PEO Industry Best Practice: IRS Information Reporting under the ACA
Many PEOs are beginning to prepare for new federal tax information reporting requirements under the Affordable Care Act (“ACA”) that take effect in 2015 (with initial reporting due in early 2016). There are a number of open questions about how these reporting requirements will work– particularly for PEOs and their client employers, given the unique issues related to the co-employment relationship. These materials have been prepared by NAPEO to provide members and their client employers with a better understanding of the new tax reporting requirements and how PEOs can comply with them.
Please note that the information provided in this document 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.
Summary of the Information Reporting Requirements
As you likely know, the ACA imposes certain coverage mandates on employers and employees. Specifically, the individual mandate requires most individuals to maintain some level of health insurance, or group plan coverage, that meets the requirements set forth in the ACA as “minimum essential coverage” (“MEC”), or the individual could be liable for additional taxes. The employer mandate requires applicable large employers (generally, employers with 50 or more full-time employees) to provide a certain level of health benefits to those full-time employees, or potentially the employer could be liable for additional taxes. In order to assist the IRS with enforcement, the ACA added new Internal Revenue Code (“Code”) sections 6055 and 6056 which impose certain annual tax reporting requirements on employers and issuers.
Code Section 6055 requires issuers, and employers in the case of self-funded plans, to file an annual report with the IRS and issue annual statements to covered individuals indicating the calendar months in a given year in which individuals were enrolled in MEC offered/sponsored by the issuer or employer, as applicable. The reported information will then be used by the IRS to substantiate a taxpayer’s compliance with the individual mandate. The statements will be used by the individual to complete their tax return and establish that they had MEC during particular months.
Code Section 6056 requires each “applicable large employer member”[1] to file a return with the IRS after the close of each calendar year, and issue annual statements to full-time employees about the coverage (if any) offered to the employee, by month, including the lowest employee cost of self-only coverage offered. The purpose of Section 6056 reporting is three-fold. One purpose of Section 6056 reporting is to provide the IRS with the information necessary to enforce an employer’s compliance (or lack thereof) with the employer mandate provisions of the ACA. A second purpose of Section 6056 reporting is to help the IRS determine if an individual was eligible for federal premium tax credits and cost-sharing reductions (the individual’s eligibility for those tax subsidies may be affected by whether he or she had access to employer-sponsored coverage). Finally, the statement provided to the employee will help the employee understand whether he/she may be eligible for a premium tax credit for his/her federal taxes. If the employer provided health coverage that was not “minimum essential coverage,” or if the coverage did not provide minimum value or was not affordable, and the employee purchased individual health insurance on an Exchange, the employee might be eligible for a premium tax credit (depending on multiple factors, including the employee’s income for the year).
Under the ACA, these reporting requirements were originally to be effective for the 2014 calendar year), with the first information return due in early 2015. However, in July 2013, the Department of Treasury and the White House announced that the ACA’s employer mandate requirements would not apply until 2015. In connection with this announcement, mandatory Code Section 6055 and 6056 reporting was also delayed for one year. Therefore, the first required filings will need to occur in early 2016 based on information compiled in 2015.
In July 2014, the IRS issued a set of draft forms (Forms 1095-B, 1094-B, 1095-C, and 1094-C), for employers and insurers to use to meet their reporting requirements under Code Sections 6055 and 6056. Draft instructions for these Forms were released in August 2014. However, it is important to remember that these Forms and instructions are only drafts and will most likely be revised, in some manner, based on comments received by the IRS. It is expected that the Forms and instructions will be finalized by the end of 2014.
To summarize the purpose of the forms:
- Form 1094-C is the transmittal form for the required reporting under Code Section 6056.
- Form 1095-B is the reporting form for required reporting under Code Section 6055, which requires all providers of minimum essential coverage to provide information to the IRS regarding the extent to which an individual was covered by MEC during the preceding tax year. The form will generally be filed by issuers, although small employers (those not subject to the employer mandate) that self-insure will also have to file this form on behalf of their covered participants. (Applicable large employers subject to the employer mandate that self-insure will perform the required reporting under Section 6055 on the Form 1095-C, as discussed below.)
- Form 1094-B is the transmittal form for the required reporting under Section 6055. In other words, the 1095-B forms will be submitted to the IRS with a 1094-B “cover” form.
- Form 1095-C is the reporting form for required reporting under Code Section 6056, which requires “applicable large employers” (those employers subject to the employer mandate) to provide information regarding the terms and conditions of the health coverage (if any) provided to its full-time employees for the year at issue. So the Form 1095-C filing requirement applies only to “applicable large employers.” Applicable large employers that self-insure will also provide the reporting required by Code Section 6055 on the Form 1095-C (the IRS tried to accommodate large employers by only requiring them to file one form).
Understanding the Reporting Requirements and the New IRS Forms
The chart on the following pages is intended to highlight best practice regarding the application of these new tax reporting rules to various coverage scenarios. After the chart, we have provided narratives with respect to each of the scenarios set forth on the chart to provide additional and more specific information and recommended best practices.If you have more specific questions about these issues, we recommend that you consult with your professional advisers regarding how to comply.
[1] Very generally, an “applicable large employer” is any employer that employed on average 50 or more full-time employees or equivalents over the 12 months of the preceding calendar year. An “applicable large employer member” includes both an applicable large employer, as well as any member of a controlled group that collectively meets the definition of applicable large employer. In other words, the determination of whether an entity employed on average 50 or more full-time employees or equivalents is made at the controlled group level, but the Section 6056 reporting requirements apply on a member-by-member basis to each member of that controlled group (regardless of how many employees that particular member of the controlled group had).