Five Common Mistakes Employers are Making with the Affordable Care Act

Early in June we received a call from an employer who had 300 employees and was seeking information on how to handle its Affordable Care Act (ACA) needs.  A little confused by the call, we inquired as to what steps the employer had already taken, surely thinking the employer had taken some steps.  Unfortunately, the employer was inquiring about everything regarding the ACA from classifying employees and determining who needed to be offered coverage to submitting the Form 1094-C and Form 1095-C.  Complete noncompliance like this is shockingly not a rare occurrence we have learned from conversation with other attorneys who have had similar experiences.

Hopefully, an employer reading this has already taken some if not all of the steps necessary for complete ACA compliance.  This article is intended to clarify some common errors we have heard when employers are explaining their ACA compliance efforts.

Classifying Employees 

Perhaps the most important step for any employer who has adopted the look back measurement method is the initial step of classifying an employee.  If an employer misclassifies its employees, it could lead to a penalty under section 4980H.  Unfortunately, the government has already stated there is no corrections procedure for misclassifying a worker.

An employer who adopts the look back measurement method can only classify a new employee with one of four labels: a part-time employee, a variable hour employee, a seasonal employee, or a full-time employee.  The great news is regardless of whether a new employee is a part-time employee, a variable hour employee, or a seasonal employee, the employee will be treated under one set of rules by being placed into an Initial Measurement Period.  A separate set of rules exists for a new employee classified as a full-time employee.  The problem we are seeing is employers are classifying new employees who should be classified as full-time employees as part-time employees or variable hour employees.

This will create a problem if an audit occurs as a full-time employee is required to have coverage offered to him/her by the first day of the fourth calendar month following the employee’s start date (note the first day of the third calendar month may be a prudent choice to avoid any problems with the 90 day waiting period restrictions) or the employer risks paying a section 4980H penalty.  To the contrary, a part-time employee, a variable hour employee, or a seasonal employee placed into an Initial Measurement Period may not have to be offered coverage until the first day of the fourteenth calendar month following the employees start date without the employer risking a section 4980H penalty.  If a part-time employee, a variable hour employee, or a seasonal employee is misclassified as such and should have been classified as a full-time employee, the employer could be responsible for a section 4980H(b) penalty for 13 months with respect to that employee.  If this mistake is repeated, it could even cause an employer to fail the 95 percent rule and be assessed a section 4980H(a) penalty.

The easiest way to combat the misclassification of employees is to adopt a policy explaining the steps the employer takes to determine how it is classifying each new employee.  The regulations discuss three factors (seven factors for staffing companies) an employer should examine to determine if an employee should be classified as a part-time employee, a variable hour employee, or a full-time employee.  The three factors (seven factors for a staffing company) is not an exhaustive list and it is a facts and circumstances determination.  However, listing and utilizing the factors the regulations discuss should put the employer well on its way to correctly classifying a new employee.  The regulations also discuss the factors an employer should use when determining if an employee is a seasonal employee. Having a process in place should lead to more accurate classifications.

Similar issues could occur for an employer who is under the assumption that certain individuals are not common law employees and are instead independent contractors of the employer.  In general, an employer will be the common law employer if the employer controls what will be done and how it will be done by an individual.  An employer who misclassifies a full-time employee as an independent contractor will be at risk for a section 4980H(b) penalty with respect to that employee and potentially a section 4980H(a) penalty if the employer misclassifies enough employees causing it to fail the 95 percent rule.

Both classification issues are not solved by an automated tracking system.  For the automated tracking system to function an employer must first properly place an employee in an Initial Measurement Period or offer coverage to that employee by the first day of the fourth calendar month following the employees start date (if not earlier to comply with the 90 day waiting period) based on the new employees classification.  This classification has to do with the employer’s reasonable expectation at the employee’s start date which is a subjective issue.  This is where a proper policy and guide explaining the employer’s classification process is necessary to make the correct classification decision.

One of the most important parts of ACA compliance is documentation.  This includes how an employer is determining how to classify its employees.  An employer who loses the audit lottery will be in a much better position if its ACA compliance effort are organized and documented. 

Adopting Policies

Consistent with the statement above, in the event of an audit, an employer is going to want to have policies in place explaining its ACA compliance efforts.  At a minimum an employer should have four policies in place.  First, an employer should have a policy that explains its look back measurement method.  This policy should include a description of how the employer is classifying its new employees.  This policy should also explain the time frames and dates of the measurement periods.  This policy needs to be consistent with the employer’s eligibility conditions discussed in the employer’s SPD.

An employer should also have a document explaining how it determines whether an employee who has been rehired is a new or a continuing employee.  The 13 week rule applies to all employers who are not educational organizations.  The rule of parity is optional so the policy should include a statement whether the employer is using the rule of parity.  An employer should also adopt a policy explaining the special unpaid leave rules.  The special unpaid leave rules apply if an employee has a leave of absence that is a result of the Family Medical Leave Act, the Uniform Services Employment and Reemployment Rights Act (commonly referred to as “USERRA”) or jury duty and certain conditions are satisfied.  The special unpaid leave rules are mandatory.

Finally, an employer should have a policy explaining which affordability safe harbor it has elected to use.  If an employer is using several affordability safe harbors, this document should explain which affordability safe harbor is being used for each category of employee.  Having these documents in place and properly following the rules discussed in the policies will start any government audit related to the ACA off on the right foot. 

Documenting an Offer of Coverage

Another issue that is occurring frequently is employers not sufficiently documenting their offer of coverage.  The government provided little guidance on how the offer of coverage should be made.  Despite the lack of guidance from the government the offer of coverage is one of the most important aspects of ACA compliance.  A quality offer of coverage will explain the product being offered including the price of each coverage option and whether the coverage provides minimum value.  However, the most important part of any offer of coverage is being able to document the offer was made.

Not surprisingly many employers are encountering the issue of an employee not returning his/her offer of coverage.  This issue can be avoided by providing a confirmation of receipt to the employee at the time the offer is provided to the employee with a statement that the coverage will be presumed to be declined if the offer of coverage is not returned by a certain date.  A properly drafted confirmation of receipt will give the employer a document with the employee’s signature that an offer was in fact made should the employee not return the offer of coverage document.

There are a lot of things that can go wrong with the ACA such as an employee receiving a premium tax credit when he/she is not eligible, the incorrect code being entered on the Form 1095-C, or the IRS performing an audit.  Every employer can minimize the issues these scenarios present by having a well-documented offer of coverage.  Documenting the offer thoroughly is a really simple protective step.

Errors in Reporting on the Form 1094-C and Form 1095-C 

Even with the benefit of an extended deadline, many employers are struggling to accurately complete the Form 1094-C and Form 1095-C.  In general, all Applicable Large Employer members (ALE members) were required to file a Form 1094-C and Form 1095-C for each employee who was a full-time employee of an ALE member for any calendar month in 2015 (self-insured plans had additional reporting obligations).  We have heard of brokers informing employers that their insurance company will be fulfilling this obligation.  The brokers are confusing the Form 1094-C and Form 1095-C with the insurance industries reporting obligations under Form 1094-B and Form 1095-B.  If an ALE sponsors a fully insured plan, the employer will have Form 1094-C and Form 1095-C reporting obligations for each full-time employee while the insurer will have a separate reporting obligation under Form 1094-B and Form 1095-B.

Another issue we have encountered with some clients who asked us to review a few of their Form 1095-Cs is inaccurate code combinations on line 14, 15, and 16.  There were 200 potential code combinations for line 14, 15, and 16.  However, of the 200 potential code combinations only 49 were theoretically possible.  For example, the line 14/15/16 code combination of 1H/Leave Blank/2F is not possible because an employer cannot use the Form W-2 affordability safe harbor for a month in which no coverage was offered.

The Form 1094-C and Form 1095-C tell the IRS a story which will help determine if the employer owes a penalty under section 4980H but also whether the employees of the employer are eligible for premium tax credits.  Entering incorrect code combinations will present a false narrative to the IRS which could impact the employer being assessed a section 4980H penalty but also may make an employee ineligible for a premium tax credit.

For example, if an employee is hired in the middle of the month, the correct code combination is always 1H/Leave Blank/2D.  This code combination signifies that no offer of coverage was made but the employee was in a limited non-assessment period.  With this code combination the employer would not be assessed a section 4980H penalty with respect to that employee for that month and the employee would still be eligible for a premium tax credit if other conditions were satisfied. However, we have seen payroll providers and other service providers completing this scenario with 1E/the cost of the plan/2F.  The 1E code signifies that the employer offered minimum essential coverage (MEC) providing minimum value to the employee and at least MEC to the employee’s spouse and the employee’s dependents for each day of the calendar month.  The 2F code signifies the employee rejected the coverage but the employer’s offer was at a rate that met the Form W-2 affordability safe harbor.  By entering the 1E/the cost of the plan/2F code combination the employer would not be assessed a section 4980H(b) penalty with respect to that employee for that month but the employee would likely be ineligible for a premium tax credit for that month.  This is why the code combinations are so important.  If lines 14, 15, or 16 are completed incorrectly, the government will have no way to accurately determine which employers owe a section 4980H penalty or who is eligible for a premium tax credit.

At this time it is unclear how the government will handle Forms that are submitted with impossible or inaccurate code combinations.  While the IRS has stated it will not impose penalties for employers who made “good faith efforts” it is not fully understood what that entails.  For instance, if an employer submits its Form 1095-Cs with a zero percent accuracy rate, can it really be argued that the employer acted with “good faith efforts”?

In 2015 an employer can be assessed a penalty of up to $250 for each Form 1095-C submitted with incorrect information.  Similarly, an employer can be assessed a penalty of up to $250 for each Form 1095-C statement provided to an employee with incorrect information.  The Form 1095-C submitted to the IRS is likely to contain the same incorrect information that was supplied to the employee.  Therefore, the penalty should be viewed as up to $500 for each Form filed with incorrect information.  This penalty could be an option for the IRS if it deems an employer did not meet the “good faith efforts” standard.

The Procedures in Place are Not Followed

The last error is the simplest to correct.  Follow the procedures in place.  We have heard of several situations where an employer has all of the proper procedures and policies in place but fails to timely offer coverage to an employee.  This could lead to a section 4980H penalty being assessed.  The software and policies are only as good as it is applied by the employer.  Following the procedures in place is the easiest way to maintain compliance but it involves almost daily attention.

Conclusion 

These five errors are by no means an exhaustive list of the mistakes employers are making.  However, each of these mistakes is easily correctable and will place the employer on the path to complete ACA compliance.  With the “good faith efforts” standard not applying in 2016 employers should review their ACA policies and procedures.  Don’t wait until the end of the year as by then it will be too late.


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