Posted by Evan Piccirillo, CPA
There will be angry emails; there will be heated telephone discussions. Fingers will be pointed and harsh words will be uttered. I’m not talking about holiday shopping, but rather penalties on the Employer Shared Responsibility Payment (ESRP).
Early this month, the IRS announced that enforcement of the ESRP penalties would begin in late 2017. And so it has begun. As a mandate of the Affordable Care Act (Obamacare), Applicable Large Employers (ALEs) must provide minimum essential health insurance coverage (MEC) for their employees or pay what is essentially a penalty. This is referred to as the “Play or Pay” mandate. There is some nuance to the definitions of ALE, MEC, and everything else having to do with Obamacare, but ALEs are those employers with 50 or more full-time employees (in 2015 that threshold is 100) and MEC is affordable and sufficient health insurance. These are more specifically defined in the related code sections; go have a read.
In addition, reporting of coverage is required on the 1094 and 1095 series of forms. These forms let the employee and the IRS know what coverage was offered and for which months. In the event that the employer does not “Play” in a given month, they must “Pay”.
There are two flavors of ESRP that may apply if: a) minimum essential coverage is not offered to most employees and any employee applies for and receives a premium tax credit to pay for insurance; b) minimum essential coverage is offered to most employees but it is either too expensive or wasn’t of minimum value. The percent of employees defined as “most” increases from 70% to 95% from 2015 to 2017 and the prices and value are indexed each year. Only one of the two types of ESRP can apply to a given month, not both.
The intention of the Play or Pay mandate is to compel employers to become part of the insurance pool, but bad planning and/or unintentional errors can have drastic consequences.
You see, the rub here is that the penalty is calculated based on ALL employees of the company for any month in which at least one employee falls under a situation described in “a” or “b” above. In 2015, the penalties for “a” and “b” are $173 and $260 per month, respectively. In the event that you have, say, 130 full-time equivalent employees and have only one employee that falls under the “a” penalty variety for every month of the year, you may be on the hook for more than $200k. Let that sink in a moment. Two. Hundred. Thousand.
“Yikes. I just received such a notice and I only have 30 days to respond! They are proposing an ESRP of over $100k! This looks really bad. What should I do?”
As the Hitchhiker's Guide advises: Don’t Panic! Forward the notice you received to your accountant or trusted advisor. If you respond within the 30-day window, you can secure an extension of time to digest and fully respond to the information contained in the notice. In absence of a response, the IRS may issue a notice and demand for payment and proceed with their routine methods of collecting that payment. Don’t let that happen.