PPACA Update: Extensions are Over, Penalties Await Late Filers

Most employers that sponsor group medical plans (all applicable large employers and those smaller employers that self-fund their plans) have a new reporting obligation for 2016 under the PPACA. The IRS means it this time — no more delays. It’s time to report benefits coverage to employees (and other covered individuals) as well as to the IRS. Employers need to get their Form 1095 and 1094 reporting obligation started or risk fines and penalties.

The reporting obligation, along with the employer mandate to provide coverage to full-time employees, was originally scheduled to go into effect in 2014, but the IRS issued an extension that delayed the start of those requirements until 2015. All of the news from the IRS to date, however, is that they will not be providing any additional delays in the reporting requirement. Officials from the IRS and Treasury have said that they know the first year is going to bring problems, and since that inevitably will happen whatever year is the first year, they want to get that first year out of the way and move ahead.

What Does That Mean for Employers?

Employers need to get their Form 1095 and 1094 reporting obligation started or risk fines and penalties.

This means that this is the year, 2015, that employers need to meet their initial 1095 and 1094 reporting obligation. If you have delayed until now, do not delay any further or you will risk fines and penalties.

In fact, in the recent trade bill that Congress passed, one of the potential areas for raising tax money was the filing obligation, and Congress actually doubled the potential penalties to as much as $3 million annually for missed filings. The IRS and Treasury have said that they will accept reasonable, good-faith efforts to comply and have offered some opportunities to extend the filings; however, failure to file will not be acceptable. Nor will a late filing.

While extensions are available, they are very limited. There will be one automatic 30-day extension for the filing obligation with the IRS.

The extension for the reporting obligation to employees is also limited to 30 days, and that is not automatic; the filer must explain the reason that an extension is needed, and the IRS must approve the request. In order for the IRS to approve an extension for distributing employee statements, there has to be an extreme necessity. (A hurricane that destroys the company’s computer is the Internal Revenue Service’s idea of a good reason, so procrastination and the inability to find a vendor will likely not be sufficient.)

Why the Inflexibility?

The government took a lot of heat last year for the delays, so they are extremely sensitive to the individual reporting obligation and the potential political fallout. Moreover, they are particularly sensitive to the individual filers who must have the 1095 information to file their tax returns.

The political concerns go beyond the PPACA mandates and subsidy issues for those who purchase coverage on the exchanges. Everyone needs to report their health care coverage (or lack thereof) on their tax returns. Any delay in reporting that information to a taxpayer will delay the filing of that taxpayer’s tax return and generate a potential firestorm of political bad will. The IRS wants to avoid that at all costs, at least from their end. So, they are pushing employers to meet the deadlines — or risk being the “bad guys.”

Some Flexibility for Good-Faith Efforts

The only real flexibility by the IRS may come on the accuracy side of the equation. They’ve not been happy about one tactic floating around: the “just get something out there” strategy, which assumes that as long as an employer gets “something” into the hands of employees and the IRS, the employer will not get hit with a penalty and can fix the problem later. This approach is “semi” true.

While it is important to get the filings to the IRS in a timely manner, employers should be equally focused on their accuracy.

It is true that a complete failure to file is worse than an incorrect filing. The IRS has said that it will not impose penalties for reporting incorrect or incomplete information if an employer can show that it made good faith efforts to comply with the reporting requirements. However, the IRS has been adamant that employers will have to be very aggressive about fixing any filing mistakes, and has included guidance in the instructions indicating when and how employers must correct errors in their filings.

Moreover, there is at least some concern that if the errors are substantial enough, the filings will be rejected and treated as a failure to file, resulting in penalties. So, while it is important to get the filings to the IRS, as well as the reporting to the employees — and to do so in a timely manner — employers should be equally focused on the accuracy of that information.

New Responsibilities for HR

This entire process is somewhat foreign to HR. Employee information reporting is usually done by payroll, but the benefits information is often maintained on a different system and the benefit and payroll systems often do not interact well.

Now is not the time to procrastinate.

Most employers have turned to outside vendors (including their current payroll providers) to offer solutions for this reporting. Unfortunately, many vendors have discovered that the issues are more complex than they had realized and have told employers that their capabilities at this point will be limited to those who are already in the queue for that assistance.

Other vendors have popped up to fill the void, but being new they cannot provide track records showing employers their performance capabilities. Nevertheless, those new vendors may be the only option for many employers.

This is going to be a stressful time for many employers — even for those who know what they are going to do and are currently implementing their solution.

Other employers are going to have to scramble, along with their advisors, to find other solutions that will at least get them through the “IRS deadline door.” Of course, they may not know what issues they still might face until that point, so the potential for penalties remains.

Now is not the time to procrastinate. Employers should be moving ahead and making every effort to get their filings completed on time.

About Jay Kirschbaum

Jay spent 22 years as a tax attorney specializing in employee benefits before joining Willis in 2001. He is current…
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