Beginning in 2015, certain employers were required to report information to the IRS on an annual basis to assist the IRS in assessing penalties associated with the employer shared responsibility and individual mandate requirements of the Affordable Care Act (“ACA”) and administration of the premium tax credits for exchange-based coverage. While the individual mandate was essentially repealed effective in 2019, by reducing the amount of the penalty tax to zero, the employer shared responsibility and ACA reporting requirements remain fully applicable.
Late last year, the IRS began utilizing the information it received from required reporting to assess penalties against noncomplying employers and individuals. Penalties applicable to employers for failure to report are in addition to other ACA reporting penalties for noncompliance are two-fold, including assessments for both a failure to file correct returns with the IRS and a failure to provide a required statements to employees. Penalties for failure to report can be significant because they are assessed with regard to each affected employee up to an annual maximum of $3 million. Further penalties can be increased where there is intentional disregard for the reporting requirements. Through the 2017 reporting cycle, the IRS has issued transition relief granting a reprieve from penalties for employers who have made a good faith effort to comply with the reporting requirements. Nevertheless, it remains to be seen whether such transition relief will be granted for the 2018 reporting cycle. Consequently, employers can avoid costly penalties by understanding and complying with the ACA reporting requirements.
The ACA imposed reporting requirements on any Applicable Large Employer (“ALE”) and on all employers sponsoring self-funded group health plans. As a result, an employer will fit into one of 4 different categories, each with different reporting requirements:
- Category 1 does not have any reporting requirements at all. This category includes employers who are NOT ALEs, and who either do not sponsor a group health plan or sponsor a fully-insured group health plan.
- Category 2 does have reporting requirements, but they are minimal. This category includes employers who are NOT ALEs, but who do sponsor a self-funded health plan.
- Category 3 does have reporting requirements, but they are less than those in category 4. This category includes employers who are ALEs, and who either sponsor a fully-insured group health plan or do not sponsor any group health plan.
- Category 4 has the most significant reporting requirements. This category includes employers who are ALEs and who also sponsor a self-funded group health plan.
An employer knows from the outset if it sponsors a self-funded group health plan, but whether the employer is an ALE is a determination that must be made on an annual basis. If an employer is required to report for 250 or more employees, the employer is required to report electronically. There is a special IRS reporting system that was developed for this purpose called the AIR system, which stands for the ACA Information Return (AIR) system.
WHAT IS AN ALE?
Whether an employer is an ALE is determined for each calendar year, and depends on the average size of the employer’s workforce during the prior year. If an employer has fewer than 50 full-time employees, including full-time equivalent employees, on average during the prior year, the employer is not an ALE for the current calendar year. If an employer has at least 50 full-time employees, including full-time equivalent employees, on average during the prior year, the employer is an ALE for the current calendar year. To determine its workforce size for a year an employer adds its total number of full-time employees for each month of the prior calendar year to the total number of full-time equivalent employees for each calendar month of the prior calendar year and divides that total number by 12. An employer that was not in existence on any business day in the prior calendar year is still an ALE if it is reasonably expected to employ, and actually does employ, an average of at least 50 full-time employees (including full-time equivalent employees) on business days during the current calendar year.
A full-time employee for any calendar month is an employee who has on average at least 30 hours of service per week during the calendar month, or at least 130 hours of service during the calendar month. A full-time equivalent employee is a collection of employees, each of whom individually is not a full-time employee, but who, when hours are considered collectively, are equivalent to a full-time employee. An employer determines its number of full-time-equivalent employees for a month by the following steps:
- Combine the number of hours of service of all non-full-time employees for the month but do not include more than 120 hours of service per employee, and
- Divide the total by 120.
Hours that must be counted include paid vacation and sick time and certain paid disability time off, and certain seasonal employees can be excluded for purposes of determining ALE status.
Companies with a common owner or that are otherwise related under certain rules in IRC §414 are generally combined and all employees of all the companies are counted to determine ALE status. If the combined number of full-time employees and full-time equivalent employees for the group is large enough to meet the definition of an ALE, then each employer in the group (called an “ALE Member”) is part of an ALE and all must report even if one or more of the separate ALE Members would not be ALEs standing alone. This means each ALE Member is liable for its own information reporting requirements, and is not liable for the information reporting requirements of any other entity in the group. One ALE Member in the group may, however, do the reporting tasks on behalf of, and in the names of, the respective ALE Members.
The common control rules are important and determinative. Even companies that are in different industries will result in the employees being counted together to determine ALE status if they have common owners that meet the “controlled group” tests. For example, a husband and wife can own and operate both a small restaurant that employs 40 full-time and full-time equivalent employees and a florist shop that is operated by their daughter that employs 15 full-time and full-time equivalent employees and the two entities together are considered an ALE with separate reporting responsibilities.
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About the Authors
DANNAE L. DELANO is a Partner with The Wagner Law Group in Saint Louis. She concentrates her practice in employee benefits, executive compensation and tax matters. Focusing on comprehensive, practical and innovative employee benefits solutions for all types of employers, she counsels clients regarding all aspects of employee benefits design, implementation, termination, and compliance for the full spectrum of benefits programs including: retirement plans, health and welfare plans and executive and incentive compensation arrangements. She also has considerable experience in integrating benefits in mergers and acquisitions and qualified retirement plan corrections.
ROBERTA CASPER WATSON is a Partner with The Wagner Law Group in Boston. Her practice areas include ERISA, Employee Benefits; Pension and Profit Sharing Plans; Health and Welfare Benefit Plans, including COBRA, HIPAA and the Affordable Care Act; ERISA Fiduciary Decision-Making; Employee Stock Ownership Plans; Benefits Litigation Backup; Benefits Aspects of Mergers and Acquisitions; Employee Benefits Aspects of Family Law; Labor Laws Affecting Employee Benefits, including ADA, ADEA, and FMLA; Other Employee Benefits and Deferred Compensation; Employee Benefit Disputes and Employee Benefits Claims.