Under the Affordable Care Act’s employer shared responsibility rules, applicable large employers (those with 50 or more full-time and full-time equivalent employees on business days during the preceding calendar year) incur exposure for assessable payments under Internal Revenue Code § 4980H when an applicable premium tax credit or cost-sharing reduction is allowed or paid for one or more low- or moderate-income full-time employees who have been certified to the employer as qualifying for an advance premium tax credit under Code § 36B. The final Code § 4980H regulations refer to this certification as a “Section 1411 Certification,” which is a reference to Act § 1411(a). This provision gives the Department of Health and Human Services (“HHS”) the authority to determine whether individuals are eligible to enroll in qualified health plans through a public exchange and whether they are eligible for a premium tax credit.

While not perhaps immediately apparent, there are really two related though different reasons for making advance premium tax credit determinations:

  • Code § 36B

The purpose is to determine eligibility for advance payments of the premium tax credit and cost-sharing reductions. The question is whether an individual is eligible for an advance premium tax credit under Code § 36B.

  • Code § 4980H

The purpose is to determine whether an applicable large employer is subject to an assessable payment under Code § 4980H.

Act § 1411(f)(1) directs HHS (in consultation with other departments) to provide an appeals process relating to eligibility for advance payments of the premium tax credit and cost-sharing reductions under Code § 36B. Act § 1411(f)(2) provides for a “separate appeals process for employers who are notified . . . that [they] may be liable for a tax imposed by” Code § 4980H. This post deals with the latter determination—i.e., whether an applicable large employer is subject to an assessable payment under Code § 4980H.

Applicable large employers may be liable for assessable payments under Code § 4980H. This determination is generally made by a controlled group member (or “applicable large employer member.” The preamble to the proposed §4980H regulations provides that an assessable payment will be—

“[P]ayable upon notice and demand and is assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68 of the Code.” (78 Fed. Reg. p. 235, Jan. 2, 2013).

The IRS will determine the penalty amount (if any) of each applicable large employer member based on information provided under the Code § 6056 reporting rules.

In connection with the process of assessing and paying the excise tax imposed by Code § 4980H, the IRS plans to adopt procedures that ensure employers receive certification that one or more employees have received a premium tax credit. According to an IRS Q&A on the subject:

“The IRS will contact employers to inform them of their potential liability and provide them an opportunity to respond before any liability is assessed or notice and demand for payment is made. The contact for a given calendar year will not occur until after the due date for employees to file individual tax returns for that year claiming premium tax credits and after the due date for applicable large employers to file the information returns identifying their full-time employees and describing the coverage that was offered (if any).” (Emphasis added).

The reference to “an opportunity to respond’ refers to the second level of appeal cited above, i.e., the level of appeal that is related to Code § 4980H, and not the appeal relating to Code § 36B.

NOTE: Public exchanges may send the employer notices on an employee-by-employee basis as eligibility determinations are made, or they may send notices for groups of employees. For 2015, the HHS intends to issue employer notices in batches, beginning in spring 2015. See 78 Fed. Reg. 54,113 (Aug. 30, 2013).

Some employers may get hundreds, even thousands, of Section 1411 Certifications, many of which may relate to variable hour employees who have not yet reached (and may not ever reach) full-time status. In these cases, since the employee’s full-time status is not relevant to eligibility, the employer would have no basis for appealing the certification at the time it is made. While the reporting rules are designed to recognize these employees for purposes of the assessable payment calculations, the process may not work perfectly. Thankfully, an employer may wait until the IRS contacts them to inform them of their potential liability to explain why a tax is not owed with respect to one or more employees. Thus, an employer may—but is not obligated—to appeal each and every Section 1411 Certification as it is received. Or, to put it another way, the employer is not prejudiced for failing to engage in the initial appeals process under Code § 36B.