Clarifying Two Separate ACA Appeals – HHS Appeals and IRS Appeals

The deadline for the Form 1094-C and Form 1095-C being submitted to the Internal Revenue Service (IRS) is fast approaching.  This will bring us to the penalties phase of the Affordable Care Act (ACA) process which will be the scariest phase to date.  The fabled section 4980H(a) and section 4980H(b) penalties should begin to be assessed against employers in July or August based on, among other things, the information an applicable large employer (ALE) member submitted on its Form 1094-C and Form 1095-Cs.  While the calculation of the penalties has been discussed ad nauseam, there has been scarce accurate information on what should be done if an employer is assessed a penalty.  This article is intended to describe the two separate appeals options associated with the employer mandate.

The first appeals option an employer may have is an appeal to the Department of Health and Human Services (HHS).  It is important to understand an appeal to HHS will not be the final determination on whether an employer will be assessed a penalty under section 4980H.  The HHS appeal is completely separate from the IRS appeal.  The Exchange is required by PPACA section 1411(e)(4)(B)(iii) to notify an employer if one of its employees is receiving a premium tax credit.  The law states this notice should include a statement that the employer may be liable for a section 4980H penalty.  However, last year CMS issued a FAQ in which it stated the 1411 notices (commonly referred to as a marketplace notice) would only be provided to “certain employers” whose employees enrolled in an Exchange with advance premium tax credits. Furthermore, these “certain employers” would only be receiving the marketplace notice if the Exchange has the address of the employer. CMS stated in the FAQ that it will increase the number of employers receiving the required notice in later years.   Therefore, the first appeals option may not be an option for an employer.

If an employer receives a marketplace notice from a federally facilitated Exchange or a stated-based marketplace operating in California, Colorado, the District of Columbia, Kentucky, Maryland, Massachusetts, New York, or Vermont, the employer can appeal by completing the following form https://www.healthcare.gov/downloads/marketplace-employer-appeal-form.pdf.  Alternatively, the employer can include the information requested in the Form and submit the appeal via letter.  Regardless of whether the Form or letter is used, an employer must submit the appeal within 90 days from the date on the marketplace notice.  If an employer receives a marketplace notice from a state not listed above, that state was required by law to have its own appeals procedures.  Accordingly, that state’s appeals procedures should be followed. 

Both section 4980H penalties require an employee to be receiving a premium tax credit in a respective month to trigger a penalty.  Remember a single full-time employee can trigger a section 4980H(a) penalty for the entire workforce if the 95 percent rule is not satisfied, while each individual receiving a premium tax credit could increase the amount of the section 4980H(b) penalty.  Therefore, a successful appeal to HHS for every employee who received a premium tax credit would make it impossible for the IRS to assess an employer mandate penalty.  However, a successful appeal to HHS may not be as easy as it appears even if an employer has followed all of the proper procedures to prevent an employer mandate penalty. 

As discussed above, an employer may not receive a notice for an employee receiving a premium tax credit.  So there is always the possibility of the IRS assessing an employer mandate penalty even if the employer successfully appeals all of the marketplace notices it receives or receives no marketplace notice.  Additionally, an employee may receive and be legally eligible for a premium tax credit even if the employer offered minimum value coverage to the employee at an affordable price and at least minimum essential coverage to the employee’s dependents.  The premium tax credit final regulations allow an employee to still be eligible for a premium tax credit if at the time the employee (or other dependents) applied for the premium tax credit, the Exchange determines that the employer plan is not affordable for the year (see 1.36B-2(c)(3)(v)(A)(3)).  This scenario could occur if a family is expecting the  husband to be the sole income provider for the year when applying for the advanced premium tax credit but the wife unexpectedly takes a job early in the calendar year raising the family’s household income above the premium tax credit threshold.  This exception is just one of the scenarios where a full-time employee could be receiving a premium tax credit even if the employer offered the employee minimum value coverage at an affordable price and at least minimum essential coverage to the employee’s dependents.

It is critical for employers to remember the ACA added Fair Labor Standards Act (FLSA) section 18C.  This provision prevents any employer from discharging or discriminating against any employee who receives a premium tax credit.  In an ever litigious world even an employee who is terminated or has his/her circumstances change for valid reasons may claim section 18C of the FLSA was violated.  To protect against a frivolous claim it may be prudent for an employer to be unaware of which particular employees received a premium tax credit.  This can be done by ignoring the marketplace notices all together or having a third party handle all of an employer’s marketplace appeals.  Any successful argument made through the HHS appeal should also be successful in the higher stakes IRS appeal where money will actually be changing hands.

As a result of the FAQ, which says not every employer with an employee receiving a premium tax credit will receive a marketplace notice, it is possible for an employer to not receive a marketplace notice and still be assessed an employer mandate penalty.  The FAQ may take away one of the possible appeal options for an employer.  To the contrary, just because an employer receives a marketplace notice does not mean the IRS will assess an employer mandate penalty.

The second appeals option will be a direct appeal to the IRS regarding the assessment of a section 4980H(a) or a section 4980H(b) penalty.  While some providers are already claiming to be handling the IRS appeals procedures for penalties that have been assessed against employers, this goes against statements made by the IRS.  In a Questions and Answers publication the IRS specifically states no penalty will be assessed until “after the due date for applicable large employers to file the information returns identifying their full-time employees and describing the coverage that was offered (if any).” (see question 27).  The electronic deadline to submit the Form 1094-C and Form 1095-C is June 30, 2016.  Therefore, any employer mandate penalty will not be assessed until July 2016 at the earliest but more likely in Q3 2016. 

Publication 556 explains the IRS appeals procedures.  An employer has the right to appeal the employer mandate penalty through an appeal within the IRS or, alternatively, or additionally, the employer may be able to appeal to the United States Tax Court, the United States Court of Federal Claims, or a United States District Court.  This process can be long and cumbersome which led some tax professionals hoping for an expedient appeals process specifically designed for the employer mandate penalty particularly in light of skepticism of the IRS’ ability to accurately assess the employer mandate penalty.  To date no special appeals process for the IRS has been released. 

Employers should be on the lookout for marketplace notices.  Receiving one of these notices is not determinative on whether the IRS will assess a section 4980H employer mandate penalty.  Remember the IRS appeals procedure is completely separate from the HHS appeals procedure.  It seems logical a successful appeal of a marketplace notice will reduce the assessment of any section 4980H(b) penalty and could possibly eliminate a section 4980H(a) penalty (assuming no other full-time employee is receiving a premium tax credit).  However, the appeal that will matter the most for an employer is the appeal to the IRS not the appeal to HHS. 


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