Editor’s note: This post provides a full analysis of two Affordable Care Act IRS reporting regulations that were discussed in abbreviated fashion in an earlier post.
On September 5, 2013, the Internal Revenue Service issued proposed rules intended to implement key reporting requirements of the Affordable Care Act. One rule would require insurers, self-insured employers, government-sponsored programs, and entities that provide minimum essential coverage to report information on this coverage to the IRS and to covered individuals. This rule will be referred to as the “6055 Rule” and implements section 6055 of the Internal Revenue Code, created by section 1502 of the ACA.
The second rule would require large employers to report to the IRS and to their employees information regarding the health care coverage they offer to full-time employees. This rule will be referred to as the “6056 Rule” because it implements section IRC Section 6056, created by ACA section 1514.
The IRS also issued a press release describing the proposed rules.
The purposes of the reporting requirements. These reporting requirements serve distinct purposes under the ACA. The 6056 large-employer reporting requirement is necessary to determine whether large employers are complying with the employer responsibility requirement of the ACA; it will also help identify individuals who are ineligible for premium tax credits because they have been offered coverage by their employer, as well as individuals who meet the individual responsibility requirement because they have employee coverage. The 6055 minimum-essential-coverage reporting requirement will assist the IRS in determining whether individuals are complying with the ACA’s individual responsibility requirement, and also whether they are eligible for premium tax credits because they lack minimum essential coverage.
The absence of these rules was the reason given by the IRS for delaying the employer mandate until 2015. The IRS is encouraging voluntary reporting by employers and insurers subject to the requirements for 2014 and should have no trouble getting the final rules in place for mandatory reporting in 2015.
The ACA requires individuals to maintain “minimum essential coverage” or pay an individual-responsibility penalty, unless the individual is exempt from the requirement. It also permits individuals who lack minimum essential coverage to qualify for premium tax credits if they meet other requirements (the most important of which is that their income falls between 100 percent and 400 percent of the federal poverty level). To implement these two requirements, it is important to determine whether individuals have minimum essential coverage.
The 6055 rule. The proposed 6055 rule would require most entities that provide minimum essential coverage to report annually to the IRS and to covered individuals certain information regarding that coverage. Covered entities that must report include insurers, self-insured employer groups, self-insured group plans, government-sponsored programs (including Tricare, Medicaid, and CHIP), and other entities that provide minimum essential coverage, such as Medicare Advantage plans or — prior to December 31, 2014 — self-funded student health plans and state high risk pools.
To reduce their reporting burden, insurers are not required to report information on individuals enrolled in qualified health plans through the exchanges, since this information will be provided to the IRS by the exchange. They must, however, report on enrollment through the SHOP exchange, as the exchanges will not report SHOP information to the IRS. Insured employers are not required to report under 6055 (although large employers may be required to report under 6056) because their insurer will file the report. Self-insured small employers will have to report under 6055 (though not under 6056); this is one of the few extra requirements imposed on self-insured small employers, who under the ACA are often free from requirements imposed on insured small employers, such as covering the essential health benefits.
The joint board of trustees will be responsible for reporting for a self-insured multiemployer (Taft-Hartley) plan. Each employer that participates in a multiple employer welfare arrangements (MEWAs) will be responsible for reporting on its own employees, as will affiliated employers, but one member of the group may assist others in reporting. Governmental employers, such as state and local government agencies, may delegate responsibility for reporting to a related governmental agency if that agency accepts the responsibility. For example, state agencies could delegate responsibility to the agency responsible for state personnel management. States must report on Medicaid and CHIP coverage.
Self-insured large employer plans will have to report under both 6055 and 6056. But the proposed regulations suggest that the IRS may allow the use of substitute forms and statements by entities that will have to report under both 6055 and 6056 requirements, and the IRS is considering whether this information could be provided on a W-2 (see below)
The requirement that state and local government employers report to the IRS and to their employees minimum essential coverage may further aggravate tensions between the federal government and states that have adopted statutes or constitutional amendments rejecting the individual responsibility requirement of the ACA. The constitutional authority of the federal government to impose requirements on state and local government employers is clear, however, and state laws to the contrary will have to yield to the Supremacy Clause.
Entities subject to the 6055 reporting requirement must include in the report the name of each individual with minimum essential coverage and the name and address of the responsible person (for example, an employee spouse or parent) who has submitted the application for coverage. The report must also include the taxpayer identification number (TIN) for each covered individual and the months for which each individual was covered. The proposed rule does not require reporting of information not needed by the IRS for administering the individual responsibility requirement or premium tax credits, such as the specific dates of coverage (since only months of coverage are relevant) or the portion of the premium covered by the employer. The report must go to the IRS and to each individual who has minimum essential coverage from the entity.
Insurers and self-insured employers have objected that they do not have the TINs of the dependents of covered individuals. The IRS needs the TINs of covered dependents to verify the existence of minimum essential coverage, and therefore requires the reporting of this information. Penalties for failure to report, however, will be waived if the reporting entity makes an initial attempt to collect the information (for example, at enrollment) and two subsequent annual TIN solicitations. The reporting entity can instead report a birth date if reasonable efforts fail to obtain the TIN. Entities need only report the last known address for the responsible individual.
Since an individual who has coverage for any day of a month is considered to have minimum essential coverage for the entire month, it is only necessary for reporting entities to report months of coverage, not the specific dates of coverage. Reporting must be based on a calendar year, as that is the relevant period of time that taxpayers need information on for filing their returns. Employers and insurers are not required to report on health savings accounts or health reimbursement arrangements that supplement insured high-deductible health plans that are themselves minimum essential coverage.
The return under section 6055 will be made on a yet-to-be-designed form 1095-B. The return must be filed by February 28 of the year following the calendar year in which the minimum essential coverage was provided. Any reporting entity may file electronically, and must do so by March 31. Statements must be provided to covered persons by January 31. Statements may be provided electronically to individuals if the individual consents. Only one statement need be provided per address. Statements sent to individuals may include a truncated TIN. Normal IRS rules apply for correcting errors and for relief from penalties for errors that are timely corrected.
The 6056 rule. The 6056 proposed rule requires applicable large employers, as defined in the employer-responsibility proposed regulation (employers that employed an average of at least 50 full-time and full-time equivalent), to file a return with the IRS and to send a statement to each full-time employee providing certain information. Full-time employees are defined as they will be under the employer responsibility provisions.
The proposed rule confusingly refers to an employer that must file the return as an “ALE member.” This is because the ACA treats aggregated employer groups (such as parents or subsidiaries) as single employers for purposes of determining large-employer status under the employer responsibility requirement, but the proposed 6056 rule treats each member of an aggregated group as a separate employer for the filing requirement. An ALE member may be a part of such a group, but a single employer—not affiliated with other employers—is also identified in the rule as an ALE member, even though it is only a member of itself. Each ALE member that has full-time employees must file a return and must provide coverage statements to its full-time employees. ALE members may, however, obtain assistance from a third party, including an associated ALE member, in filing a return.
The proposed rule provides a “general method” of reporting and then requests comments on simplified alternatives. The general method is available to all employers for reporting for all employees. Simplified methods, if they are adopted, will be optional. As with W-2s, the proposed regulations would require a separate return for each employee (using a yet-to-be designed form 1095-C) which would be filed with the IRS accompanied by a single transmittal form (1094-C). Filers may also use a substitute form if it complies with IRS guidance and includes all the information included in the 1095-C.
Under the proposed rule, an ALE member must report:
- the name, address, and employer identification number of the ALE member, the name and telephone number of a contact person, and the calendar reporting year;
- a certification as to whether the ALE member offered its full-time employees and their dependents the opportunity to enroll in minimum essential coverage by calendar month;
- the number of full-time employees for each month in the calendar year
- for each full-time employee, the months for which coverage was made available;
- For each full-time employee, the employee’s share of the lowest-cost monthly premium (self-only) for coverage providing minimum value under an eligible employer-sponsored plan, by calendar month; and the name, address, and TIN for each full-time employee and the months, if any, for which the employee was covered under an employer-sponsored plan.
Some of this information will be collected using indicator codes on the return, to minimize as much as possible the need for detailed and specific information. Indicator codes will also be used to collect information about the reporting entity, such as whether or not it was conducting business in particular months of the year, expects to be in business the next year, is part of an aggregated group, is reporting on behalf of a governmental unit or agency, or is a member or administrator of a multiemployer plan. Certain information about employees will also be collected using indicator codes, including justification for not offering coverage to a full-time employee, coverage offered to persons who are not full-time employees, or employees with respect to whom the ALE member was protected by an affordability safe harbor.
Under the proposed rule, ALE members must also provide statements to each full-time employee including the information shown on the 6056 return relevant to that employee. The IRS is considering whether this information could be provided under certain circumstances on a W-2. Employers may also provide this information on a substitute statement if it meets IRS requirements.
Employee statements must be provided by January 31. 6056 returns must be filed with the IRS by February 28, March 31 if filed electronically. ALE members may file electronically, and ALE members filing 250 or more returns must do so. ALE members may also furnish statements to employees electronically if certain notice, consent, and hardware and software requirements are met. Reporting is not required before 2016 for 2015, but earlier voluntary compliance is encouraged.
In an attempt to lessen the burden on employers, the proposed regulations do not require the reporting of four data elements that are listed in the statute but are not relevant to the employer responsibility or individual responsibility provisions of the ACA or the determination of eligibility for premium tax credits:
- the length of any waiting period, although the employer will need to indicate when an employee’s coverage was not effective because of a waiting period;
- the employer’s share of the total cost of benefits, other than an indication that the employer provided minimum value;
- the lowest-cost option in categories other than self-only coverage; or
- the months for which an employee’s dependents were covered under the plan, which will be reported on the 6055 report.
Only the cost of self-only rather than family coverage needs to be reported since affordability is under the IRS rules determined based on self-only coverage. This means, however, that it will be difficult to detect if employers are reducing employer contributions for family coverage and increasing contributions for self-only coverage to avoid penalties, thus making family coverage less affordable. Since employers need only report the fact of minimum (60 percent actuarial value) coverage, and not the value of coverage, it will also not be possible to tell whether employers are cutting coverage to the bare minimum or not.
Possible simplified reporting options. The IRS is considering allowing combined reporting under sections 6055 and 6056, as well as under section 6051, which requires employers to report to their employees the aggregate cost of coverage. The IRS is also considering various combined reporting options, including reporting of 6056 information on the W-2, on the employer Fair Labor Standards Act section 18B employer notice, or through the HHS employer coverage tool, but different reporting requirements apply to different entities, require different information, and come due at different times, so combining them is a challenge.
The proposed rule preamble discusses a number of simplified reporting options, some of which look promising and others of which do not. In some instances, simplified reporting could be used for some employees and not for others. One option, already mentioned, would allow employers to report with respect to employees who were employed for the entire year whether the employer was offered coverage and, if so, the amount of the employee contribution for the lowest cost minimum value plan self-only coverage and to whom, in addition to the employee (spouse, dependents), coverage was offered.
The IRS is also considering allowing simplified reporting for coverage where the required monthly contribution is below a certain threshold. If an employee, for example were required to contribute less than 9.5 percent of the poverty level to pay for coverage (about $800 a year), coverage would always be affordable if the employee was otherwise eligible for premium tax credit and the employee would either be able to afford coverage, and thus be subject to the individual mandate, or otherwise be eligible for a hardship exemption without needing 6056 report information. The IRS is unlikely to allow W-2 reporting for partial-year coverage because it would not provide enough information to explain why the employee lacked coverage in non-covered months, which might be relevant to the application of the individual responsibility penalties.
Under another simplified method of reporting, employers would be excused from determining whether or not employees were full-time employees if the employer offered minimum coverage to all potentially-full time employees. If an employee claimed a premium tax credit, the employer could be asked to verify whether the employee was full-time. Under yet another alternative, self-insured employers that offered all of their employees no-cost, minimum-value, coverage, would only be required to report under section 6055 and not 6056.
Other options the IRS seems less open to include allowing employers to report coverage information earlier in the coverage year (since information may change by tax-filing time) or forgoing reporting for high-income employees (because the employer cannot know total modified adjusted gross family income, on the basis of which premium tax credits are determined). If simplified reporting methods are adopted, employers will be permitted to use different methods for different employees, as appropriate.
As with 6055 reporting, governmental agencies will be allowed under the proposed rule to designate other government agencies to report for them, if the designation is accepted. Special reporting rules apply with respect to multiemployer plans. ALE members may contract with third parties to file 6056 reports, but remain liable for failure to report. Employers who fail to file 6056 reports are subject to the general reporting penalty provisions of the Internal Revenue Code.
Other news. On September 4, 2013, the Department of Labor, Employee Benefits Service Administration (EBSA) issued two frequently asked questions. The first FAQ clarified that employers may use third-party entities — such as insurers, multiemployer plans, or third party administrations — to provide their employees with the Fair Labor Standards Act section 18B notice of coverage options available through the exchange, as long as all employees receive the notice and not just those who are insured. The second FAQ clarified that that group health plans and insurers may rely on guidance provided in the proposed rules on employer responsibility for determining compliance with the prohibition against waiting periods exceeding 90 days. Under the proposed rules, employees who have met substantive eligibility requirements that are not based solely on a lapse of time may not be required to wait longer than 90 days thereafter before eligibility begins.