No Statute of Limitations Protection Gained from Filing Forms for Employer Shared Responsibility Penalties

The IRS Office of Chief Counsel has released a memorandum stating that employers are not protected by a statute of limitations from the ACA's employer shared responsibility penalties ("ESRP"), even if they file the required forms relating to the penalties. (IRS Chief Counsel Memorandum 20200801F; Dec. 26, 2019).

The ACA's employer shared responsibility provisions apply to an employer that is an Applicable Large Employer ("ALE"). In general, an employer is an ALE for a calendar year if it had an average of 50 or more full-time employees (including full-time equivalent employees) during the preceding calendar year. ALEs may be subject to two penalties if they fail to comply with the ACA's employer shared responsibility provisions.

The first penalty applies if: (i) an employer fails to offer health care coverage to "substantially all" of its full-time employees; and (ii) a low-income, full-time employee receives a premium tax credit through a Marketplace. In those situations, the employer must pay an annual penalty of $2,000 (adjusted for inflation) multiplied by the number of full-time employees in excess of 30. The second penalty applies in situations where: (i) an employer offers health care coverage to its full-time employees that is either "unaffordable" or does not provide "minimum value"; and (ii) a low-income, full-time employee receives a premium tax credit through a Marketplace. In such situations, the employer must pay an annual penalty of $3,000 (adjusted for inflation) for each full-time employee who receives the premium tax credit. However, this penalty is capped at $2,000 (as adjusted) multiplied by the number of full-time employees in excess of 30.

ALEs are required to file Forms 1094 and 1095 with the IRS to report their compliance with the ACA's employer shared responsibility provisions. Forms 1094 and 1095 provide certain information to the IRS and taxpayers regarding individuals who are covered by Minimum Essential Coverage (i.e., the individual mandate). The IRS says it will issue Letter 226J to an ALE if, based on a review of Forms1094-C and 1095-C, it determines that, for at least one month during the year, at least one full-time employee was enrolled in a qualified health plan for which a premium tax credit was allowed. In the letter, the IRS will detail the reasons why it believes the ESRP should be assessed.

NOTE: For fully-insured group health plans, the insurance carrier is responsible for furnishing the Forms 1095-B to the IRS and employees, and the employer is responsible for furnishing Forms 1095-C to the IRS. For self-funded group health plans, the employer/sponsor is generally responsible for issuing and filing both Forms 1095-B and 1095-C.

Usually, when an employer files required returns reporting a tax liability, this filing starts a limited period of time during which the IRS can challenge the reported tax liability. This period is referred to as a "statute of limitations" and generally runs for three years, after which the IRS cannot assess additional taxes.

However, the IRS noted that for a return to start a statute of limitations period it: (i) must have sufficient data to calculate tax liability; (ii) must purport to be a return; (iii) must be an honest and reasonable attempt to satisfy the requirements of the tax law; and (iv) the taxpayer must execute the return under penalties of perjury.

The IRS then stated that the information provided through Forms 1094-C and 1095-C fails the first criterion because "it is not possible to determine the amount of an ESRP owed by an ALE, or if such payment is even owed at all," based solely on the information contained in the forms. Consequently, because these forms do not provide sufficient information, the submission of these forms to the IRS does not start a statute of limitations period and, therefore, the IRS can assess ESRPs beyond the normal three-year limit.