J). Any employer shared responsibility payments paid by an employer are not deductible on its tax return.

Due to the large penalties that can be assessed, an employer should review any IRS penalty notice carefully and respond promptly if it disagrees with the assessment.

For more details about employer shared responsibility payments, please review our article, Employers face new penalties on health plans under the Affordable Care Act.

Jill Harris

Senior Director

Jill helps businesses with planning and compliance for employee welfare and retirement plans. She can be reached at jill.harris@rsmus.com.

Areas of focus: Washington National TaxAffordable Care Act