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June 08, 2018
Business Groups Decry IRS Enforcement of ACA Employer Mandate

In its recent efforts to enforce the Affordable Care Act’s (ACA) employer mandate, the Internal Revenue Service (IRS) has been disregarding key safeguards in the law designed to protect employers from unwarranted penalties, a coalition of business organizations warned in a recent letter to federal officials.

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“The IRS’s issuance of so-called ‘226J’ letters notifying employers of potential assessments for calendar year 2015 does not comply with the clear and comprehensive requirements the ACA laid out for employer mandate notification and enforcement,” according to the letter from 22 groups including the Society for Human Resource Management, the ERISA Industry Committee, and the National Retail Federation.

Based on recent testimony to a House committee, “the IRS has identified over 30,000 employers who are potentially liable for assessments totaling $4.3 billion—and at least 10,000 assessment letters had already been sent,” the groups noted. “The fact that most of the assessments issued have been reconciled according to the testimony makes clear that the IRS is operating on incomplete and incorrect information and assumptions—a disturbing result that could have been avoided if the law had been followed.”

In 2017, the IRS began enforcing the ACA’s “pay or play” mandate by notifying employers deemed to owe employer shared responsibility payments (ESRPs) for failing the minimum value or affordability tests for coverage offered in 2015. This process has involved sending employers a “Letter 226J” listing proposed ESRPs and offering only a narrow window to contest them.

This process violates “the ACA’s express guarantee that employers be given ‘two bites of the apple’ before tax penalties can be assessed,” the groups argued. “This unlawful denial of employers’ due process rights—and the ongoing cost, complexity, and confusion surrounding compliance with the employer mandate, especially for smaller businesses—warrants suspension of further 226J letters.” The groups’ letter was sent May 30 to the heads of the IRS and the U.S. Departments of Health and Human Services (HHS), Labor, and the Treasury.

Role of Notices from Exchanges

For an employer to be potentially liable for an ESRP, an employee must first enroll in an ACA exchange and qualify for a premium subsidy. Under the ACA statute and regulations, the ESRP assessment process cannot begin until the exchange notifies the employer that this has occurred, that this may subject the employer to an assessment, and that the employer may appeal the eligibility determination.

In fact, however, HHS, which runs most of the states’ exchanges, did not send out any such notices for 2015, the business groups contend. “HHS did issue notices for calendar year 2016, but it is unclear whether all employers entitled to a notice received one, and to our knowledge no assessments for that year have been made.”

A key reason for this process of notice and appeals “is to give employers a chance to resolve health coverage issues before having to face the IRS,” the groups continued. “Those salutary purposes were thwarted by failure to comply with the notice and appeals requirements unambiguously set forth in ACA section 1411.”

The IRS has asserted that the Letters 226J are the exchange notices contemplated by ACA Section 1411, but the groups counter that that provision requires HHS to notify the exchange, which in turn notifies the employer. “Nowhere does ACA section 1411 refer to the IRS, much less direct or authorize that agency to issue notices under that section of the law.”

The groups’ letter calls for the suspension of ESRPs, citing “the ongoing cost, complexity, and confusion surrounding compliance with the recordkeeping and reporting requirements of the employer mandate, especially for smaller businesses—and the denial of employers’ due process rights by failing to satisfy the mandated notice and appeals requirements under ACA section 1411.”

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