Under the Patient Protection and Affordable Care Act (“PPACA”), an applicable large employer may be responsible for an “employer shared responsibility payment” (an “ESRP”) if the employer (a) fails to offer minimum essential health coverage to most (generally, at least 95 percent) of its full-time employees and their dependents, or (b) offers coverage to most, but not all, full-time employees and their dependents, or offers coverage that is not affordable or that does not provide minimum value. However, an employer that falls into one of the above categories will be subject to an ESRP only if at least one of the employer’s full-time employees has enrolled in a qualified health plan through a health insurance exchange and received a premium tax credit.
More colloquially called the “employer mandate” or the “pay or play mandate,” this requirement generally took effect in 2015. The ESRP in 2015 for an applicable large employer that failed to offer minimum essential health coverage was generally $2,080 per full-time employee. If the employer offered minimum essential coverage to most employees, but not all, or coverage was not affordable or did not provide minimum value, the ESRP was generally $3,120 per employee who purchased coverage through a health insurance exchange and received a premium tax credit. Until now, though, the IRS had not issued a description of its process for assessing ESRP liability and, to date, no ESRPs have been assessed against applicable large employers.
Some expected that the ESRPs might not be assessed at all, given recent efforts to repeal and/or replace PPACA. Moreover, President Trump released an Executive Order dated January 20, 2017, directing that the Secretary of Health and Human Services and the heads of all other departments and agencies exercise all authority and discretion available to them waive, defer, grant exemptions from, or delay the implementation of any part of PPACA that would impose a financial burden on health insurers, families, individuals, or purchasers of health insurance. Subsequent guidance from the Department of Treasury, though, released on June 30, 2017, suggested that ESRPs might be imminent. In response to an inquiry from an employer, the Department of Treasury stated that employer shared responsibility payments under the Affordable Care Act are not being waived, reminding employers that “[t]he [January 2017] Executive Order does not change the law; the legislative provisions of the ACA are still in force until changed by the Congress, and taxpayers remain required to follow the law and pay what they may owe.” And now the IRS has weighed in …
Updated FAQs, issued by the Internal Revenue Service (the “IRS”) on November 2, 2017, indicate that the wait is now over. FAQs 55-58 outline the procedures that the IRS plans to use to notify applicable large employers of their potential liability for ESRPs and to ultimately assess such liabilities. Specifically, the IRS plans to issue a “Letter 226J” notifying applicable large employers “of their potential liability” for an ESRP for calendar year 2015 “if any, in late 2017.” The Letter 226J will be issued if the IRS has determined that, for at least one month in 2015, one or more of an applicable large employer’s full-time employees was enrolled in a qualified health plan through a health insurance exchange and received a premium tax credit (and the employer did not qualify for certain exceptions). The IRS has since released a form of Letter 226J, as well as a variety of other forms relating to the ESRPs.
Employers receiving a Letter 226J must be prepared to investigate and respond quickly to the letter. Responses will likely require a fact-intensive investigation, including a review of eligibility determinations and offers of coverage made to individual employees up to three years ago. Written responses to the letter (including any disagreements with the calculation of liability) will generally be due within 30 days from the date of the letter. Those responses will be acknowledged by the IRS with a “Letter 227,” which will detail any further steps that the employer must take to object to the calculation of the ESRP liability (such as requesting, within 30 days of the date of the Letter 227, a pre-assessment conference with the IRS Office of Appeals). If an employer fails to timely respond to either the Letter 226J or the Letter 227, the proposed ESRP will be assessed, and the IRS will issue a notice and demand for payment.