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PEO Industry Best Practice: Correcting and Filing Forms 1094(C) and 1095(C)

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PEO Industry Best Practice: Correcting and Filing Forms 1094(C) and 1095(C)

Many PEOs have been assisting their client employers with the new federal tax information reporting requirements under the Affordable Care Act (“ACA”)- in particular, with the Forms 1095-C (the reporting form for required reporting under Code Section 6056, which requires “applicable large employers” (“ALEs”) to provide information regarding the terms and conditions of health coverage offered to its full-time employees for the year at issue) and the Forms 1094-C (the transmittal forms for the Forms 1095-C).

The Forms 1095-C generally had to be provided to employees by no later than March 31, 2016.  Forms 1095-C (and the accompanying Form(s) 1094-C) must be filed with the IRS by no later than June 30, 2016.[1]

Now that the deadline for furnishing the Forms has passed, we are aware that there are many questions about what to do if an error on a form is subsequently discovered, and also about procedures for filing the forms with the IRS.   These materials have been prepared by NAPEO to provide members and their client employers with a better understanding of the available guidance on these issues.

Please note that the information provided here is for general informational purposes only, and NAPEO strongly recommends that a PEO and its client employers consult with legal, tax or other competent professionals regarding any obligations under the ACA.  In particular, we note that the federal agency guidance regarding the ACA is continually evolving, and the obligations of PEOs and their client employers under the ACA may change over time.   NAPEO is not recommending any specific scenario or course of action described in this document.  The contents of this document should not be relied upon for legal or tax advice in any particular circumstance or fact situation.

Correcting Forms 1095-C with Errors

Given that it is the first year of this reporting requirement, it is not surprising that many employers/PEOs discovered errors on the Forms 1095-C after furnishing them to employees.  The decision many employers now face relates to how to deal with those errors.

As an initial matter, the penalty for failing to timely furnish a correct Form to an individual or timely file a correct Form with the IRS is $260 per Form, with an annual cap of $3.1785 million, under  Code §§ 6721 and 6722 and Treas. Reg. § 1.6055-1(h).  (These penalties can be reduced if the filer corrects within a certain period of time, or increased if the failure was due to intentional disregard).  If there is a failure to both furnish and file a particular Form, the penalties are doubled (i.e., to $620 per Form and a $6.357 million annual cap).

However, the IRS has consistently said over the past year that some relief from these penalties is appropriate to allow employers time to come into compliance with the new reporting requirements.  Most recently, in Notice 2015-87, the IRS stated that it “will not impose penalties under §§ 6721 and 6722 on ALE members that can show that they have made good faith efforts to comply with the information reporting requirements. Specifically, relief is provided from penalties under §§ 6721 and 6722 for returns and statements filed and furnished in 2016 to report offers of coverage in 2015 for incorrect or incomplete information reported on the return or statement.”

But it is important to note that the IRS has also said that “this relief does not apply in the case of ALE members that cannot show a good faith effort to comply with the information reporting requirements or that fail to timely file an information return or furnish a statement. However, consistent with existing information reporting rules, ALE members that fail to timely meet the requirements still may be eligible for penalty relief if the IRS determines that the standards for reasonable cause under § 6724 are satisfied.”

Code Section 6724, referenced above, provides generally that the IRS will not assess penalties for a failure to furnish or file a form “if it is shown that such failure is due to reasonable cause and not to willful neglect.”  IRS regulations at 26 CFR 301.6724-1 indicate that “reasonable cause” requires the filer to establish that the filer acted in a “responsible manner” and that either (i) there are significant mitigating factors with respect to the failure, or (ii) the failure arose from events beyond the filer’s control (“impediment”).  The regulation goes on to define “responsible manner,” “significant mitigating factors,” and “events beyond the filer’s control.”  “Acting in a responsible manner” means that the filer exercised reasonable care under a prudence standard and undertook significant steps to avoid or mitigate the failure.  This latter requirement generally necessitates taking action to correct the problem. 

Here are two examples intended to highlight the above analysis:

Example 1: IronMan Co. is an applicable large employer (“ALE”) subject to the ACA’s employer mandate rules and related reporting requirements. Acme PEO assisted IronMan Co. with furnishing Forms 1095-C to its employees prior to the March 31 deadline. In May, Acme PEO learned for the first time that IronMan Co. had a subsidiary, BlackWidow Co., which employed 15 full-time employees in 2015.IronMan did not advise Acme of the existence of BlackWidow because IronMan was unaware that IRS rules require every member of an ALE’s controlled group to file Forms 1095-C for its full-time employees, even if that particular company had less than 50 full-time employees and equivalents.Even if IronMan believed in good faith that it had no obligation to furnish Forms 1095-C to employees of BlackWidow, it appears that the relief under Notice 2015-87 would not be available, because the forms were not furnished in a timely manner. Therefore, Acme PEO may want to advise IronMan to furnish the forms to BlackWidow employees as quickly as possible in order to preserve the argument that “reasonable cause” under Code Section 6724 applies.

Example 2: Acme PEO brings on CapAmerica Co. as a new client in May 2016. CapAmerica Co. is also an ALE that is subject to the ACA’s employer mandate rules and related tax reporting obligations. CapAmerica was using another PEO prior to signing up with Acme PEO, and its prior PEO had agreed to furnish Forms 1095-C to CapAmerica’s full-time employees. However, the prior PEO had serious problems with its data systems. While Forms 1095-C were sent to all full-time employees prior to March 31, 2016, Part II was not completed on any of those Forms.In this scenario, it is doubtful that the good faith relief under Notice 2015-87 applies, even though the forms were furnished in a timely manner. The IRS likely would not find that there was a good faith effort to complete the Forms if the employer simply left Part II blank. Acme PEO likely will want to advise CapAmerica to furnish corrected forms as quickly as possible in order to preserve the argument that “reasonable cause” under Code Section 6724 applies.

Notice 2015-87 specifically provides that if an employer issued a Form 1095-C to an employee by March 31, 2016, but there was incorrect information on that form, the employer will not be subject to a penalty under Code §§ 6721 and 6722 provided that the employer provided the form in “good faith.”  What Notice 2015-87 does not address, however, is whether once the employer becomes aware of the error, if there is an obligation to correct that error promptly in order to maintain the argument that it is acting in “good faith.”

In a recent webinar,[2] IRS representatives shed some light on their views regarding corrections generally.  The representatives emphasized the following:

  • Correcting errors is part of the good faith effort to file accurate and complete information returns.  (While not entirely clear, this appears to be the IRS position with respect to the relief provided by not only Code section 6724, but also Notice 2015-87.)
  • The IRS’ view is that as a best practice, the reporting entity should develop an internal process for identifying errors, correcting the errors, filing corrected returns with the IRS, and furnishing corrected statements to the recipients.
  • If, after furnishing Forms 1095-C to recipients, you later determine that certain information on the Forms was incorrect, but you have not yet filed those returns with the IRS, then you do not file a corrected return with the IRS.  Instead, when you file those returns with the IRS, simply make sure the returns reflect the correct information.
  • When you file returns electronically with the IRS through the AIR system, you will get one of five responses—accepted; accepted with errors; partially accepted; rejected; or not found.
  • If your transmission is “accepted with errors,” it means that AIR didn’t find any fatal errors (that would have caused a rejected return) but at least one, and possibly all, submissions had errors that require correction.
  • If your transmission is “partially accepted,” it means that at least one submission within the transmission was accepted with or without errors and at least one submission within the transmission was rejected.
  • If the transmission is “accepted with errors” or “partially accepted,” you’ll receive an acknowledgment identifying the error data and are expected to submit a corrected filing.
  • If a transmission is rejected by the IRS when you attempt to file your Forms 1094-C and 1095-C, you must completely replace the transmission rather than use the correction process.  You must replace all records in the transmission or submission that the IRS rejected.
  • When you are correcting information on a Form 1095-C that was previously filed with the IRS, you should file a fully completed form 1095-C, including the correct information, and mark it as a corrected return. The corrected Forms 1095-C should be filed with a Form 1094-C transmittal, but do not mark the transmittal as corrected. The IRS believes you must then furnish the employee a copy of the corrected Form 1095-C.
  • A corrected Form 1095-C is needed if the information on any of the following lines is incorrect:  Lines 1, 2, 8, 14, 15, 16, and 17-22.
  • When you are correcting information on Form 1094-C, file a standalone, fully completed Form, including the corrected information, and mark it as a corrected return.  You should not file a return correcting information on a Form 1094-C that is not the authoritative transmittal.
  • A corrected Form 1094-C is needed if the information on any of the following lines is incorrect:  Lines 1, 2, 9, 10, 20, 21, 22, and Part III, Columns A-E.
  • If you discover an error with an IRS filing prior to the due date, you should correct it prior to the due date.  Corrections discovered after the due date should be filed as soon as possible.
  • If the error relates to a mismatch between a name and a person’s TIN, you should file a correction if you have the correct TIN information or the date of birth, if the TIN was not provided.  If you are in the middle of the TIN solicitation process, you should file the correction when the TIN is obtained.  If you are unable to correct the TIN before a penalty notice is issued by the IRS, you will have the opportunity to argue that either good faith relief (under Notice 2015-87) or reasonable cause relief (under Code section 6724) applies.
  • An “inconsequential error” (an error or omission that doesn´t stop the IRS from processing, correlating required information with the affected individual´s tax return, or otherwise putting the return to its intended use) on the Forms will not result in a penalty.  For example, if an employee’s first name is William and it is misspelled as “WILLAIM,” that would be considered inconsequential.  However, errors with regard to an individual’s TIN or surname are never considered inconsequential.

Existing IRS guidance indicates that all efforts should be made to file the tax forms on a timely basis to ensure the availability of the good faith penalty relief provided by Notice 2015-87 and Code section 6724.  Additionally, recent IRS statements appear to indicate that if a PEO or client employer learns of a reporting error, it should generally correct the forms to ensure application of the good faith penalty relief.

This best practice approved by the NAPEO Healthcare Task Force on June 8, 2016

[1] Anyone filing the forms may file electronically by the June 30, 2016 deadline.  Entities that choose to file a paper return must file the forms with the IRS no later than May 31, 2016.  However, the option of filing a paper return is only available to entities that are filing less than 250 forms. 

[2] The webinar can be accessed at http://www.irsvideos.gov/Governments/AffordableCareAct/AffordableCareActInformationReturnsCorrectionsProcess