There is a significant increase in businesses receiving letters from the Ogden, Utah, office of the Internal Revenue Service (the “IRS”). Whether you are a business owner, member of the c-suite or HR professional, this notice is not a scam and should be taken seriously.
Below is a brief overview to help address this letter and the potential significant penalties.
Typically, the letter states the following:
We have made a preliminary calculation of the Employer Shared Responsibility Payment (ESRP) that you owe.
Proposed ESRP $X,XXX,XXX.XXX …”
When you look at the notice and realize that the amount of the proposed ESRP quite high, questions of “how” and “why” begin to formulate in the midst of unleveled anxiety. In our experience, we have found that the proposed ESRP penalties are a result of filing incorrect or incomplete Form 1094-C (“Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns”) and/or Form 1095-C (“Employer-Provided Health Insurance Offer and Coverage”).
ESRP Summary Table – Minimum Essential Coverage
Preliminary measures must be taken immediately, including a thorough review of the chart labeled “ESRP Summary Table” usually located in the middle of the letter. The IRS uses data in this table from the actual forms the employer submitted, specifically, Forms 1094-C and 1095-C.
If this chart contains the answer of “No” under any month under column “a,” then you may have a penalty that will need to be specifically addressed in your response. Column “a” specifies whether the company offered “minimum essential coverage” to at least 95% of your full-time employees and their dependents. The most common type of “minimum essential coverage” is a group health insurance plan.
The next critical column on this chart will be column “d.” If there are any numbers under this column for any months, and there is an answer of “No” under column “a” for the same month, then that means the ACA forms your company filed with the IRS are stating that it had at least one month (and maybe more) where minimum essential coverage was not offered to at least 95% of your full-time employees (and their dependents); and at least one (1) of your employees obtained health care coverage on a health care exchange and was eligible for the “Premium Tax Credit,” or a tax credit that is available to employees with household incomes below certain designated levels and which is used to purchase health care exchange insurance coverage.
The ramifications of an answer of “No” under at least one (1) month under column (a), and the existence of at least one (1) employee purchasing health insurance utilizing a Premium Tax Credit for that same month (under column (d), is the potential imposition of penalties (under the ACA) for each respective month. These ACA penalties are calculated on a monthly basis and the IRS is currently transmitting proposed penalty letters for the 2017 calendar year.
What can employers do to address ESRP letters?
Thankfully, all hope is not lost. We have found that with enough time and effort, most, if not all, of the penalties the IRS is proposing can usually be eliminated, if a proper and accurate response is filed timely. As previously mentioned, most of these penalties are a result of incorrect filings and in some instances certain safe harbors may apply, and specific coding errors are the result of these substantial penalties, upwards of a million dollars.