ACA Regulatory Update: Why a “Good Faith” Reporting Year Doesn’t Zero Out Penalties

This blog was last updated on June 26, 2021

The Affordable Care Act Employer Mandate is in full force for tax years 2016 & 2017, despite the ongoing dialogue in Washington DC.  Although it is a “good faith” filing year, corrections and replacements are still required and penalties can be enforced. The Affordable Care Act Employer Mandate has been a crucial talking point for larger companies amidst the ongoing dialogue surrounding ACA reform in Washington. These organizations should take note: The Employer Mandate, along with all associated reporting obligations and penalties, is in full force for Tax Years 2016 & 2017. Even in a “good faith” year, penalties can be enforced. As a result, all Applicable Large Employers (ALEs) and ALE members must comply with ACA requirements. Namely they must provide employee health benefits and report offers and coverage to the IRS. Failure to comply with these obligations can lead to serious ramifications, including marketplace and/or IRS reporting penalties.

What reporting penalties could non-compliant employers face?

The President’s ACA executive order from January encourages the IRS to extend “good faith” reporting as it had previously done for Tax Year 2016 ACA returns. “Good faith” reporting simply means the IRS may excuse reporting errors and failures upon a showing of reasonable cause. It does not signify that the penalties will be unenforced. Intentional failures to file fall outside of this “good faith” exception. Because of this, it is better to file late than not at all. Employers should also be aware the late filing penalties apply to errors and corrections as well. Although it is a “good faith” filing year, reporting organizations must still submit corrections and replacements. Corrections must be filed as soon as possible, and all replacement files must be completed within 60 days. Failure to submit corrections and replacements promptly will not constitute “good faith” and will result in IRC penalties as described above. Late filing does not excuse the requirement to meet the “good faith” standard, as the penalty amounts can be significantly reduced by filing late compared to not filing at all The further delay of the ACA Compliance Validation (ACV) system until May 2017, as recently announced by the Treasury Inspector General for Tax Administration (TIGTA), does not impact employers’ reporting obligations and potential liabilities for penalties. The ACV system’s purpose is to determine compliance with the Employer Mandate’s substantive provisions, rather than to measure reporting compliance. Once the ACV system is functional, the IRS plans to identify all noncompliant employers from tax years 2015 and 2016 to assess marketplace penalties. That said, the current lack of noncompliance penalties does not indicate the IRS will opt not to enforce the employer mandate and reporting requirements. On the contrary, it signifies the IRS fully intends to carry out its ACA audit process for past and current years.

What about marketplace penalties?

The marketplace penalties are distinct and independent of the Internal Revenue Code reporting penalties applicable under §§ 6721 and 6722, which apply broadly to all information returns, including Forms 1094 and 1095. Even if the Department of Health and Human Services were to delay or grant exemptions from the Employer Mandate pursuant to the President’s executive order to “ease the burdens” of the ACA, such action would not relieve ALEs of their reporting obligations. Since this is the case, it is important to be mindful that even amidst the deliberation and potential executive action regarding the Employer Mandate, reporting obligations will still be in effect and penalties will be enforced. Per the executive order, the IRS has manifested an intent to simplify filing while still remaining compliant with the requirements under the law and Internal Revenue Code. The IRS does not have the constitutional authority to eliminate reporting requirements on its own: This would require congressional action. You may remember the IRS has already relaxed the reporting validations for individual reporting – however, because reporting requirements are separate and independent from coverage requirements, this simplification has no bearing on an employer’s obligation to provide health insurance. Bottom Line: The ACA is still controlling law, and the IRS has given no indication that it plans to implement any changes to employers’ 1094 and 1095 reporting obligations and related penalties. That being said, businesses should continue to meet their ACA reporting obligations as they would for any other information returns.

Further Reading

• The National Law Review: Where Do We Stand with Health Care?
• Accounting Web: Coming Soon: Employer Mandate Penalties from the IRS
• Politico: White House Pressures GOP Leaders on Obamacare Showdown Next Week