The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
M. Gordon, Esq., Joanna C. Kerpen, Esq., Jacob Mattinson, Esq., Susan M. Nash, Esq.,
and Jamie A. Weyeneth, Esq.
McDermott Will & Emery, Washington, D.C. and Chicago, IL
Employer Shared Responsibility Penalties
There are two types of employer shared responsibility payments, also known as pay or play penalties, under the Affordable Care Act (ACA). The first penalty, under §4980H(a), is the penalty for failure to offer health coverage. Effective for plan years beginning on or after January 1, 2015, a $2,000 annual penalty applies to a large employer that fails to offer at least 70% of its full-time employees (FTEs) health coverage. For plan years beginning on or after January 1, 2016, the $2,000 penalty applies to an employer that fails to offer health coverage to at least 95% of its FTEs. The $2,000 penalty is assessed on a monthly basis, but applies to all of an employer's FTEs, minus 30 FTEs (or minus 80 FTEs for 2015).
The second penalty under §4980H(b) is for the failure to offer coverage that is of minimum value and affordable. The §4980H(b) penalty is a $3,000 annual penalty assessed on a monthly basis, and applies to each FTE who isn't offered minimum value affordable coverage by the large employer, goes to the Marketplace Exchange and receives an exchange subsidy for insurance he or she purchases through the Marketplace Exchange. It is important to note that even if an employer offers coverage to 70% of its FTEs for 2015 and 95% of its FTEs for 2016 and beyond, the employer could still be subject to penalties under §4980H(b) if the coverage is unaffordable or does not provide minimum value. Also, even if an employer meets the 70/95% threshold, it still faces the potential for the $3,000 §4980H(b) penalty for every FTE who isn't offered coverage (i.e., the 30/5% safe harbor employees) if that employee receives an exchange subsidy for insurance he/she purchases through the Marketplace Exchange.
Individual Shared Responsibility Penalty
The ACA also imposes a penalty on certain individuals who fail to obtain minimum essential coverage (MEC). Beginning in 2014, under §5000A, if a taxpayer (or an individual for whom the taxpayer is liable) isn't covered under MEC for one or more months, then, unless an exemption applies, the taxpayer is liable for the individual shared responsibility payment on his or her individual tax return. Health plan coverage provided through an insured or self-insured employer group health plan is deemed to be MEC.
New Annual Reporting Requirements
Section 6055 requires health insurance issuers and employers that sponsor self-insured health plans to report information concerning the type and period of coverage to the IRS and to the covered individuals. Section 6055 reporting is intended to serve as verification that the individual has MEC for purposes of enforcing the ACA's individual responsibility requirements. Section 6056 requires large employers to provide information to the Internal Revenue Service (IRS) about whether MEC is offered to their FTEs and their dependents. This information will be used by the IRS to determine whether an employer owes a shared responsibility payment under §4980H and whether an employee is eligible for a premium tax credit on a Marketplace Exchange.
How to Report
Employers with 50 or more FTEs use Forms 1094-C and 1095-C to report the information required under §6055 and §6056. Form 1094-C is used to report to the IRS summary information for the employer and to transmit the Forms 1095-C to the IRS. Form 1095-C is used to report information about each applicable employee.
A large employer subject to the employer shared responsibility provisions under §4980H must file one or more Form(s) 1094-C and must file a Form 1095-C (or substitute) for each employee who was an FTE of the employer (and for each other employee who has MEC through the employer's plan, even if not an FTE) for any calendar month during the year. Each employer member of the controlled group with employees must separately file. If an employer provides coverage through an insured plan, part of Form 1095-C will be left blank. The insurance company will separately report on MEC for those individuals enrolled in fully insured plan options.
The IRS has released draft forms and instructions to be used for §6055 and §6056 reporting, including, draft Form 1095-C, draft Form 1094-C and draft instructions for draft Forms 1094-C/1095-C.
The forms and instructions are expected to be finalized later in this year. The IRS has also issued FAQs with helpful information about these §6055 and §6056 reporting requirements.
When to File
There is no filing requirement for 2014; employers may voluntarily file for coverage provided in 2014. Forms 1094-C and 1095-C for the 2015 year (with 2015 data) must be filed by February 29, 2016 (if paper filing) and by March 31, 2016 (if filing electronically). For calendar year 2015, Form 1095-C must be furnished to employees by February 1, 2016. Employers filing 250 or more Forms 1095-C must file electronically.
Simplified Safe Harbor Offer Methods
Recognizing the burden these reporting requirements imposed on employers, the IRS has provided a simplified reporting method for large employers that make qualifying offers of coverage to FTEs, their spouse and their dependents for all 12 calendar months of the reporting year. A simplified alternative that allows the employer to report without identifying or specifying the number of FTEs is also available for employers that offered, for all 12 months of the calendar year, affordable health coverage (under IRS safe harbors), providing minimum value to at least 98% of its employees and their dependents for whom it is filing a Form 1095-C.
Employers should review the draft reporting forms and instructions to familiarize themselves with the types of information that must be provided under these reporting requirements. Employers should coordinate with their payroll and/or human resource information systems providers to prepare to capture the information necessary to comply with these new reporting requirements.
For more information, in the Tax Management Portfolios, see Cowart, 389 T.M., Medical Plans — COBRA, HIPAA, HRAs, HSAs and Disability, and in Tax Practice Series, see ¶5560, Health & Disability Plans.
©2014 McDermott Will & Emery
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