For the last half of 2015, we spent a good deal of time explaining the Affordable Care Act reporting requirements that applied to carriers and large employers. A compilation of these posts, which generally address the content of the ACA reporting requirements, is available here. This post examines the how of ACA reporting. In particular, it provides a primer on the electronic filing system—referred to as the Affordable Care Act Information Return System (AIR)—that the IRS has developed and deployed to facilitate the submission of reporting data to the government.
AIR’s Antecedent—The IRS Filing Information Returns Electronically (FIRE) system
When explaining the ACA’s filing requirements, we found it helpful to point to the similarities between the payroll reporting on IRS Form’s W-2 (“Wage and Tax Statement”) and W-3 (“Transmittal of Wage and Tax Statement”), and the Forms 1094-B and 1095-B (that apply to providers of minimum essential coverage) and Forms 1094-C and 1095-C (that apply to applicable large employers). Form W-2 is (all too) familiar to taxpayers of all stripes as the form that employers provide to them in connection with the filing of their annual Form 1040 (“U.S. Individual Tax Return”), and employers recognize Form W-3 as the form they use to provide copies of W-2s to the government. Forms 1094-B and 1095-B, and 1094-C and 1095-C, operate in a similar fashion. Forms 1095-B and 1095-C are individualized forms that are provided to employees, and Forms 1094-B and 1094-C are used to transmit information reflected on Forms 1095-B and 1095-C to the government.
To facilitate the submission of payroll information, the IRS has long maintained and required employers and service recipients to use either the IRS’ Business Services Online program (for Forms W-2, W-2c, W-3 and W-3c) or the IRS Filing Information Returns Electronically (FIRE) system for Forms 1042-S, 1097, 1098, 1099, 3921, 3922, 5498, 8027, 8955-SSA, and W-2G. Entities using the FIRE system must apply for and obtain a FIRE Transmitter Control Code (TCC). Entities obtain a TCC by submitting an application on IRS Form 4419 (“Application for Filing Information Returns Electronically”). Generally, any corporation, partnership, employer, estate and/or trust, who is required to file 250 or more information returns for any calendar year, must file electronically, and the IRS generally encourages filers who have less than 250 information returns to file electronically as well.
While many expected the IRS would expand the FIRE system to encompass ACA reporting, it did not. Rather, the IRS developed an entirely new electronic filing system, the AIR system for ACA information returns.
The Affordable Care Act Information Return System
The AIR system accepts (only) the following information returns:
- Form 1094-B, Transmittal of Health Coverage Information Returns
- Form 1095-B, Health Coverage
- Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns
- Form 1095-C, Employer-Provided Health Insurance Offer and Coverage
As is the case with the FIRE system, filers must apply for a TCC (Transmitter Control Code) using the “ACA Application for TCC.” To be eligible to apply entities must be one of the following:
- A Software Developer: An organization writing either origination or transmission software according to IRS specifications;
- A Transmitter: A third-party sending the electronic information return data directly to the IRS on behalf of any business required to file; or
- An Issuer: A carrier or employer filing their own ACA Information Returns regardless of whether they are required to file electronically (transmit 250 or more of the same type of information return) or volunteer to file electronically.
The term “Issuer” includes any person required to report coverage on Form 1095-B and any applicable large employer required to report offers of coverage on Form 1095-C and file associated transmittals on Form 1094-B or 1094-C. (These roles are not mutually exclusive; for example, a firm or organization may be both a Transmitter and a Software Developer.) Thus, Issuers include both state-licensed health insurance carriers and employers. These entities can, if they so choose, apply for and file under their own TCC, or they can rely on a third-party (a “Transmitter” in AIR system parlance) to handle the submission on their behalf. To be clear, however, a carrier or employer that elects to rely on a third-party Transmitter remains legally obligated to ensure compliance with the reporting rules. And while the carrier or employer can seek indemnity as a condition of entering into a service agreement with a third party, in our experience vendors are unwilling to provide anything other than the most limited indemnities.
Submitting the application for TCC begins with identification of a “Responsible Official” and “Contacts.” The registration process, according to the IRS, “involves collecting personal and taxpayer data for the sole purpose of authenticating your identity.” This specifically includes providing the Responsible Official’s Adjusted Gross Income (AGI) from their 2015 tax filings.
- Responsible Official
A “Responsible Official” is an individual with responsibility for and authority over the electronic filing of ACA information returns on behalf of the firm or organization. The Responsible Official is also the first point of contact with the IRS and has authority to sign an original/revised ACA Application for TCC. He or she is responsible for ensuring that all requirements are adhered to. At least two Responsible Officials must be listed on the application, and all Responsible Officials will be required to sign the application. A Responsible Official can also be a Contact on the application.
A “Contact” is any individual who may be responsible for transmitting and/or is available for inquiries from the IRS on a daily basis. There is a minimum of 2 required Contacts and a maximum of 10 Contacts allowed per application.
Once an entity is enrolled, and depending on the roles selected on the application, one or more TCCs will be assigned.
AIR has two channels available as transmission methods of electronic ACA returns. One is the ISS-UI channel (User Interface). This channel is a Web Browser based Graphical User Interface that allows Transmitters and/or Issuers to upload two XML files (one with manifest information and the other with 1095-B or 1095-C forms data) to the IRS and to subsequently obtain the status of each submission via their Web Browser.
The second channel is the ISS-A2A channel (Application to Application) which is even more advanced than the UI Channel. This channel is based on Simple Object Access Protocol (SOAP) messaging with Message Transmission Optimization Mechanism (MTOM) attachments built on a Services Oriented Architecture (SOA). This channel permits Issuers and Transmitters of ACA returns to file returns and check on submission status of these filings directly from applications via either a web-based system or a locally installed software system. In order to transmit returns through the ISS-A2A channel, the IRS requires strong authentication and Issuers and Transmitters must obtain a digital certificate from an IRS approved certificate authority. It is likely that only very large organizations or third party vendors submitting on the behalf of numerous entities will utilize the ISS-A2A channel.
Both channels require submissions to be transmitted via single, uncompressed, self-contained “XML” or “Extensible Markup Language” files. While the acronym “XML” may be unfamiliar to readers, XML and HTML (HyperText Markup Language) are both routinely encountered in our everyday interaction with computers. HTML is the more common of the two, since it is integral to our web browsing experience. XML, in contrast, is both human and machine readable. It also simplifies data sharing, data transport, platform changes, and data availability. It is therefore ideally suited to the IRS’s needs in this case. The XML protocols for Forms 1094/1095-B and Forms 1094/1095C are designed to identify ACA Information Returns transmissions, submissions within the transmission, and records within the submission, and each transmission is identified with a Unique Transmission ID, all of which facilitates tracking.
In order to utilize either of these channels, Issuers, Transmitters, and Software Developers must complete testing in the ACA Assurance Testing System (AATS). The testing for Issuers and Transmitters requires that they complete an error free test submission to ensure that they are able to communicate with the AIR system. The testing for Software Developers is more rigorous in that they must pass testing for every software package and scenario that they support (1094-B, 1095-B, 1094-C, and 1095-C). The testing scenarios are validated character by character and will only pass when they precisely match the AATS Answer Key.
The AIR System as a Source of Substantive Rules
While the AIR system is designed to merely transmit reporting data, it may prove to have a substantive component. Lines 14 and 16 on Form 1095-C, Part II contain a total of 18 different indicator codes that can be used in various combinations to convey information about (among other things) the coverage offered by an applicable large employer and whether the employer might be liable for any assessable payments. Not all combinations of code are permitted, and where more than one code might apply the 2015 Instructions to Forms 1094-C and 1095-C provide ordering rules in some but not all cases. For example, indicator code 2C (used to indicate that an employee is enrolled in minimum essential coverage offered by the employer) trumps any other 2-series indicator code that might apply. But there are combinations with respect to which the rules are less than clear. For example, is it appropriate to use a 2-series affordability code (2F, 2G or 2H) with a 1-series code in which coverage is not offered to a dependent, e.g., 1B or 1D? If the answer is no—which we suspect to be the case—then a submission that includes this combination is likely be rejected. In this way, the AIR system will fill the gaps in our understanding of the content of the reporting rules.
Impact on Carriers and Employers
Some carriers are relying on outside vendors, while others are handling the submission process internally. Either way, carriers appear to be generally familiar with the AIR system, and those that we have encountered are well into the enrollment and testing process. Employers, in contrast, are not as far along the learning curve. As a result, the delay in the filing deadlines announced in IRS Notice 2016-4 is most welcome. Most employers that we encountered have chosen to rely on outside vendors. The result has put a strain on vendor capacity—at the same time that vendors are still in “beta testing” mode. For example, the IRS launched a more demanding AATS testing environment in January 2016 and Software Developers who tested in 2015 continue to make changes to their systems to adapt to IRS changes. As a consequence, some employers are finding it difficult to engage vendors. And in the case of those that have, we have encountered software that falls short of full ACA reporting functionality. For example, we encountered an instance in which a vendor software program was unable to fill in Form 1095-C, Part II, Line 16. (The employer was put in a position of having to do this manually.)
Employers that have yet to engage an outside vendor, or that have determined to do their own filing but are not registered are at the most risk. Employers who are thinking that they will transmit their own returns should be aware that the IRS requires that Issuers and Transmitters use only approved software to prepare and transmit their returns. While the delays afforded by Notice 2016-4 are welcome, they are not an excuse for any further delay on the part of filers. Filing for 2016 begins this month. So the best counsel is to get started now.