Big ACA tax bills catch some smaller employers by surprise

Unexpected letters from the Internal Revenue Service rarely contain good news, yet some employers in the region have still been knocked back by what has been landing in their mailboxes.

These IRS letters ask for "shared responsibility" payments for failure to offer enough full-time employees the right kind of health insurance back in 2015. Based on conversations with benefits consultants and accountants last week, no employer that received one saw it coming, but curiously they were shocked for at least three completely different reasons.

One group of employers thought they had fully complied with the Affordable Care Act's so-called employer mandate to provide health insurance. A letter and six-figure bill from the IRS thus came out of the blue.

Some employers had expected to some day get asked to come up with a payment for not fully complying, based on their reporting to the IRS of what they did for 2015. Now, nearly two years later, they have just learned that they missed the estimate of how much they owed by a country mile.

The third reason for reacting with surprise is that some business owners and executives just can't believe the IRS is still intent on enforcing this provision. Didn't the Trump administration get that killed?

The ACA, of course, remains the law. So while assuming it wouldn't be enforced seems to be a case of stepping on your own garden rake, there have been repeal efforts, court cases and an administration executive order repeatedly fired at the ACA. You can't really blame a few business owners for being a little confused about it.

As for how widespread the problem is for regional employers, it's "a huge deal for a small number of employers," according to St. Paul consultant Bob Radecki.

Big companies have sophisticated human resources technology, along with in-house expertise and top legal and accounting experts a phone call away. Compliance wasn't free, of course, but it hasn't created the kind of problem that reaches the office of the CEO.

"But the 100-, 200- or 300-life employers, a lot of them just face-planted on the reporting" for 2015, Radecki said. "Now the IRS tells them they owe a lot of money and they've got 30 days to respond. And there are some really stressed-out people about this."

A client with a six-figure problem told Radecki she hadn't cried so much since her husband died.

Employers were given this obligation to provide insurance or pay up because Congress wanted to level the playing field for employers. The idea was to keep some of them from using the expanded coverage of the ACA as an opportunity to dump their employee health insurance plans and send their workers into the taxpayer-subsidized market.

Of course, Congress didn't mean every employer, every worker or just any kind of health insurance. It's a little complicated, but in a nutshell, "applicable large employers" with 100 or more full-time employees in 2015 had to offer them and their dependents health insurance that met a "minimum value" and that was "affordable," all as defined in the rules. Failure to do so could cost about $2,000 per employee.

"It was difficult, extremely difficult," said Tom Krieg, a partner and employee benefits practice leader of accounting firm Wipfli LLP. "All you had to do really was look through the instructions. A lot of our clients raised their hands and asked for help, 'We can't understand what all this stuff means.' Because it was the first time, nobody was really an expert at this."

Because 2015 was the first year, there were additional rules lumped under the general heading of "transition relief," helpful for some employers but adding still more complexity for a layman just trying to figure it out.

The notices that are now arriving from the IRS are called 226J letters. This is basically a warning, that the IRS thinks money is owed and that the employer should provide evidence that the IRS is wrong.

A common problem now showing up is that employers reported their number of full-time employees using a different definition than the IRS'. Another was misunderstanding how to handle a health plan fiscal year that might have started July 1. Without the right box being checked on the IRS filing, the agency concluded that the employer didn't offer full-time employees health insurance for half of the year.

Krieg said he has advised clients holding an IRS notice to stop sighing and instead start digging into what can be learned and presented to the IRS to bring down the assessment, with only 30 days from the date on the letter to respond. And don't just take the IRS' word for how much is owed.

Another message from the consultants is a reminder that the law is still the law. Once problems from 2015 get cleaned up the notices for 2016 problems may start arriving. And by now, the time until the first reporting deadline for 2017 is best measured in weeks, not months.

"A lot of people are surprised that the IRS under a Trump administration is sending letters out to collect," Radecki said. "Just because we have the Trump administration doesn't mean that the professionals in the enforcement area of the IRS stopped doing their jobs."