The IRS recently announced a 30-day extension for employers to file their 1095 info. But they also announced that this will be the last extension they grant unless they hear from people explaining why the extensions should continue.
We believe the extended deadline is critical for employers. That’s why we’re asking you to join us in submitting comments to the IRS. It’s easy to do and only takes a few minutes.
Here are a few things to consider sharing with the IRS when you submit your comments:
Generating 1095 forms and filing that information with the IRS is a challenge for most employers. It typically requires gathering data from multiple systems: payroll, HRIS, enrollment systems, etc. This often requires a lot of time from IT team members, as well as time spent auditing the data for accuracy.
With the data gathered and audited, the code generation process begins. Some employers do this themselves, while many others use a vendor to do this for them. Regardless of who does it, it takes time to do it right. It also requires data that is often not available until late January each year.
Form 1095 rules are complex. It often involves carefully reviewing an employee’s unique circumstances to determine the correct codes to apply. Incorrect codes leave the employer exposed to fines and penalties. They can also negatively impact individuals who receive a premium tax credit through a public exchange.
Complicating matters further is the fact the forms change each year. Everyone needs time to adjust to the changes and start using the new codes. Expecting that this can be done by January 31 each year is unrealistic.
Employers must have accurate and complete enrollment data to generate 1095 forms. This data has to be accurate through the last day of each calendar year. A January 31 filing deadline doesn’t account for the reality of how enrollment data works:
These timelines make it almost impossible for employers to issue accurate forms by the January 31 deadline.
There are three “safe harbors” available to employers when determining affordability: rate of pay, W-2, and federal poverty line (FPL). The W-2 safe harbor is the only option available for many employers due to their plan and pay structures.
Employers who rely on the W-2 safe harbor must have W-2 information complete before determining the correct codes for line 16 for the Form 1095-C.
And that’s where it gets tricky.
How many employers can complete their W-2 forms in time to also complete their 1095 forms by a shared January 31 deadline?
Individual Health Reimbursement Arrangements (ICHRAs) count as an offer of minimal essential coverage. But these plans make it even more challenging to determine affordability.
One particularly troublesome aspect involves a sixty-day deadline to use the correct geographic cost ratings when employees move. When this happens near the end of the year, it further limits the employer’s ability to meet the January 31 deadline.
Taxpayers are not required to include a copy of their 1095 form when filing their taxes. A statement about their health coverage status is all that’s needed.
And since there’s no longer a penalty for not having coverage, there’s no impact to taxpayers if they receive their 1095 forms after January 31.
There are substantial penalties for mailing and filing incorrect 1095 information. And unfortunately, this is the last year the IRS will apply “good faith” standards to 1095 filing content.
Employers must carefully review their final 1095 information to ensure accuracy and avoid penalties. But this review process takes significant time. For example, an employee with no covered family members has 36 fields that require review. Employees with dependents can have as many as 100 fields to review.
With so much content to review, it’s clear that even small and mid-size employers will struggle to meet a January 31 deadline.
As we’ve seen, complying with the ACA can be very challenging, and there’s a genuine risk of significant penalties. That’s why many employers use a vendor to do this work for them.
Of course, using a vendor doesn’t change any of the timelines we discussed above. Employers must still gather all of the same information, and they need the same amount of time to do it.
But now it’s up to the vendor to take that information, do the calculations, prepare and mail the forms, and then file the information with the IRS. This must all be done within a very narrow timeframe. And vendors need to leave enough time for employers to review and approve the information before the vendor submits it to the IRS.
Without an extension, it will be incredibly difficult for vendors to perform this work at scale while meeting a January 31 deadline. It’s not hard to imagine some vendors will stop offering the service.
We think the 1095 filing deadline should be permanently extended by thirty days. If not, then the IRS should continue to offer the extension each year. But this will only happen if the IRS hears from a large number of people concerned about the January 31 deadline.
You can help by submitting comments to the IRS. They have asked for comments about the deadline in years past, but they received only a single comment. They are now asking for comments one last time:
“Unless we receive comments that explain why this relief continues to be necessary, no relief related to the furnishing requirements under sections 6055 and 6056 will be granted in future years. Taxpayers and reporting entities are strongly encouraged to submit comments electronically via the Federal eRulemaking Portal at www.regulations.gov.
Please join us in submitting comments to help ensure employers will continue to have the time they need to file accurate information on time each year.
The IRS recently released a memo from the Office of Chief Counsel that addresses how long the IRS has to assess ACA penalties. You can read a copy of the memo here.
In short, the IRS has determined that there is no limit on the amount of time they have to assess ACA penalties. This means it’s absolutely critical that employers comply with ACA requirements so they aren’t subject to potential fines forever.
If you’d like more information, we offer a full breakdown of the release below.
Individuals and companies are required to file tax returns with the IRS. These returns show if the filer owes money to the IRS for the reporting period.
Tax filings have to meet various criteria to be considered a “return.” One of the requirements is the disclosure of information that allows the IRS to determine the amount of tax liability.
The IRS has a limited amount of time to challenge tax filings. This is known as the “statute of limitations.” The standard period is three years after the return is filed. More information is available in Section 6501(a) of the Internal Revenue Code.
In addition to tax filings, the ACA requires certain employers to file health coverage information with the IRS each year. These “applicable large employers” do this by filing a Form 1094-C, along with copies of the 1095 forms sent to employees each year.
Employers are required to file this information so the IRS can determine if they owe any penalties under the ACA. The IRS does this by matching up this information with the information they receive from exchanges and individual taxpayers. This allows the IRS to determine if any full-time employees were eligible for tax credits through an exchange.
The penalties are excise taxes known as “employer shared responsibility payments” or ESRP for short. There are two types of penalties:
4980H(a). This penalty applies if at least one full-time employee qualifies for a tax credit on an exchange – and the employer fails to offer minimum essential coverage to least 95% of its full-time employees (or all but five of its full-time employees, if five is greater than 5%).
4980H(b). This penalty applies if the employer fails to offer affordable, minimum value coverage to employees. This tax is calculated by multiplying $3,860 (for 2020) times the number of full-time employees who qualify for tax credits through an exchange.
If the IRS decides that an employer owes a penalty, they send the employer a Letter 226-J.
Here’s the logic followed by the IRS to reach its decision:
The ACA forms filed by employers don’t contain the information needed to determine tax liability. That means they’re not officially returns. And because they’re not returns, they’re not subject to the statute of limitations that apply to return filings.
Since ACA filings aren’t returns, and because Section 4980H doesn’t contain a statute of limitations, the IRS can assess 4980H penalties at any time without limit.
There’s very little employers can do to protect themselves for previous year filings. If you receive a Letter 226-J, don’t ignore it! Make sure you work with experienced experts to reply to the IRS. This is your best chance to minimize the amount of any penalty you may have to pay.
Going forward, employers should do everything they can to comply with all ACA requirements. It’s critical that employers document offers of coverage and complete 1095 forms correctly. Failure to do so could lead to heavy fines at any point in the future.
UnifyHR helps employers meet their ACA requirements. We offer full and reporting-only services and Letter 226-J support. We also help employers with state filing requirements like those in New Jersey and Washington DC.