Cadillac Tax Repealed and Other Employer ACA Penalties on the Rise!

Chris Stevenson, Esq.

We are routinely asked by city, town, and county officials why they still need to worry about offering health insurance coverage and/or IRS health reporting requirements when the ACA (Affordable Care Act) has been overturned.

The question is very understandable due to many highly publicized and recent developments concerning the legislation. For example, just last month, the President signed into law the “Further Consolidated Appropriations Act, 2020” (the “Act”), which, among other things, contained a full repeal of the highly controversial so-called “Cadillac Tax” on high-cost health plans. The law was previously scheduled to take effect January 1, 2022 and its repeal is a very important development for municipal employers, many of whom offer generous employee health benefits that could have triggered the tax. Although the Cadillac Tax was not scheduled to take effect for about 2 more years, the tax has been a thorn in the side of many municipal employers at-tempting to negotiate long-term employment agreements. In addition to the repeal of the Cadillac Tax, adding to the confusion surrounding the relevance of the ACA are: (i) the 2017 Tax Cuts and Jobs Act, which repealed the requirement that individuals obtain adequate health coverage, (ii) a directive from President Trump to federal agencies to “waive, defer, grant exemptions from, or delay the implementation of” the ACA ( White House Executive Order 13765, January 20, 2017) (iii) and another seemingly inevitable impending review of the law’s constitutionality by the U.S. Supreme Court’s following a recent Texas District Court ruling. (Texas v. Unites States, No. 18-167 (N.D. Tex, Dec. 14, 2018). In light of these developments, it would be logical to assume that the ACA is an Obama-era law that is no longer relevant to municipal employers. Although understandable, the assumption could not be further from the truth.

The reality is that the major responsibilities under the ACA for those municipal employers who constitute “large employers” (for the purposes of the ACA, a municipal employer is considered a “large employer” for a particular calendar year if it had a monthly average of 50 or more full-time equivalent employees during the previous calendar year) remain in full effect. In fact over the past year, the IRS has stepped up ACA enforcement efforts and several local public employers have received significant IRS penalty assessments in connection with violations of the ACA’s so called “Play or Pay” penalties and/or IRS Form 1095-C employee health insurance information reporting requirements. Most notably, a Maine public sector employer was recently assessed a penalty if excess of $1,000,000! In all cases, we have worked with employers to appeal these penalty assessments and we have had good success securing significant penalty relief. However, once assessed on the employer, abatement of these ACA penalties is not guaranteed and the process can take several months. So if your municipal office receives an ACA penalty notice, what should you do? It depends upon whether the penalty relates to an apparent violation of the Form 1095-C employee reporting requirement or the “Play or Pay” rules.

Form 1095-C Reporting Penalties:

Municipal employers with 50 or more full-time equivalent employees are “large employers” subject to IRS Form 1094-C and 1095-C re-porting requirements. Such municipal employers that do not timely file their IRS Form 1095-Cs will very likely be notified by the IRS of a proposed penalty of up to $540 per full time employee (See 26 U.S.C. §6722(a)(1) and (d)(1)(A) for the general penalty and IRS Rev. Proc. 2018-57, §3.58 for the 2019 indexed penalty amounts). It appears that the IRS identifies large employers that are subject to Form 1095-C reporting, but failed to file the forms, by re-viewing the number of W-2s issued by the employer. In other words, if your municipal office prepares 50 or more W-2s, but does not prepare Form 1095-C for its full-time employees, you should expect to be contacted by the IRS with respect to the apparent missing Form 1095-Cs. If your office did in fact fail to timely file 2019 Form 1095-C and it had, for example, 200 full-time employees, it could expect to receive a penalty notice in the amount $108,000 (200 x$540 penalty per missing return for 2019). If your office is contacted by the IRS about an apparent failure to timely file Form 1095-C, the municipal business office should:

1) First determine whether it is a “large employer” with 50 or more full-time employees (including full-time equivalents) for the year in question according to a detailed formula contained in the IRS reg-ulations. If your municipality is not a “large employer” for the year in question, neither the Play or Pay rules nor the ACA Reporting obligations apply and this should be explained to the IRS.  

2) Assuming the municipality is a large employer, it should deter-mine whether it did in fact file Form 1095-C by the prescribed deadline. The deadline for filing Form 1095-C with employees is generally January 31 following year end, but the IRS recently announced an extension of the deadline for furnishing employees with their 2019 Form 1095-C to March 2, 2020 (IRS Notice 2019-63). Additionally, the deadline to file copies of Form 1095-C with the IRS is February 28th following year-end, or March 31st if filing electronically with the IRS {Treas. Reg. § 301.6056-1(g)}. If the municipal employer did not already file Form 1095-Cs for a particular year, the municipal employer should do so immediately. The IRS will not entertain a penalty abatement request for untimely filing of the forms until the Form 1095-Cs are actually filed.

3) Once the IRS Form 1095-Cs have been successfully filed with the employee and the IRS, the IRS will consider a waiver of the late filing penalties if the employer can convince the IRS that it had “reasonable cause” for its untimely filing of the forms. A non-exclusive list of factors the IRS uses to assess the presence for reasonable cause are described in the Treasury Regulations (See Treas. Reg.
§ 301.6056-1(i) permitting an appeal of late filing penalties based upon “reasonable cause” and Tres. Reg. § 301.6724-1(b) for factors the IRS considers in assessing reasonable cause penalty waivers).

Although we have had good success appealing late filing penalties based upon a reasonable cause argument, the appeal process is lengthy, time consuming, and requires a close examination of the employer’s circumstances at the time of the reporting failure, as well as a detailed letter and possible follow-up correspondence with the IRS. A much more efficient approach is to simply start the Form 1095-C filing process early and ensure the forms are filed with employees and the IRS by the appropriate deadlines.

Play or Pay Rule Penalties:

The Play or Pay penalties apply to large employers that fail to offer affordable health insurance that provides mini-mum value to its full-time employees. However, unlike penalties for failure to timely file IRS Form 1095-C, there is no “reasonable cause” exception for violations of the ACA Play or Pay rules. If a municipality receives an IRS notice for a Play or Pay violation, it will need to closely examine the notice for accuracy. We have seen many instances where Play or Pay penalties were incorrectly assessed on employers. Also, employers should note that any mistakes they make in preparing an employee’s Form 1095-C could lead the IRS to assess the so-called “Affordability Penalty” on the employer with respect to the employee (the Affordability Penalty is up to $3,750 per full-time employee for 2019). To this end, any employer receiving a Play or Pay Penalty notice should closely examine its associated IRS Form 1094-C and Form 1095-Cs to determine if a coding error on the form triggered the Play or Pay penalties. If so, the mistake should be explained in detail to the IRS, which should result in the IRS reducing or eliminating the pro-posed penalty.

In summary, despite widely publicized challenges and changes to certain aspects of the law, the portions of the Affordable Care Act applying to cities, towns, and counties that are large employers are still in effect and have caused many local employers to be assessed extremely large penalties. In order to help minimize the risk your municipality is liable for such a penalty, each municipality should ensure that their Form 1094-C and Form 1095-Cs are filed with the employee before January 31 (extended to March 2, 2020 for the 2019 Form 1095-C) and with the IRS before March 31 deadlines (assuming electronic filing, or February 28 if filing by paper). Also, employers should take care to accurately complete Form 1094-C and Form 1095-Cs to avoid inadvertently triggering a Play or Pay penalty. Lastly, in the event a municipality receives an ACA penalty notice, the employer should closely examine the reason for the notice, the accuracy of the penalty assessment, and whenever possible, draft an appeal to the IRS to have any unnecessary penalties reduced or completely eliminated.

Chris Stevenson is a tax and employee benefits attorney with Drummond Woodsum. Chris has extensive experience advising public employers on all aspects of qualified and non-qualified deferred compensation plans, health plans, and other employee benefit arrangements. Chris also regularly represents clients before the IRS, as well as state taxing authorities. This is not a legal document nor is it intended to serve as legal advice or a legal opinion. Drummond Woodsum & MacMahon, P.A. makes no representations that this is a complete or final description or procedure that would ensure legal compliance and does not intend that the reader should rely on it as such. “Copyright 2020 Drummond Woodsum. These materials may not be reproduced without prior written permission.”