ACA - Employment tax year in review 2016

2016 employment tax year in review

Focus on the Affordable Care Act 30 November 2016


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educational purposes only and is not intended, and should not be relied

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Ernst & Young LLP.

► This presentation is © 2016 Ernst & Young LLP. All Rights Reserved.

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Our speakers

Proudly presented by Workforce Advisory Services

Alan Ellenby

Ernst & Young LLP

Affordable Care Act

Ron Krupa

Ernst & Young LLP

Affordable Care Act


What do the election results mean for ACA? The elephant in the room!

► 2016 is status quo

► Not the forum to speculate about

how the Affordable Care Act will

be “repealed and replaced”

► Anticipate some form of

transition

► What it means for the employer

mandate and reporting is anyone’s

guess at the moment

► Good news for 2016, information

statement due date is again

extended!


2016 and beyond comes with new requirements, including excise tax, audit

preparedness, contingent workforce evaluation, data/systems, mergers and

acquisitions and cost considerations.

Affordable Care Act What’s left to do?

“The HR

function is

working with

their

consulting

firm and has it

covered.”

“We’re done with

IRS reporting

(through EY

COMPASS,

etc.)… what else

is there to do?”

There is a lot left to do!


Affordable Care Act From deferral to accountability

2015

The year of

“training wheels”

2016

The year of

accountability

2014

Year of the

employer

mandate

deferral

► Most employers were not ready to comply with the ACA and the employer mandate deferral provided more time

► “Good faith” waiver for accuracy-related penalties

► 30% error margin allowed

► Reporting deadlines extended (90 days to furnish)

► “Good faith” waiver for accuracy-related penalties goes away*

► Margin for allowable error reduced to 5%

► Employers only have 30 days to furnish statements*

* The IRS just announced that for 2016, additional time is granted to furnish statements and the “good faith” waiver is extended .


Affordable Care Act Penalties and abatements for failing the coverage requirements

Employers that do not offer coverage may subtract the first 30 workers from the calculation when determining their liability for taxes under IRC §4980H(a). Taxes under IRC §4980H(b) are capped so they do not exceed an employer’s potential tax under IRC §4980H(a).

► If a large employer does not offer coverage to its full-time employees (FTE) and their dependents, employers face a tax of:

► $2,160* x the total number of FTEs if at least one FTE is receiving a premium assistance tax credit

Tax for no coverage IRC §4980H(a)

•* The indexed excise tax, which was originally $2,000, increased to $2,080 for 2015 and to $2,160 for 2016.

•** The indexed excise tax, which was originally $3,000, increased to $3,120 for 2015 and to $3,240 for 2016.

► If a large employer offers coverage to its FTEs and their dependents, but the coverage is unaffordable to certain employees or does not provide minimum value, employers face a tax of:

► The lesser of $3,240** x the number of FTEs receiving a premium assistance tax credit or $2,160 x the total number of FTEs

Tax for unaffordable coverage IRC §4980H(b)


Focus on accuracy

The “good faith” penalty waiver was reinstated in November 2016 by Notice 2016-70.

Affordable Care Act Six key changes in 2016

1 2

Offer of coverage The §4980H offer of coverage threshold will increase from 70% to 95%.

3 §4980H(a) penalty increase to $2,160 The Employer Shared Responsibility Payment for §4980H(a) penalty is equal to the number of full-time employees the employer employed for the month (minus up to 30) multiplied by 1/12 of $2,160, as long as at least one full-time employee receives a premium tax credit.


§4980H(b) penalty increase to $3,240

Employer Shared Responsibility Payment for the month equals the number of full-time employees who receive a premium tax credit for that month multiplied by 1/12 of $3,240.

Affordable Care Act Six key changes in 2016, cont’d

4 Increase in Marketplace Notices in 2016 The Federal Marketplace has released employer notices. 5

Delayed reporting due dates for some returns

For 2016, the due date to furnish the Forms 1095-B and 1095-C is extended from 31 January 2017, to 2 March 2017, but Forms 1094-B and 1094-C are due 31 March 2017, if filing electronically, and 28 February 2017, if filing on paper. A 30-day extension applies for Forms 1094-B and 1094-C.

6


Affordable Care Act information reporting Tax year 2016

ACA information

reporting requirements

for 2016

Self-insured employers

and insurance providers

Forms 1094-B and 1095-B

IRC §6055

ACA-covered employers

Forms 1094-C and 1095-C

IRC §6056

Information to be reported Information on enrollment in

minimum essential coverage

Information on offer of

employer-sponsored coverage

Entity required to report Health care insurance issuers;

employers sponsoring self-

insured group health plans;

joint boards of trustees

responsible for multiemployer

plans; designated entities of

governmental units

Large employers (50 or more

full-time equivalent employees);

designated entities of

governmental units

Take a look at the 2016 Form 1094-C and 1095-C instructions here.

Electronic filing instructions are available in IRS Publication 5165

https://www.irs.gov/pub/irs-pdf/i109495c.pdf?_ga=1.28581756.1715266919.1446884244

https://www.irs.gov/pub/irs-pdf/p5165.pdf?_ga=1.107924491.848619922.1474402038


Affordable Care Act information reporting Tax year 2016, cont’d

ACA information

reporting due dates for

2016

Self-insured employers

and insurance providers

Forms 1094-B and 1095-B

IRC §6055

ACA-covered employers

Forms 1094-C and 1095-C

IRC §6056

Who receives the

statement/return

IRS; individuals who are

enrolled in coverage; covered

dependents may be included on

report for primary insured

IRS; all full-time employees (as

defined in IRC §4980H and the

underlying regulations); all

employees who are offered

coverage

Due date to furnish

statement to the recipient

(i.e., employee or covered

individual)

Form 1095-B is due on the

extended due date of 2 March

2017 (normally due 31 January

of following year)

Form 1095-C is due on the

extended due date of 2 March

2016 (normally due 31 January

of following year)

Due date to file

information return

Form 1094-B is due by

31 March if filed electronically

(or 28 February if filed on

paper)

Form 1094-C is due by

31 March if filed electronically

(or 28 February if filed on

paper)


W-2, 1099 and ACA* return penalties increase Penalties apply to both returns and payee copy**

If filed: Maximum for

returns due

1 Jan. 2016 to

31 Dec. 2016

Maximum for returns

due 1 Jan. 2017 to

31 Dec. 2017 ***

Maximum for

returns due

1 Jan. 2016 to

31 Dec. 2016

Maximum for

returns due

1 Jan. 2017 to

31 Dec. 2017 ***

1-30 days late $50 $50 $529,500 $532,000

More than 30 days late but

before 1 August

$100 $100 $1,589,000 $1,596,500

On or after 1 August $260 $260 $3,178,500 $3,193,000

*ACA refers to the Affordable Care Act. **The penalty for intentional disregard increased from $520 to $530 per return. There is no maximum penalty. ***Penalties are indexed annually for inflation.

Effective with returns required to be filed in 2017, penalties increase for late or incorrect Forms W-2, 1099 and ACA returns and information statements. The penalties below apply to each return.


Common Affordable Care Act pitfalls Exposure to significant business risk – financial and reputational

Risk 1 Misclassified contingent workers may

expose an employer to excise taxes.*

Could be subject to up to

$26m in excise taxes

10,000

+ 2,000

=

12,000

Full-time employees

Misclassified

contingent workers

Total employees

Risk 2 Contingent liabilities, tax accruals and financial

statement positions are not supported by

appropriate documentation and internal controls.

Risk 3 Employers need processes to support timely

response to or appeal of Marketplace notices.**

* The indexed excise tax, which was originally $2,000, increased to $2,080 for 2015 and to $2,160 for 2016.

** The indexed excise tax, which was originally $3,000, increased to $3,120 for 2015 and to $3,240 for 2016.

Up to $3,240 per employee in excise tax

penalties for receiving an incorrect premium tax

credit

Risk 4 Significant technology changes may be needed for

tracking employee eligibility and IRS reporting

requirements – penalty exposure over $6m.

Potential penalty per form:

$260 Potential penalty per entity:

$3.2m

Failure to file

accurate and

timely Form

1094-C

Failure to

furnish accurate

and timely Form

1095-C

Potential penalty per form:

$260 Potential penalty per entity:

$3.2m


New audit area Preparing for financial statement audits

► IRC §4980H provides for an excise tax that could be material to the

financial statements for most organizations

► Organizations are addressing the ACA requirements, including:

► Evaluating the need for an accrual for an excise tax under ASC 450

► Assessing internal controls

► Implementing internal controls

► Documenting internal controls

Why is 2016 important?

► 2015 required only 70% under an offer

► Starting plan year 2016, 95% must be under

an offer

► Analysis should include W-2 workforce and

contingent workforce

► Finance and accounting need to feel

comfortable with position to sign off on

financial statements


Affordable Care Act Determining full-time employees becomes complex

► Measures actual hours rather than

scheduled hours

► Special rules for students and temporary

workers

► Counts disability and leave of absence

hours

► Uses averaging methodology for variable

and seasonal employees

► Uses “common law” employee standard

Examples that may be considered full

time under the ACA

Complexities of full-time status

determinations

Accurate compliance and reporting

► Employees on a paid leave of absence

► Interns and co-ops, students, graduate

assistants and adjunct faculty

► Employees hired by staffing agencies

► Contingent, temporary or seasonal

workers

► Variable hour employees

► Per diem workers


Data capturing Capture data from multiple systems, including external service providers, often a challenge

1 Self-only coverage Capture lowest self-only cost plan offered and plan enrollment by employee

.

2 Service providers Accommodate increased management of service providers with specific and changing data requirements

.

3

Medical eligibility Accommodate a new set of medical eligibility decisions, including measurement method/periods, break in service and employee groups

4 Health plan offerings Facilitate complicated health plan offerings intended to manage cost or address union workforce became a burden for some

5 Multiemployer plans Cope with multiemployer plans that are often unresponsive to employer questions

6

Affordable Care Act IRS reporting The top six employer challenges


Affordable Care Act IRS reporting Are your systems and processes ready and capable?

Where is the data?

Is it complete?

Is it accurate?

Are the correct indicator codes applied?

§6055

§6056

Employee master

data

Time and attendance Payroll

Benefits

Consolidated data

Labor scheduling

Outsourced providers

Contingent worker

database

1094-C

1095-C

1

2 3 4


Affordable Care Act IRS reporting Other IRS reporting observations

► Implementing software and/or

service providers to support ACA

determinations and reporting

required more time and resources

than anticipated.

► Internal coordination with those

responsible for assembling the

required data is key, including

outside service providers.

► IRS informational reporting levels

of acceptable error are new to

most human resources

professionals.


Affordable Care Act IRS reporting ACA Information Returns System (AIRS)

► AIRS is the system used to electronically

file Forms 1094-C and 1095-C with the

IRS

► Experiences on transmittal

► Apply to become a “transmitter” and

receive transmitter control code

► File size limits required larger files to

be broken up

► Timing of IRS responses

► Acknowledgment report provided via

XML file

► Error messages received from AIRS

► Name/TIN mismatch most common

error

► Initial error reports not user friendly


Reporting

Requires providers of minimum essential coverage to report information about that coverage to the IRS for the agency to enforce the individual insurance mandate

1 Taxpayer IDs

Requires that Taxpayer Identification Numbers (TINs) be solicited for all covered individuals, which has caused significant concern among insurers and employers

2 Penalties Subject to penalties under Sections 6721 and 6722 for failing to timely file or furnish a correct information return to the IRS or an individual

3 Penalty waiver

Penalties may be waived under Section 6724 if the failure is due to reasonable cause

TIN matching errors The high TIN matching error rate for 2015 returns have employers nervous about this process

5 4

Affordable Care Act IRS reporting Information reporting under IRC §6055


Affordable Care Act TIN solicitation New rules for both employers and health insurers

► New proposed regulation (including preamble)

modifies the Taxpayer Identification Number

(TIN) solicitation rules (81 FR 50671)

► Provides clarity on when the initial, first

annual, and second annual TIN solicitations

must occur when a new individual first

becomes covered

► Provides clarity on when first annual and

second annual solicitation must occur after

formal IRS notice of a TIN error

► Reinforces guidance that a TIN mismatching

error which is generated from the ACA

information returns (AIR) program is not such

a “notice” automatically triggering solicitation

requirement


Affordable Care Act TIN solicitation Initial enrollment

► A responsible individual must have an SSN to file a

Form 1095-C

► A covered individual can be filed as enrolled with a TIN

(including an SSN) or a date of birth, if a TIN was not provided


Affordable Care Act TIN solicitation Initial enrollment, cont’d

First solicitation

Must occur when “account is opened”

► In the context of medical coverage, the

proposed regulations specify an

account is “opened” at the point in time

that the application for coverage is

“substantially complete”

► A TIN must be solicited for each

covered individual (dependent) but the

solicitation can be made through the

responsible individual (employee)

► A separate “first solicitation” is triggered

for each new enrollee (e.g., adding a

newborn will trigger the TIN solicitation

process with respect to that individual)

► Second solicitation This annual solicitation, must occur within

75 days of the initial solicitation (assuming a

TIN was not provided in the first solicitation)

► In a special transition rule, this first

annual solicitation can occur within 75

days of 29 July 2016, for someone

who was enrolled on or before that

date

► There is no corresponding transition

rule for the initial solicitation

► So the filer may be out of luck if it

did not conform to the timing of

the initial solicitation under the

new definition or prior transition

rules

1

This third and final solicitation (second annual solicitation) must occur by 31 December of the year following the initial solicitation

2

3


Affordable Care Act TIN solicitation IRS notice

► Initial solicitation is subject to the requirement that it occurred when

the account was opened

► There is no cure if the initial solicitation did not occur timely

► First annual solicitation is required by the 31 December in the calendar

year in which the Notice from IRS was received

► Second annual solicitation must occur by 31 December of the year

following the calendar year in which the Notice from IRS was received

► The proposed regulations restate the rule that the AIR System error

notice is NOT the notice that triggers penalties or this requirement

► Notice 972CG, Notice of Proposed Civil Penalty is the notice that

triggers this new solicitation requirement


2016 Form 1095-C

► Final instructions released 29 September 2016

► New Line 14 codes 1J and 1K to report offers of coverage that

are “conditional” for a spouse

► Codes no longer applicable (interim relief codes from 2015

reporting) are now “Reserved”

► Added line under title of form “Do not attach to your tax return.

Keep for your records.”

► Further detail on Consolidated Omnibus Budget Reconciliation

Act (COBRA) offers with differences when an employee

terminates vs. reduces hours

► Instructions include more explanations and examples to

address common 2015 errors and misunderstandings


Affordable Care Act compliance It’s time for the talk

Has human resources (HR) prepared documentation to support the liability

accrual position under ASC 450?

What types of controls are in place to ensure your exposure to tax penalties is

minimized?

Are these controls documented for external audit, to minimize substantive

testing efforts?

Has an analysis of contingent worker classification (contractors, staffing

agencies) been performed and documented for external audit support?

Have you documented that you have met the threshold to offer coverage to

95% of all full-time employees on a monthly basis for each subsidiary?

Has an IRS defense package been prepared?

Have you considered ACA exposure and data gathering with your business

growth and acquisition strategy?

Is the data from the systems clean to avoid accuracy penalties for 2016 IRS

reporting?

What is the increase in health care costs? Have alternatives been considered?

Which function (tax/HR/payroll) is responding to state exchange tax notices?

Have cross-functional stakeholders been involved in compliance efforts (tax,

finance, accounting, internal audit, human resources, information technology,

legal, procurement, payroll)?

Consider these talking points for tax discussions

with human resources.


Affordable Care Act See more of our thought leadership

Insights for companies on their ACA journey

Affordable Care Act: IRS compliance and reporting

Washington insider analysis

Perspectives on compliance challenges

Perspectives on the evolving ACA

.

http://www.ey.com/Publication/vwLUAssets/ey-aca-insights-for-companies-on-their-journey/$FILE/ey-aca-insights-for-companies-on-their-journey.pdf

http://www.ey.com/Publication/vwLUAssets/ey-aca-one-year-retrospective/$FILE/ey-aca-one-year-retrospective.pdf

http://www.ey.com/Publication/vwLUAssets/ey-aca-one-year-retrospective/$FILE/ey-aca-one-year-retrospective.pdf

https://www.youtube.com/watch?v=mqMaKXsMClU&index=1&list=PLBzcNNo68MDKldS0caYlFXJqtMTbSqhIH



https://www.youtube.com/watch?v=ids2sMY8ZBQ&list=PLBzcNNo68MDKldS0caYlFXJqtMTbSqhIH&index=2

https://www.youtube.com/watch?v=ids2sMY8ZBQ&list=PLBzcNNo68MDKldS0caYlFXJqtMTbSqhIH&index=2

https://www.youtube.com/watch?v=tTYPwtpj7kM&index=3&list=PLBzcNNo68MDKldS0caYlFXJqtMTbSqhIH


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ACA - Employment tax year in review 2016

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