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Employers continue to receive nastygrams from the IRS threatening “Employer Shared Responsibility Payments” (ESRP). These penalties are assessed against an employer that doesn’t offer compliant, affordable group health coverage to a sufficient percentage of its employees when an employee who isn’t offered compliant, affordable coverage obtains tax-subsidized health coverage via the federal “marketplace.”
In our experience, and with just a few exceptions, the penalty notices are generated not because of an actual violation of the rules, but because of incomplete or incorrect reporting on IRS Forms 1094-C or 1095-C, which are the reporting forms the large employers use to report health coverage offered to employees.
Often an employer delegates responsibility for preparing the reporting forms to its payroll provider or a consulting firm. Employers should review these forms before they are filed. For example, does the form check the correct box indicating whether coverage was offered to employees? We have seen numerous ESRP penalties assessed based on forms stating that coverage was not offered when in fact the employer had offered coverage. Employers should look for other obvious errors such as inconsistent information, checkboxes not marked, blanks not filled in, etc.
We all know the goal to just “get the form filed on time,” but a few minutes of review can save hours of sifting through old forms, corrections, etc. And that is assuming you will have access to the necessary records when the IRS ultimately issues its notice, which can be challenging if you change payroll providers in the interim (a common scenario we encounter).
Employers should not ignore notices from the IRS regarding ESRP penalties. In our experience, the IRS is surprisingly cooperative in resolving the penalties. If you contact them, they readily grant extensions of time to reply and give every opportunity for you to avoid the assessment. Our recent interactions with the IRS instruct that they are looking to you for even just a low level of evidence that your company offered the proper health insurance at affordable rates to employees. Please be prepared to offer that evidence with complete and accurate records.
It may take months for the IRS to reply to your response, but the quicker you take steps to get off the IRS radar for increasingly urgent notices, the better.
While the IRS appears to be loath to actually impose the penalty (“assess” in the IRS world), ignoring the notices leaves the IRS with no other option. Assessment of the ESRP triggers a lot of IRS activity aimed at actual collection of the penalty. But without at least some evidence of compliance, the IRS will assess the penalty and do what’s necessary to collect it. That activity can make you nervous, interfere with lending relationships (IRS assessments may prevent a borrower from obtaining new financing and could cause a default under some existing loans) and generally distract from your core business, to say nothing of the financial effect if your company ultimately has to pay the ESRP. Further, the process to resolve a penalty after assessment can be more complicated and could even require litigation.
We encourage you to take the necessary steps each year BEFORE filing the forms to ensure they are correct to avoid the entire potential ESRP penalty process.
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