ERIC Sends IRS Letter on ACA Penalties

July 17, 2019

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The Honorable Charles P. Rettig
Commissioner
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20220

The Honorable David J. Kautter
Assistant Secretary for Tax Policy
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

The Honorable Michael J. Desmond
Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20220

Ms. Carol Weiser
Benefits Tax Counsel
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Re:  Request for Guidance Regarding IRS Review of Household Income to Determine ESRP Liability and Suspension of All Further ESRP Assessments and Collection Activities

Dear Messrs. Rettig, Kautter, and Desmond and Ms. Weiser,

We are writing to raise concerns with the process created by the Internal Revenue Service (the “Service”) to assess Employer Shared Responsibility Payment (“ESRP”) penalties under the Affordable Care Act (“ACA”) relating to determinations that an employer may have failed to offer affordable, minimum essential coverage to its full-time employees. 

We respectfully urge the Service to suspend all further ESRP assessments and ESRP collection activities until a process is implemented to (i) compare household income reported by individual taxpayers against group health plan cost information reported by employers on Form 1095-C and identify only those individuals who did not receive an offer of affordable coverage from their employer based on household income as required under the ACA, and (ii) allow employers a timely opportunity to protest determinations of eligibility for a subsidy consistent with Section 1411 of the ACA.  In addition, we request a meeting to discuss these concerns and explore measures to provide the necessary and appropriate information to employers and help the employer community understand reasonable remedies to rebut ESRP penalty determinations.

The ERISA Industry Committee (ERIC) is a national association that advocates exclusively for large employers on health, retirement, and compensation policies at the federal, state, and local levels, representing these employers solely as sponsors of benefit plans for their own workforce. ERIC member companies are leaders in every industry sector and provide comprehensive benefits to workers, families, and retirees.  They drive improvements in health care quality in the communities where their employees live and work, and advance initiatives to lower health care costs and improve access. Importantly, large employers pay the vast majority of health care costs incurred by plan beneficiaries. 

A number of ERIC’s member companies have expressed concerns about the process created by the Service to assess ESRP penalties under the ACA, and the limited opportunity to dispute penalties issued with respect to individuals who appear to have improperly claimed a premium tax credit or cost-sharing reduction (“subsidy”) for coverage purchased through a state or federally facilitated Marketplace Exchange (“Exchange”).

Background

Under the ACA, an applicable large employer is generally subject to an ESRP penalty if the employer does not offer minimum essential coverage to at least 95% of its full-time employees (26 U.S.C. § 4980H(a)), or if the employer offers coverage that is not affordable or does not provide minimum value (26 U.S.C. § 4980H(b)), and at least one employee has been certified to the employer under ACA Section 1411 as having received a subsidy for individual coverage purchased through an Exchange.  A Section 1411 certification is the certification “received as part of the process established by the Secretary of Health and Human Services under which an employee is certified to the employer under section 1411 of the Affordable Care Act as having enrolled for a calendar month in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee” (26 C.F.R. § 54.5980H-1(a)(40)).

Under Section 1411 of the ACA (42 U.S.C. § 18081), the Secretary of the U.S. Department of Health and Human Services (“HHS”) is directed to establish a process for determining whether an employee is eligible for a subsidy and has enrolled in Exchange coverage.  If HHS determines that an Exchange enrollee is eligible for a subsidy, Section 1411(e)(4)(B)(iii) of the ACA provides that the HHS Secretary will notify the Exchange, and the Exchange is then directed to notify the relevant employer of the subsidy eligibility, so the employer is on notice that it may be liable for an ESRP penalty.  The Section 1411 certification regulations require that this notice be provided “within a reasonable timeframe following a determination that the employee is eligible for advance payments” of the subsidy (45 C.F.R. § 155.310(h)).  However, it is well-established that there was no Section 1411 certification process in place for the federally-facilitated Exchanges or most of the state-based Exchanges in 2015, and that the federally-facilitated Exchanges began to phase in a notice program starting in 2016 (see CRS Insight IN10904; see also Frequently Asked Questions Regarding The Federally-Facilitated Marketplace’s (FFM) 2016 Employer Notice Program).  Our member companies have received few if any employer notices from either federally-facilitated or state-based Exchanges for any enrollment year.

Section 1411(f)(2)(A) of the ACA states that the Secretary of HHS will set up an appeals process for employers who receive such notification so the employers can challenge their liability for an ESRP penalty.  The appeals process is supposed to “provide the employer the opportunity to (i) present information to the Exchange for review of the determination either by the Exchange or the person making the determination, including evidence of the employer-sponsored plan and employer contributions to the plan; and (ii) have access to the data used to make the determination to the extent allowable by law.”  Section 1411(f)(2)(B) of the ACA goes on to acknowledge that, due to confidentiality concerns, an employer is entitled to limited tax information about employees who receive a subsidy, but specifically provides that “the employer may be notified as to the name of an employee and whether or not the employee’s income is above or below the threshold by which the affordability of an employer’s health insurance coverage is measured” (emphasis added).

An individual is eligible for a subsidy for a given month only if (A) the individual’s household income is at least 100% but not more than 400% of the federal poverty line; (B) the individual is enrolled in qualified health plan coverage through an Exchange for that month, and (C) the individual is not eligible for affordable, minimum essential coverage through an employer-sponsored plan (or other minimum essential coverage, such as Medicaid, Children’s Health Insurance Program coverage, or TRICARE) for that month.  Under Section 36B of the Internal Revenue Code (the “Code”) and the applicable regulations, employer coverage is affordable if the employee’s share of the premium for self-only coverage does not exceed the required contribution percentage of the taxpayer’s household income (26 U.S.C. § 36B(c)(2)(C)(i)(II), 26 C.F.R. § 1.36B-2(c)(3)(v), emphasis added).  The required contribution percentage is 9.5%, adjusted for years after 2014 (26 C.F.R. § 1.36B-2(c)(3)(v)(C)).  The ESRP regulations also apply this 9.5% of household income standard for affordability (see 26 C.F.R. § 54.4980H-5(e)(1), “An employee who is offered coverage by an applicable large employer member may be eligible for an applicable premium tax credit or cost-sharing reduction if that offer of coverage is not affordable within the meaning of section 36B(c)(2)(C)(i) and the regulations thereunder.”)  The importance of household income for ESRP purposes is stated clearly in Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, available on the Service’s website (emphasis added):

39. When is coverage offered by an employer considered affordable for purposes of the employer shared responsibility provisions?

Employer-provided coverage is considered affordable for an employee if the employee required contribution is no more than 9.5 percent (as adjusted) of that employee’s household income. In general, the employee required contribution is the employee’s cost of enrolling in the least expensive coverage offered by the employer that provides minimum value. The employee required contribution includes amounts paid through salary reduction or otherwise, and takes into account the effects of employer arrangements such as health reimbursement arrangements (HRAs), wellness incentives, flex credits, and opt-out payments.

The ESRP rules acknowledge that employers do not have access to their employees’ household income.  Therefore, the ESRP regulations offer three safe harbors under which an employer could determine affordability.  Even if the employer’s offer of coverage is not actually affordable under Section 36B of the Code and the employee receives a subsidy, the employer will not be assessed an ESRP penalty if a safe harbor applies (26 C.F.R. § 54.4980H-5(e)(2)).  Use of the safe harbors is optional (26 C.F.R. § 54.4980H-5(e)(2)(i)); an employer’s failure to claim a safe harbor does not automatically make the employer liable for an ESRP penalty.  Under the ESRP rules, an employer can be assessed an ESRP penalty only if a full-time employee did not receive an offer of affordable employer group health insurance within the meaning of Section 36B(c)(2)(C)(i) of the Code.

Current ESRP Assessment Process

Through regulations issued under Section 1411 of the ACA, the Service is directed to “adopt methods to certify to an employer that one or more employees has enrolled for one or more months during a year in [an Exchange plan] for which a premium tax credit or cost-sharing reduction is allowed or paid” (45 C.F.R. § 155.310(h)).  The Service established a process for assessing ESRP penalties and began to issue penalty assessment notices for the 2015 tax year in late 2017.  The ESRP penalty assessment process was quietly announced in the form of updates to Questions and Answers on Employer Shared Provisions Under the Affordable Care Act, posted on the Service’s website on November 2, 2017, rather than through a detailed Revenue Procedure or other more formal process.  An audit by the Treasury’s Inspector General for Tax Administration, issued March 21, 2018, found that a “Revenue Procedure would provide guidance to taxpayers who are sent notices proposing Employer Shared Responsibility Payments.  IRS management noted that the Revenue Procedure was not issued because they did not receive final approval from the Department of the Treasury.”

Under the IRS process for assessing ESRP penalties, the Service issues a 226J letter, notifying an employer of a potential ESRP penalty and providing the employer with a list of “assessable” employees for whom the Service was assessing a penalty.  A full-time employee is assessable if (i) the employee was allowed a subsidy on his or her individual income tax return for one or more months of the tax year, and (ii) the employer did not report a safe harbor for the individual on Form 1095-C for the assessed months.  Employers are then provided a chance to object to the preliminary assessment by correcting the information initially provided by the employer on Form 1095-C.  If an employer reviews its records and determines that an assessable employee was incorrectly coded as being full-time during a month, or if an employer failed to claim an applicable affordability safe harbor for that employee, then the employer can request the correction, and if the Service agrees, the Service will issue a corrected ESRP penalty assessment.

On May 30, 2018, ERIC and a number of other organizations representing U.S. employers submitted a letter to the Secretary of the U.S. Department of the Treasury, the Secretary of HHS, the Acting Commissioner of the Service, and the Administrator of the Centers for Medicare and Medicaid Services, objecting to the ESRP assessment and enforcement process put into place by HHS and Treasury.  We will not repeat those arguments here, but, rather, will explain how this flawed process has left large employers without an adequate remedy for challenging the ESRP penalties assessed against employers based on individuals who were not eligible for and should not have been permitted a subsidy under the ACA rules.

Employers are Being Assessed for Improperly-Claimed Subsidies

Several of ERIC’s member companies have received penalty assessment notices for the 2015 and/or 2016 tax years.  In reviewing the lists of assessable employees that accompany the Service’s Letter 226J, our member companies believe that they are being assessed for every full-time employee who received a subsidy, even though some of those individuals could not have been eligible for a subsidy under Code Section 36B.  Based on these initial lists received for the 2015 and 2016 tax years, our member companies suspect that nobody – not the Exchanges, the Service, HHS, or any other government entity – is actually reviewing tax records submitted by individual taxpayers and large employers to confirm that employers are being assessed an ESRP penalty only for full-time employees who did not receive an offer of affordable coverage based on household income.  This is because employers have received initial assessable employee lists which included employees who had W-2 income from that employer that would make the employer’s offer of coverage fall well below the affordability threshold.

Some of our member companies responded to initial ESRP assessments in Letter 226J by specifically requesting that the Service review the assessable employees’ household income to confirm eligibility for a premium tax subsidy.  The ESRP Response Unit charged with ESRP assessments did not address those requests.  Through phone discussions our member companies had with Service representatives working in the ESRP Response Unit (both the Utah and Kentucky offices), it was confirmed that the ESRP Response Unit is not reviewing household income to determine subsidy eligibility.  A supervisor from the Utah ESRP Response Unit told one of our member companies that the ESRP Response Unit does not have access to individuals’ household income and, therefore, could not consider arguments for a reduced ESRP assessment on the basis that the employer’s offer of coverage was affordable when compared to household income.

Employers do not have access to the tax information needed to determine whether all individuals identified as assessable by the Service were actually eligible for a subsidy, as they do not possess and cannot obtain household income for employees.  Thus, the burden must be on the Service – or some other government entity – to affirmatively determine that the employer’s offer of coverage was not affordable based on that individual’s household income before assessing an ESRP penalty against an employer.

The Service has taken the position that the Service’s Letter 226J serves as the employer certification required under Section 1411 of the ACA.  (See Sample Letter 226J:  “This letter certifies, under Section 1411 of the Affordable Care Act, that for at least one month in the year, one or more of your full-time employees was enrolled in a qualified health plan for which a PTC was allowed.”)  If this is the case, then under the Section 1411 rules, employers should have an opportunity to challenge their liability for an ESRP with respect to the list of assessable employees provided with the Service’s Letter 226J, and receive confirmation that each assessable employee’s household income was below the affordability threshold pursuant to Section 1411(f)(2)(B)(i) of the ACA.  Employers have been denied this information by the ESRP Response Unit.  Our member companies have been advised by ESRP Response Unit representatives that their only avenue to argue that assessable employees were not eligible for a subsidy under Code Section 36B is to file a formal protest with the Service’s Appeals Office.

The experiences of ERIC’s member companies raise concerns about the Service’s process and procedures used to propose an ESRP penalty against employers, and that the standards for receiving a subsidy required by statute and regulations have not been followed.  We urge the Service to take the steps necessary to review tax information submitted by individual taxpayers and large employers to confirm that subsidies are only being provided to eligible persons. If the Service is not able or willing to do so, then the Service should not assess penalties against employers.  In addition, by failing to provide the information employers require to effectively challenge assessed penalties, and by requiring employers to undergo significant time and expense to protest ESRP assessments through the formal Service appeals process, the government is denying employers their due process rights that are mandated under the ACA (see 42 U.S.C. § 18081(i)(1)(B), directing the HHS Secretary to conduct a study of the procedures used to administer the ACA subsidies to ensure that the “rights of employers to adequate due process and access to information necessary to accurately determine any payment assessed on employers” are protected).

Additional Future Concerns

There is some urgency around the Service resolving the household income issue, because a failure to do so will also negatively impact the adoption of the new individual coverage health reimbursement arrangements (HRAs) permitted under final regulations released by the Departments of the Treasury, Labor, and HHS titled Health Reimbursement Arrangements and Other Account-Based Group Health Plans (“HRA Guidance”).  Under the HRA Guidance, employers are permitted to offer HRAs that integrate with individual health insurance coverage if certain requirements are met.  Such individual coverage HRAs could be used to satisfy the employer shared responsibility requirements under the ACA if the employer contribution to the individual coverage HRA meets the affordability threshold.  An offer of an “affordable” individual coverage HRA from an employer would also make an individual ineligible for a subsidy.  As described in the preamble to the HRA Guidance, “an employee who is offered an individual coverage HRA will not be eligible to claim the [subsidy] for his or her Exchange coverage unless the premium of the lowest cost silver plan for self-only coverage offered by the Exchange for the rating area in which the employee resides less the individual coverage HRA contribution amount exceeds 9.5 percent (indexed for inflation after 2014) of the employee’s household income (assuming the employee meets various other [subsidy] eligibility requirements)” (84 FR 28888, 28962, emphasis added; see also 26 C.F.R. § 1.36B-2(c)(5)).  The regulators acknowledge that employers do not have access to household income information, and that large employers offering an individual coverage HRA will need to determine the employer contribution amount necessary to avoid an ESRP penalty.  The preamble states that “the Treasury Department and the IRS intend to issue guidance in the near term providing safe harbors or other methods intended to reduce burdens and provide more predictability regarding the application of Code section 4980H to these arrangements” (84 FR 28888, 28921).  The same household income concerns with respect to determining affordability for traditional group health plans, as described in this letter, will also impact these new individual coverage HRAs, and should be addressed in upcoming guidance.

ESRP Penalties Should Be Suspended

We respectfully urge the Service to suspend all further ESRP assessments and ESRP collection activities until the Service implements a process to ensure that employers are assessed a penalty only for full-time employees who were legitimately entitled to a subsidy, based on household income.  We also request that the Service, together with HHS, create a fair, efficient, and reasonable path for employers to challenge ESRP assessments, consistent with Section 1411 of the ACA, with respect to employees who may not have been eligible for a subsidy.

We request a meeting to discuss the matters raised in this letter and look forward to working cooperatively on necessary guidance. 

Sincerely,

Annette Guarisco Fildes
President and CEO, ERIC