The IRS is digging into ACA reporting data, putting your organization at increased risk for pricey penalties.
In the past, the IRS appeared to take ACA information reported by employers at face value, including safe harbor codes. Unless it detected obvious code mismatches, the IRS didn’t dig into the details.
Now, however, it appears the IRS is looking at reported data more deeply and comparing affordability codes on line 16 of forms 1095 with data it has from its own resources – namely, the W2 forms every employer also files with the IRS. It also appears that the IRS is doing its own calculations to determine if reported codes are applicable to determine affordability. And, if the IRS doesn’t agree with an employer’s use of W2s as a safe harbor, it’s sending the employer a 226-J letter with a notation of “XF” for line 16.
To date, we’ve seen the IRS use an X notation only for disallowing W2 safe harbors (XF) and not for FPL or rate of pay safe harbors, but that could change, as the 226-J letter details that XG an XH codes may also appear. Details on the new X codes are somewhat hidden within the 226-J letter – and can be confusing, so reach out to Health e(fx) or your compliance team for more insight.
Employers who receive a 226-J letter with an XF notation can assume that the IRS doesn’t think using the W2 safe harbor is accurate based on data it has on file. These employers must respond to the IRS request in one of three ways:
- Determine that another safe harbor should have been applied to a particular group of employees; providing the corrected safe harbor code for the employee group (as a whole). In this case, employers would likely be required to pay the assessed penalty for those employees who did not receive an affordable offer of coverage.
- Determine that the W2 safe harbor was the best safe harbor fit for the group, but that you did the math wrong; again the employer would likely be required to pay the assessed penalty for those employees that were not in fact offered affordable coverage.
- Defend use of the W2 safe harbor and then prove that it’s accurate by showing your calculations involving the W2 box amount, premium amount and affordability percentages for the given tax year. In addition to the completion of the Premium Tax Credit (PTC) response form, you will need to provide additional supporting documentation that includes the math and decision details.
Tips moving forward
- Be sure to use your lowest cost minimum value premium amount in your affordability calculations.
- If you have employees who work in a couple of different roles in your organization, be sure to combine their W2 information correctly.
- If you do receive a 226-J letter, don’t automatically assume that you did something wrong. It could be that the IRS pulled older data to review – before you submitted corrected data. It’s not uncommon for 226-J letters to come out with data on PTC listings that are not updated, and most recently provided to the IRS.
- To avoid any of these complications, be sure your ACA compliance technology makes it easy to understand how safe harbors were determined and to verify affordability.
- Click here to learn about other anticipated IRS enforcement shifts that could further expose your organization to ACA penalties.
Above all, choose an ACA solution that you can count on for not only IRS reporting and corrections, but that is built to support employers who need to provide a fast and detailed response to the IRS 226-J proposed penalty letter. Health e(fx) can help. Rooted in health reform expertise, Health e(fx), an Equifax company, provides the optimal combination of technology and service for ACA and state individual mandate solutions.