The Affordable Care Act exchanges/marketplaces are required to notify employers of any employees who have been determined eligible for advance payments of the premium tax credit or cost-sharing reductions (i.e., subsidy) and enrolled in a qualified health plan through the exchange.
A few weeks ago the U.S. Department of Health and Human Services (HHS) began issuing these notices to employers for 2016. If you received such a notice, this means that at the time of applying for health care coverage through the exchange, the employee indicated that:
- you made no offer of health coverage;
- you offered health coverage, but it either wasn’t affordable or didn’t offer minimum value; or
- he or she was unable to enroll in the health coverage due to a waiting period.
Now, receipt of such a notice does not mean that you are liable for the play-or-pay employer mandate penalty. In fact, HHS is required to notify all employers, whether or not they are subject to the employer mandate, so small employers (i.e., less than a total of 50 full-time employee and full-time equivalents) have also received notices. The subsidy eligibility determination by an exchange and the IRS penalty assessment are entirely separate programs.
Employers do not have to appeal a determination of an employee’s eligibility for a subsidy and the grounds for an appeal are limited. As described in the HHS exchange subsidy notice, an employer should consider appealing if there is reason to believe the employee’s receipt of a subsidy is wrong. Therefore, an employer can only really appeal if the coverage it offered was affordable and provided minimum value or if the employee actually enrolled in the coverage. More information about appeals for the federally-facilitated exchanges (and the eight state exchanges utilizing the same appeal form as the federally-facilitated exchanges) is available here. For example, if the employee was offered affordable, minimum value coverage, the employee is actually enrolled in the employer’s plan.
If an appeal is appropriate, some employers may decide to submit an appeal in an effort to correct any misinformation and to potentially “head off” the imposition of the pay-or-play penalty tax by the IRS. Other employers may view an appeal as a way to help employees avoid an unexpected tax liability at year-end since any advanced premium tax credit that was erroneously received must be repaid. Regardless of the employer’s reason for appealing, the impacted employee may construe such action as adversarial. To minimize any potential resentment, an employer should consider notifying a current employee that it plans to submit an appeal and explain the potential adverse tax consequences to the employee if the employee receives a subsidy that he or she is not entitled to.
The IRS is not expected to start assessing play-or-pay penalties until after its receipt of employees’ individual tax returns for 2016 and employer information returns (i.e., Forms 1094-C and 1095-C). Since the details of the IRS penalty assessment and appeal processes have yet to be revealed, there is no guarantee that successfully appealing the HHS subsidy determination will automatically avoid the imposition of the penalty tax by the IRS. However, if you are an applicable large employer, the HHS appeal process affords you an opportunity to establish an administrative record of the correct facts. In addition, the information you submit as part of the HHS appeal process will likely be the same information and documents that will be necessary to challenge any IRS assessment of a play-or-pay penalty tax.
In some cases, an employer may choose not to appeal. Additionally, in other cases, the individual may have provided incorrect information to the exchange, but not of a type that an employer can appeal. For example, an individual may state that he or she was an employee of the employer, when in fact, he or she was an independent contractor. Employers who opt not to appeal the subsidy determination or for whom an appeal is not appropriate should consider gathering and retaining the necessary documentation showing why the individual was not offered coverage. That way, it will be readily accessible in the event the IRS subsequently seeks to impose the penalty tax.
Additional information on the subsidy notice program for the federally-facilitated exchanges is available here.