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ACA Compliance News: 2020 Affordability Threshold Lowered, More 226-J Penalty Letters Unleashed

August 16, 2019 By Julie Kramer - Leave a comment

ACA affordability blogThe Affordable Care Act (ACA) is back in the news. Recently, the Internal Revenue Service released the employee affordability threshold percentage for 2020 via Revenue Provision 2019-29, and the new number benefits employees over employers. Simultaneously, the IRS appears to be escalating its ACA enforcement practices, issuing rapid-fire Letter 226J penalty notices to employers for prior tax years.

These are strange times. As this takes place, the legitimacy of the ACA itself remains under attack in federal appeals court. (Stranger yet, the case may end up before the Supreme Court just in time for the 2020 elections.) Should the ACA be ruled unconstitutional, it’s hard to fathom its impact on employee benefit plans, individual health protections, and the health insurance industry.

However, for now, in order to avoid increasingly-stiff penalties, employers must be meticulous in maintaining ACA compliance. That means staying on top of all ACA developments—which is why we’ve summarized the latest for you here.

2020 Affordability Percentage Dips to 9.78%

The ACA affordability threshold is the maximum percentage of household income employees can be asked to pay for their employers’ lowest-cost, self-only health plan. The figure is adjusted by the IRS each year, based on the ratio of premium growth to income growth in the preceding year.

Next year, the affordability percentage will decrease from the current 9.86% to 9.78%. This marks the second time the percentage has been lowered since 2015.

Those who will be most affected are employers with low-paid workers, who may be required to lower their employees’ premium contributions. That means employer’s may need to increase their contribution for their plans to meet affordability standards. Of course, their health plans must meet minimum essential coverage (MEC) and minimum value (MV) standards as well.

Because most employers don’t know their employees’ total household incomes, they can’t calculate their employees’ maximum contributions on that basis. For this reason, the IRS offers employers a choice of three affordability safe harbors to use instead: The Federal Poverty Line (FPL), Rate of Pay, and Form W-2 Safe Harbors.

Employers can apply different safe harbors to different categories of employees. Now, employers need to work with their finance team to determine their most-advantageous ACA compliance strategy for 2020. 

IRS Accelerates Release of Letter 226-J Penalty Notices

It also appears that the IRS is escalating its ACA enforcement initiatives. After issuing Letter 226-J penalty notices for 2016 in June, the IRS began sending Letter 226-Js for 2017 in July—the swiftest transition between tax years we’ve seen. (30,000 226-Js for 2015 were sent in late 2017.)

Letter 226-J is the initial notification employers receive that they may be liable for an Employer Shared Responsibility Payment (ESRP). The amount of the proposed ESRP is based on information in the employer’s 1094-C and 1095-C forms and individual income tax returns filed by employees.

Employers have 30 days to respond and may request an extension. However, the IRS is now limiting requests to one 30-day extension for each penalty notice, so time is of the essence.

What if you get a letter? Employers are advised to contact any third-party providers, such as payroll providers, that assisted in their calculations and 1094-C and 1095-C form preparation, as well as their tax advisors, legal counsel, and benefits consultant. Together, they should review the accuracy the 226-J, compare it to their own records, and respond accordingly, within the deadline.

Employer Shared Responsibilities Penalties Are Increasing, Too  

There are two types of penalties under the ACA’s Employer Shared Responsibility provision, and they increase every year. These penalties, which are applied per employee, are:

  • Section 4980H(a) penalty for failure to offer health insurance to all eligible employees. (This isn’t applied to the employers first 30 FTEs.)
  • Section 4980(b) penalty for failure to offer coverage that is affordable and meets minimum value standards.

You can see how these penalties have been increasing over the years:

Employer Penalty

Per Employee

2014

2019

2020

Section A Penalty

$2,000

$2,500

$2,590

Section B Penalty

$3,000

$3,750

$3,890

 

In addition, employers may face separate penalties for failure to file their 1094-C and 1095-C forms as required. For 2019, the fine may be as high as $550 per return, with no maximum payment. Some employers are seeing penalties that amount to millions of dollars.

These Days, It’s Better to Play Than Pay

For many employers, offering quality health insurance is essential to their hiring and retention initiatives—especially now, as many industries face a challenging labor shortage. In addition, escalating ACA non-compliance penalties—and the IRS’ newfound dedication to enforce them, despite the legal challenge to ACA legislation itself—give employers yet another excellent reason for maintaining absolute ACA compliance. 

If you’re struggling to meet ACA reporting requirements, EPAY can help. Our HCM system and professional services make it easy for our clients to determine employee plan eligibility, while preparing and filing mandated forms on their behalf, and proactively monitoring compliance. If you’re ready to mitigate your compliance risk and free yourself of ACA administration headaches, learn how our ACA offering works

Filed Under: Compliance, Human Capital Management, HR News, Affordable Care Act