Under the Patient Protection and Affordable Care Act (“PPACA”), an applicable large employer may be responsible for an “employer shared responsibility payment” (an “ESRP”) if the employer (a) fails to offer minimum essential health coverage to most (generally, at least 95 percent) of its full-time employees and their dependents, or (b) offers coverage to most, but not all, full-time employees and their dependents, or offers coverage that is not affordable or that does not provide minimum value. However, an employer that falls into one of the above categories will be subject to an ESRP only if at least one of the employer’s full-time employees has enrolled in a qualified health plan through a health insurance exchange and received a premium tax credit.
More colloquially called the “employer mandate” or the “pay or play mandate,” this requirement generally took effect in 2015. The ESRP in 2015 for an applicable large employer that failed to offer minimum essential health coverage was generally $2,080 per full-time employee. If the employer offered minimum essential coverage to most employees, but not all, or coverage was not affordable or did not provide minimum value, the ESRP was generally $3,120 per employee who purchased coverage through a health insurance exchange and received a premium tax credit. Until now, though, the IRS had not issued a description of its process for assessing ESRP liability and, to date, no ESRPs have been assessed against applicable large employers.
Updated FAQs, issued by the Internal Revenue Service (the “IRS”) on November 2, 2017, indicate that the wait is now over. FAQs 55-58 outline the procedures that the IRS plans to use to notify applicable large employers of their potential liability for ESRPs and to ultimately assess such liabilities. Specifically, the IRS plans to issue a “Letter 226J” notifying applicable large employers “of their potential liability” for an ESRP for calendar year 2015 “if any, in late 2017.” The Letter 226J will be issued if the IRS has determined that, for at least one month in 2015, one or more of an applicable large employer’s full-time employees was enrolled in a qualified health plan through a health insurance exchange and received a premium tax credit (and the employer did not qualify for certain exceptions). According to the FAQs, the letter will itemize the employer’s proposed payment by month, and will include a variety of details intended to support the IRS’s calculation of ESRP liability, such as a list of full-time employees who received a premium tax credit.
Employers receiving a Letter 226J must be prepared to investigate and respond quickly to the letter. Responses will likely require a fact-intensive investigation, including a review of eligibility determinations and offers of coverage made to individual employees up to three years ago. Written responses to the letter (including any disagreements with the calculation of liability) will generally be due within 30 days from the date of the letter. Those responses will be acknowledged by the IRS with a “Letter 227,” which will detail any further steps that the employer must take to object to the calculation of the ESRP liability (such as requesting, within 30 days of the date of the Letter 227, a pre-assessment conference with the IRS Office of Appeals). If an employer fails to timely respond to either the Letter 226J or the Letter 227, the proposed ESRP will be assessed, and the IRS will issue a notice and demand for payment.