7 Tips to Avoid Employer Mandate Assessments and Penalties under the Affordable Care Act

As we discussed in a prior article, it is now more important than ever for employers to ensure they fully and accurately complete IRS Forms 1094-C and 1095-C — forms required to be filed and/or furnished to employees under the Affordable Care Act. A failure to do so can lead to eye-popping proposed employer shared responsibility payment (ESRP) assessments, as well as information reporting penalties.

To avoid such costly mistakes, employers should keep the following seven tips in mind when completing or reviewing Forms 1094-C and 1095-C:

Form 1094-C

1. Be very sure that the “Yes” box is checked on Line 23, column (a) to state that minimum essential coverage was offered for all 12 months.

This is far and away the single most important data entry on both forms. The box should always be checked for an employer who provides minimum essential health coverage to all full-time employees in accordance with the Affordable Care Act (ACA). Failing to check this box may result in an automatic ESRP assessment of up to $2,700 per full-time employee for 2021. The amount is adjusted annually.

2. Know when to check the box on Line 22 for “Qualifying Offer Method.”

If an employer is eligible to use the Qualifying Offer Method, it should check this box only if it is reporting offers of coverage on Forms 1095-C using code 1A.

Form 1095-C

3. Conduct a coding audit and know where to prioritize.

Each of the below tips and other points of review for Forms 1095-C should be addressed prior to the furnishing and filing of the forms. Only by reviewing and understanding the codes can an employer have confidence that it will avoid an ESRP assessment or accuracy-related information return penalties. Of course, depending on the number of employees, reviewing the coding for all employees may be impracticable. Thus, employers should prioritize the following situations for review:

• Forms for employees who were hired, terminated, or who experienced a change in status during the year;
• Forms where code 1H is reported; and
• Forms for employees who are more likely to be eligible for the premium tax credit (e.g., employees earning less than $51,040 in 2021).

4. Review for “red flag” coding combinations on lines 14 and 16.

The following code combinations are triggers for an ESRP assessment and should never be used by an employer who provides minimum essential health coverage to all full-time employees: 1H/__, 1H/2C, 1H/2F, 1H/2G, and 1H/2H. All of these code combinations report that no offer of coverage was provided but fail to state a valid reason for why an ESRP should not apply. Where no offer of coverage is made, only one of the following code combinations should be used: 1H/2A, 1H/2B or 1H/2D.

5. Review for incomplete coding on lines 14 and 16.

For employers who are not using the Qualifying Offer Method, both code series (series 1 and series 2) on lines 14 and 16 should always be completed for all months on the Forms 1095-C of all full-time employees. However, if an employer is using the Qualifying Offer Method, then it will be acceptable in many instances to use only code 1A and to leave the series 2 code blank.

6. Make sure the safe harbor code reported on line 16 actually applies.

In more recent years, the IRS has begun scrutinizing the series 2 safe harbor codes reported by employers on line 16. For example, the IRS will automatically reject an employer’s use of code 2G, the federal poverty line safe harbor, if the monthly employee required contribution reported on the Form 1095-C exceeds $104.53 for a month in 2021.

7. Ensure the waiting period is coded correctly on lines 14 and 16.

If an employee is in a waiting period on any day of a month, the month should be coded as 1H/2D to signify that the employee is in a limited non-assessment period. This code can only be used for up to four consecutive months for each period of employment. If an employee was terminated and rehired in the same year, the employer should determine whether the waiting period and code 1H/2D can be applied again under the rules for determining periods of employment.