The Internal Revenue Service (IRS) recently issued draft forms for employers to report health care coverage to workers and the agency, but no instructions have been issued yet. Also, two recent court cases call into question whether individuals who get insurance through exchanges in states that use federally run exchanges are allowed by the law to get subsidies.
John Haslinger, vice president of strategic advisory services at ADP in Alpharetta, Georgia, says employers should become familiar with the draft forms. Each employee must receive a Form 1095C and will have to include that with their income tax filing. The form must be part of the employee’s tax file and must be retained by employers for seven years.
He notes that for each employee, there are 11 different possible codes about the offer of coverage, including safe harbor codes about why employees were not offered coverage. “It will be somewhat of a time-consuming process for employers. They will have to pull data from three or four different systems to fill out the form,” he tells PLANSPONSOR. For example, date of hire may come from the employer’s human resources system, pay used for calculating affordability of coverage as well as hours worked to determine whether the offer of coverage is required may come from the employer’s payroll system, and data about types of unpaid leave that are taken into account may come from an absence management or medical benefits system. “That’s the challenge for employers—to get data from disparate systems and put it into one form. Usually these systems do not interact with each other,” Haslinger says.
Form 1094C will be sent to the government by employers. It is simpler and more high level, Haslinger explains, and will be used to reconcile employee data with total employer data. Employers will have to report subsidiaries if they have separate employer identification numbers (EINs).
Haslinger points out that the government says it is going to reconcile data for everyone across the country that received or were denied a subsidy; those who received a subsidy inappropriately will have it taken back, and people denied inappropriately will get a subsidy adjustment. He notes that this reconciliation process, according to government’s own estimate, could take 18 months, and they will not get these forms from employers until March 2016, so employer penalties resulting from an employee getting insurance through an exchange and qualifying for a subsidy will not be assessed until the fall of 2017. However, the penalty is applicable to 2015, so employers must capture data to be able to reconcile with the government’s assessment. Also, Haslinger notes, employers may want an appeals process, and the government knows this will be critical, so while there is no process yet, they are working on it.
“This is not just a bump in the road,” Rich Stover, principal at Buck Consultants at Xerox in Secaucus, New Jersey, tells PLANSPONSOR. “The reporting requirement, other than requirements about measuring hours and full-time employees, are the most significant issue and require the most effort for employers.” One issue Stover mentions is that the forms require Social Security Numbers of employees’ dependents, and many employers had stopped collecting that information due to privacy concerns. They will now have to get that information.
He says, frankly, many employers will struggle; it depends on who will prepare the forms. According to Stover, about half of employers outsource W-2 reporting with a payroll vendor, and they will hope their vendors will do these reports as well. But, many employers process forms themselves. A big issue is that they now have draft forms, but no instructions, and the IRS is not expecting to issue those until the end of August. “The more complicated forms need instructions, so it’s hard for employers and vendors to start programming,” Stover points out.
The IRS has requested comments about the forms, and without instructions it is hard to comment, Stover says. Waiting for instructions could push the comment period into September. Although the forms will not have to be sent to the IRS until 2016, employers have to start tracking data in January 2015, so the timing of instructions and final forms is a concern. According to Stover, the delay in getting forms may have made employers hopeful the government would again delay the employer shared responsibility requirements for another year, but the IRS has been criticized hard this year about not being able to police whether individuals are getting subsidies inappropriately; another delay will continue to limit IRS enforcement. The IRS may receive comments requesting transitional relief for reporting requirements, but for the same reason, Stover says his gut tells him any transitional relief would be limited.
There were not any surprises in the forms, Stover adds. The final regulations issued in March detailed specifically what employers would be required to report, and the draft forms follow that fairly closely. If anything, the IRS left some things out of the forms that were in the regulations. However, employers may be taken aback because they have delayed their focus on preparing for reporting requirements because no forms had been released, he says. The IRS will hold a webcast about employer reporting requirements under the ACA on August 14.
According to an FYI Alert from Buck Consultants at Xerox, insurers, sponsors of self-insured plans, governmental entities, and other parties must annually report information to the IRS and to the individual for each individual to whom they provided minimum essential coverage. Forms 1095-B and 1094-B are for reporting this information.
Conflicting Court Rulings Create Questions
Just two days prior to the release of the draft forms for employer ACA reporting to the IRS, two federal courts reached differing decisions about the availability of subsidies to individuals who obtain coverage through the federal insurance exchange in states that chose not to establish a state-run exchange. The 4th U.S. Circuit Court of Appeals ruled that the ACA does provide for subsidies in the 36 states where exchanges are operated by the federal government. But, a three-judge panel of the U.S. Circuit Court of Appeals for the District of Columbia Circuit concluded that participants in federally run exchanges are not eligible for tax credits when they purchase a plan to meet their coverage requirement because the law states tax subsidies may be paid for insurance purchased on an exchange "established by the state."
Haslinger says the D.C. court found that language in several places in the legislation, so it was not an inadvertent error by drafters. The 4th Circuit said the language was ambiguous, so it looked at the intent of Congress and found the intent was that any exchange would allow for the federal government to provide subsidies.
“These are significant decisions,” Haslinger says. If it is ultimately decided that only those in state-run exchanges are allowed to receive subsidies, for the 36 states, including D.C., where the exchanges are federally run, federal tax subsidies would stop, and employers would not be subject to a penalty triggered by an employee receiving benefits from an exchange and receiving a subsidy. In a statement, American Benefits Council President James A. Klein also points out some employers have considered whether their employees might be better served through steady coverage in exchanges, especially for workers that move from job to job. The lack of subsidies for workers in some states would change the dynamics in that decision making.
Haslinger notes that the government has already asked for a review by the full 11-judge panel of the Circuit. Stover explains this could make a difference because the three judge panel comprised two Republicans and one Democrat and the ruling was 2 to 1 against the subsidies; the full panel has seven Democrats, so it would probably overturn the ruling.
Both Haslinger and Stover note that there are two similar cases still undecided, and both note that a split in decisions will mean the issue will end up with the U.S. Supreme Court. If the Supreme Court reviews the cases, the earliest any decision could result is next June, and it could go into 2016.
“The IRS’ position right now is nothing has changed, so employers, until we get a consensus, have to comply” with the employer shared responsibility rules as they are now, Haslinger says. Stover adds that he thinks these conflicting court decisions also gave employers hope that employer shared responsibility requirements would be delayed again, but employers should continue at pace assuming all requirements will not be further delayed.
“Clearly there is a degree of uncertainty that continues to swirl around ACA, but I don’t think the law is going away,” Haslinger concludes. “Whatever decisions result in as far as subsidies, I believe Congress would not just allow [the law] to collapse under its own weight; they have dismantled the prior system and created a massive infrastructure.”