When it comes to Affordable Care Act compliance reporting of eligible employee health coverage for the 2016 tax year, the difference between a small employer and an applicable large employer (ALE) isn’t so clear-cut.

ALEs are defined as organizations with 50 or more employees in the previous year, including full-time equivalent employees. However, the IRS considers subsidiaries or related entities with fewer than 50 employees to be part of the parent company when defining an ALE. Bottom line: the parent and its related entities are all subject to ACA reporting.

Then there are self-insured employers, which are basically regarded as insurance companies by the IRS. These employers are required to submit Form 1095 regardless of the number of people they employ or provide with health care insurance.

In addition to proper reporting, self-insured employers are subject to two fees as part of the ACA that are adjusted annually and have different deadlines for payment. The Transitional Reinsurance fee is paid into a federal fund that could provide reimbursements for insurance carriers that experience financial losses when participating in federal- or state-sponsored health care exchanges. The Patient-Centered Outcomes Research Institute Fee (PCORI) goes toward research of care outcomes and practices at various health care organizations; the goal is to create a central federal database to help patients make the best choices for health care. Although the Transitional Reinsurance fee is expected to go away after 2016, the PCORI fee will continue in 2016 with an expected sunset for plan or policy years ending on or after October 1, 2019.

Plan ahead to avoid penalties later.

Especially for small entities of large employers, Form 1095 can be confusing when listing the proper legal entity that employs each eligible employee. Listing the parent company or the name most people recognize as the company name can trigger a filing rejection. The same goes for the choice of address and a corresponding employer identification number (EIN), a number assigned by the IRS to identify employer tax accounts. Entities that don’t have an EIN have to request one from the IRS in order to complete Form 1095 properly.

In addition, revised Department of Labor overtime rules that go into effect December 1, 2016, could hinder proper reporting as the number of employees eligible for health care coverage shifts. Employers that choose to bump up salaries for key employees may end up increasing the number of eligible employees.  Alternatively, maintaining a larger number of part-time or non-exempt employees could lead to higher levels of overtime pay.

Employers that choose payroll outsourcing and knowledgeable benefit brokers can get support to plan ahead for ACA reporting. They can confirm whether or not the employer (or any affiliated entities) is subject to ACA reporting. Then, their advisors can help improve payroll administration and coordinate a schedule for collecting and reporting data by the January 31, 2017, filing deadline. Employers can face penalties for noncompliance with ACA requirements as well as for missing tax forms — risks that can be mitigated when benefits brokers, CPAs and payroll administration cooperate early in the year.

What if you don’t have to comply with ACA for 2016?

Small employers that are not yet required to either provide affordable health care coverage or report on coverage under ACA can eventually fall under requirements if employment hits 50 employees (or fte) or if they merge or are acquired. Working closely with an ACA compliant payroll provider, benefits broker and your CPA can help your company prepare to respond to those changes in the future.

Under the Affordable Care Act, individuals without health care coverage will pay tax penalties for their lack of coverage. However, if they are eligible to receive ACA-compliant affordable health insurance coverage through an employer, they must choose to take that coverage or actively waive that coverage. The employers must document when employees were informed of eligibility in accordance with health care plan guidelines. They must also document if and when an employee waived coverage. If the employee accepts coverage, an employer must document the start and end dates of coverage (including data on dependents and their coverage dates for self-insured plans), within the given tax year.

If the employer meets the definition of an ALE or if it is self-insured, this health care coverage information must be reported to the IRS on Form 1095 for purposes of comparing employer data with employee tax data.

Now here is the wrinkle for eligible employees who waive eligible employer coverage. Let’s say one of these employees decides to get health insurance coverage through a state- or federal-sponsored health care exchange, even though the employer offered “affordable” coverage. And let’s say that same employee receives a federal government subsidy to pay for health coverage through the exchange. If the IRS determines that the employee had affordable health coverage through the employer, the employee could be required to pay back the subsidy — and faces additional penalties which could be hundreds or thousands of dollars over a year. This is a primary reason for such scrutiny of ACA compliance — rooting out misuse or abuse of federal health care insurance subsidies among taxpayers who could receive compliant coverage through an employer.

For the purposes of this article, we won’t delve into the question of what is really affordable health care insurance through employers, particularly for family coverage. The fact remains that the IRS requires accurate reporting of the status of all eligible employee health care coverage, and is far less likely to make exceptions for employer good faith efforts in 2016.

Improve administration and payroll systems for ACA reporting

One of the biggest challenges when complying with Affordable Care Act tax reporting for 2015 was that payroll and administration systems weren’t compatible with the data requested.

Employers struggled with missing data or hard-to-interpret data. For example, coverage start dates were difficult to interpret because many were listed as generic “termination” dates. An employer would list the previous plan as terminated on a certain date, then reenact the plan the next day when adding an eligible spouse or dependent.

Employers that tried to handle ACA reporting in-house were challenged not only with reporting requirements, but also the hassle of form rejections. Payroll outsourcing companies and benefits specialists spent countless hours organizing, untangling and resubmitting forms. The best specialists have been preparing since the last tax season filing to improve their processes and collect data earlier.

Continue Reading: ACA and the Small Employer vs. Large Employer Challenge

Cornwell Jackson’s payroll team can help. Partnering with Brinson Benefits, we manage ACA-compliant payroll administration. We can guide employers to the right resources and answer questions about reporting deadlines and other payroll and tax compliance issues. For example, we advise on hourly and salaried employee compliance and new overtime rules, which tie into employee eligibility for benefits and any required ACA reporting. Read our whitepaper on outsourced payroll. Send us your questions and we’ll point you to the experts.

Scott Bates, CPA, is a partner in the audit practice and leads Cornwell Jackson’s Business Services Department, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Sharon Alt is Director of Compliance with Brinson Benefits in the Dallas/Fort Worth area. With a focus on Affordable Care Act regulations, she is responsible for ensuring that Brinson and their employee benefit clients meet all regulatory compliance standards in regards to healthcare benefits administration, particularly with regard to healthcare reform and the Affordable Care Act. She regularly guides clients through the ACA 6055/6056 reporting requirements. 

The challenges of Affordable Care Act reporting for the 2015 tax year will likely follow companies and organizations into 2016 — and the honeymoon period with the IRS is over. It will take more than careful administration to ensure proper reporting and avoid kicked back forms or penalties for missing or inaccurate data. Benefits brokers that specialize in ACA reporting recommend a combination of careful administration along with support from payroll outsourcing companies. This planning includes a CPA team that can advise on tax and payroll administration.

The IRS late “Christmas miracle” last tax season gave employers extra time to report compliance with ACA affordable health insurance coverage mandates and the status of employee health care coverage. It is not expected to be repeated for 2016.

In fact, company administrators and their CPA or payroll advisors should be gathering data now to be ready to fill out and file relevant parts of Form 1095 by January 31, 2017.

Applicable large employers (ALEs), those that have 50 or more employees (or full time equivalent), must show compliance with the ACA employer mandate to provide affordable health care coverage to eligible employees. Both ALEs and employers that are self-insured are required to report which employees were eligible for coverage and when. They also have to report which employees waived coverage and which were in fact covered in any month during 2016.

Starting and ending dates of coverage as well as starting and ending dates of dependent coverage (including birth dates and SSNs) are crucial for accurate reporting. Even eligible employees who left the employer sometime during the year must be accounted for.

Experiences from last year illustrate the complexity and financial costs at stake for employers navigating ACA reporting. Well-intentioned employers can get hung up at various stages of employee and payroll administration, data gathering and IRS reporting. They may also not understand if they fall under the definition of ALE if they are a subsidiary with fewer than 50 employees. However, the IRS views all subsidiaries or entities of large companies as falling under the same employer for the ACA reporting obligation.

Penalties can involve hundreds of dollars for each missing form with no limit on the total penalty per employer.

Last year, approximately 9 percent of all Form 1095 forms were rejected.

Some of the most common errors involved the following:

• Improper use of EIN numbers
• Employee and dependent names and SSNs that didn’t match tax forms (e.g. name changes due to marriage were kicked back)
• Discrepancies with employee and dependent start dates and termination dates

When processing through the new Affordable Care Act Information Return System (AIR), some forms were rejected due to the use of apostrophes in last names or an extra space prior to an employer’s name. The IRS is working to improve AIR for 2016 filing, but employers and their advisors should be aware of IRS tips to avoid common errors and expedite processing.

Continue Reading: Why is the IRS Cracking Down on ACA Reporting?

Cornwell Jackson’s payroll team can help. Partnering with Brinson Benefits, we manage ACA-compliant payroll administration. We can guide employers to the right resources and answer questions about reporting deadlines and other payroll and tax compliance issues. For example, we advise on hourly and salaried employee compliance and new overtime rules, which tie into employee eligibility for benefits and any required ACA reporting. Read our whitepaper on outsourced payroll. Send us your questions and we’ll point you to the experts.

Scott Bates, CPA, is a partner in the audit practice and leads Cornwell Jackson’s Business Services Department, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Sharon Alt is Director of Compliance with Brinson Benefits in the Dallas/Fort Worth area. With a focus on Affordable Care Act regulations, she is responsible for ensuring that Brinson and their employee benefit clients meet all regulatory compliance standards in regards to healthcare benefits administration, particularly with regard to healthcare reform and the Affordable Care Act. She regularly guides clients through the ACA 6055/6056 reporting requirements.