Who would have thought that more than 13 years after the passage of the Affordable Care Act (ACA), the law would still be causing benefits advisors and HR professionals so much heartburn and so many headaches trying to meet its employer mandates for data collection and reporting? Yet, here we are, with IRS scrutiny increasing, penalties for non-compliance becoming more common, and heftier fines having been rolled out this year.
Several ACA issues are intertwined, making it even more challenging for benefits professionals and HR leaders to get a clear picture of what matters most to them and what they should prioritize to avoid missteps and ensure compliance. For example, the 2022 Inflation Reduction Act, which went into effect this year, provided an additional $80 billion in supplemental funding for the IRS over 10 years. Over half of that amount is earmarked for increased enforcement. The ACA was also extended to 2025, which means more workers will be participating in state and federal ACA health exchanges. Combined with the increased attention on enforcement, the IRS can be expected to issue more penalty notices going forward.
All of this can be daunting for HR leaders, their benefits consultants and their teams who may be struggling simply to learn and understand the wrinkles of the law and its changing regulations. However, you can avoid the most common pitfalls of ACA noncompliance if you understand the most common types of violations and then implement three strategies to prevent falling victim to them.
The 4 most common violations in a nutshell
ACA penalties center on failing to collect employee data properly, failing to report properly to the IRS, or failing to properly notify employees about ACA eligibility and enrollment.
4980H(a) penalty. This penalty is levied when an employer doesn’t offer what the law calls minimum essential coverage to at least 95% of its full-time employees and their dependents for any month during the tax year, and at least one full-time employee received a premium tax credit (PTC) for purchasing coverage through a state or federal ACA marketplace. For 2023, the 4980H9(a) penalty is $240, or $2,880 annually, per employee.
4980H(b) penalty. The IRS issues this penalty when an employer offers full-time employees coverage that was either unaffordable or didn’t meet standards for minimum value under the ACA, and at least one employee received a PTC from a state or federal health exchange. For 2023, the 4980H(b) penalty is $360 a month, or $4,320 per year, per employee.
Failure to file penalty. The IRS charges separate penalties for failure to file current information returns on time and provide correct payee statements. Monthly interest can accrue if the penalty amount isn’t paid in full. For the 2023 tax year, the penalty for failing to file the ACA 1095-C form is $290 per return (per employee) if filed after August 1, 2023. The penalty amount increases to $580 if the employer intentionally disregards the filing responsibilities.
Failure to furnish penalty. This penalty applies when an employer doesn’t provide correct 1095-C payee statements to its employees. The penalty is also $290 per return (per employee) and doubles for intentional disregard.
3 strategies to avoid the common pitfalls
Effective management of ACA compliance requires access to accurate data that’s not always readily available or in an accessible format. Compliance efforts are further complicated when relying on multiple sources like payroll systems, benefit applications software, carrier statements, and more. Finally, as health care provisions continue to become more comprehensive, so do the roles of HR and benefits consulting — staying abreast of it all is key.
Nonetheless, focusing on these strategies can help prevent many of the most common ACA compliance mistakes.
Keep accurate records from the start
Keeping accurate records and tracking employee hours are critical if you want to remain ACA-compliant. Data accuracy here helps ensure you can demonstrate compliance to the IRS. It also protects you against potential litigation. To accurately report on Form 1095-C, the IRS requires employers to keep detailed records of employee hours and wages, as well as records of any health insurance coverage the company offers. Failing to keep accurate records can lead to the costly fines and penalties mentioned above. To avoid this, employers should begin tracking data as soon as possible and keep meticulous records throughout the year. Here are five tips for more accurate ACA recordkeeping:
- Make sure your records are kept up-to-date and consistent with the latest regulations.
- Double-check employee data before you enter it into a system or database; mistakes can be hard to identify and rectify later.
- Ensure your tracking system takes into account variable-hour employees.
- Make sure your tracking system can accurately track employee hours and provide data that is updated in real-time. Invest in a reliable tracking system to ensure accurate recordkeeping.
- Train employees on ACA compliance regulations and how to use the tracking system.
When employers keep accurate records from the start, they’re much less likely to have incorrect or non-existent tracking of employee hours — especially for part-time and variable-hour employee hours, which is where many ACA mistakes occur. They’re also less likely to incorrectly apply affordability safe harbors methods.
Properly classify employees every time
Misclassifying employees is one of the most common mistakes made by employers — and one of the most heavily penalized. Misclassifying an employee potentially has two costly consequences: It puts you at risk of stiff fines from the IRS, and it can potentially lead to other legal consequences, if the IRS determines your employees were denied benefits.
To ensure proper classification, you need to regularly evaluate your workforce — and be sure to consult legal counsel whenever you have doubts about a worker’s status. Here are five tips to ensure you don’t misclassify employees for ACA compliance:
- Understand eligibility requirements and confirm employee classification status.
- Document employee eligibility by creating an official record of their classification.
- Monitor changes in ACA regulations.
- Utilize employee tracking software or other automated HR tools to make things easier for you and ensure accurate records.
- Communicate with employees to keep them informed of any changes in ACA regulations or their own personal eligibility statuses.
When you consistently classify employees accurately for ACA purposes, you can avoid the pitfall of failing to properly process ACA documentation for employees who should get a form 1095-C.
Always provide proper notices
The ACA, along with other regulations, requires companies to provide employees with notices that inform them of their rights and their employer’s responsibilities regarding health plans. These include:
- Exchange Notice Regarding Availability of Health Insurance Marketplace — due to new employees within 14 days of their hire date.
- Marketplace (Exchange) Notice — also to be provided to all new hires.
- Summary of Benefits Coverage (SBC) — to be provided to employees and participants during initial, special, and open enrollment.
- ACA Exchange Notice and Initial General COBRA Notice — provided to new hires or newly eligible employees.
- 1095-C — generally required of an Applicable Large Employer (ALE) for each employee who was a full-time employee of the company for any month of the calendar year (including any employee who was treated as a full-time employee for one or more months of the calendar year under either of the two methods the IRS provides employers for determining full-time employment status: the monthly or lookback method.).
Here are five tips to ensure employees get the right notices at the right time to meet ACA compliance:
- Be sure you understand all of the ACA’s employer requirements.
- Make sure the team has all of the current information they need about ACA notice guidelines, including updates as they occur.
- Review existing employee handbooks or other documents to make sure they include all of the necessary content related to ACA notices.
- Ensure the HR team is providing timely and accurate notices to employees regarding their rights under the ACA.
- Have an automated system to track and document all notices, when they were delivered, and who received them.
Above all else, and to ensure compliance with every aspect of ACA tracking and reporting, organizations should have clear policies in place regarding ACA compliance and offer regular training sessions for managers and HR representatives. This way, everyone is aware of their responsibilities when it comes to notifications and other ACA requirements and you’re much more likely to avoid violations.