Demystifying ACA Reporting: A Comprehensive Guide to Overcoming Common IRS Filing Issues
The Affordable Care Act has been in existence for almost a decade, along with the IRS reporting requirements, and yet HR professionals continue to be overwhelmed with the intricacies surrounding this law and how to remain in compliance.
ACA Reporting Challenges for Large Employers
For many, one of the most common areas that confuse HR professionals is determining whether their organization falls under the definition of an Applicable Large Employer (ALE) and all the reporting requirements that go with it. Let’s break down some of the confusion surrounding ALEs and their reporting requirements.
What Is an Applicable Large Employer (ALE)?
While large employers have the resources to handle their ACA reporting process, many still claim that the regulations around the employer mandate are lengthy, technical, and difficult to navigate.
Therefore, it is incredibly important that HR professionals understand how to determine if their organization is an ALE to comply with the regulations. Failing to do so can lead to costly penalties and fines.
How to Determine If Your Organization Is an ALE
To determine if your organization is an ALE, you’ll need to know your full-time equivalent (FTE) employee count for the previous year. This is based on the number of true designated full-time employees plus the full-time equivalent of variable-hour employees. If your organization has over 50 FTE employees, it is considered an ALE under the ACA.
A full-time employee is defined as any employee who works an average of at least 30 hours per week in each month or 130 hours of service in each month. The full-time equivalent of variable-hour employees is where the complicated math comes into play.
To determine the equivalency of variable-hour employees, the employer must take the number of hours worked for all variable-hour employees in a month and divide it by 120. This sum is then added to the number of the designated full-time employees.
For example, ABC Company has 30 full-time employees. They also have 100 variable-hour employees who each work 80 hours a month.
100 x 80 = 8,000
8,000 / 120 = 66.67
FTE Count = 66.67 + 30 = 96.67 (This makes ABC Company an Applicable Large Employer.)
How to Determine Variable Hour Employees’ Benefit Eligibility
Any business that employs variable-hour employees must track those employees to determine if they are meeting the threshold of a full-time employee under the ACA.
This is done using either the monthly measurement method or the look-back measurement method. Each one has its pros and cons for employers. If the employer fails to track these types of employees, the fines can be steep when an employee falls through the cracks and is not offered affordable health insurance coverage.
Understanding the best measurement method for a business is just the first hurdle. Hours must be tracked and calculations run to determine the employee’s ultimate ACA status.
How to Calculate Benefit Plan Affordability
Changing affordability thresholds year-over-year makes benefit plan forecasting tedious. The regulations provide 3 safe harbors for the affordability of health plans:
Federal Poverty Line
Rate of Pay
W-2 Wages
Each year, a different percentage is used to test for affordability. This means that to ensure affordability under the law, the large employer must review these plans based on the new percentage amount being used that year.
For example, the percentage for 2023 was 9.12%, but in 2024 it will be 8.39%. This can make it complicated for employers to ensure they are meeting the standards for affordability each year. Employers with off-calendar-year plans have an even tougher time calculating affordability to ensure they are maintaining compliance.
How to Know Which 1095-C Matrix Code to Use
The codes on the 1095-C form tell a story to the IRS and it can be difficult for an employer to understand if the correct code is being used and if the right story is being told.
These codes can be found on Lines 14 and 16 of the form. They are called 1 series (Line 14) and 2 series codes (Line 16). The 1 Series can be any of 20 different codes. The 2 Series can be any of 8 different codes.
It can be confusing and frustrating trying to determine what 1 series code goes with what 2 series code. Incorrect code combinations can flag an employer for potential penalties when reporting to the IRS.
How to Respond to an IRS Non-Compliance Penalty Letter
IRS penalties can range from thousands to millions of dollars. The penalty can be for multiple different compliance reasons. Knowing when to respond and how to respond is paramount for any employer.
The unfortunate situation for ALEs is that they are guilty until they prove themselves innocent. The large employer can do everything right and still be hit with a penalty letter and thus need to prove that they followed the appropriate rules. Failure to respond can result in added interest at the least and levy of bank accounts at the worst.
As an HR professional, tasked with more than just ACA compliance, keeping up with the ACA reporting requirements can be a daunting task. This is why many turn to compliance software to help them automate this function. However, finding the right solution can be almost as challenging due to the overwhelming number of options available.
Avoiding Common Issues When Filing Affordable Care Act Information Returns (AIR)
According to the IRS, you are required to file electronically if submitting 10 or more information returns. The following employers can use the AIR System to electronically file ACA information returns to the IRS:
Software developers
ALEs
Insurance Issuers or Carriers
Government Agencies
Professional Employer Organizations and staffing agencies who would submit returns either for their own company and/or for other companies
With even more requirements at play for these types of employers, errors and mistakes are bound to happen. Here is an overview of the most common errors, reported by the IRS:
Employee Social Security Numbers and Names Don’t Match the IRS Database.
From year one of filing to now, the top error being reported by the IRS is that the employee or covered individual’s social security number (SSN) and name do not match the IRS database.
This can be frustrating for many employers as their data is reflective of the name that employees provide for payroll and/or benefits. Something as simple as a period behind an initial can make the difference between a matching and a non-matching record on the IRS’ side. An employee who gets married late in the year is likely to trigger this error due to the database not being up to date in real time.
Luckily, the IRS has always allowed for this to remain an acceptable error provided the employer has done their due diligence in making sure that the SSN provided does belong to the employee in question.
Employer-Provided Data Not Matching the IRS Database.
All employers have a Federal Employer Identification Number (FEIN) issued by the Department of Treasury. The company name attached to this number must match EXACTLY what is in the IRS database. Many times, employers receive an error that the “Business Name” and “Employer EIN” names do not match the IRS database.
This can become very cumbersome for the employer to figure out why it’s not matching. The IRS provides a CP 575 letter after applying for a FEIN. Most companies that are reporting have been in existence for some time and likely will have difficulty putting their hands on this letter. Employers can contact the IRS and request an EIN verification letter by calling 1-800-829-4933.
Knowing What the 1095-C Error Codes Mean and How to Correct Them.
The error messages returned via the IRS AIR program can be difficult to decipher. For example, the error: “If Form 1095 C checkbox 'CoveredIndividualInd' is checked, then at least one instance of 'CoveredIndividualGrp' must have a value.” simply means that Part III of the 1095-C form was checked off but there is no data in that section.
Having a supportive ACA compliance solution can help with resolving errors from the IRS. As it stands, decoding what needs to be corrected and resubmitted can be a daunting task.
IRS Air System Interruptions.
While it’s impossible to avoid unexpected service interruptions in the filing system, it does happen with little to no notice year-over-year. The IRS has yet to have a single reporting year where the system did not get overwhelmed and must be taken offline for unscheduled maintenance.
This causes an interruption in status checks from submissions already made and the ability to send new submissions. This can also cause extreme frustration for both software providers and large employers as filing deadlines must be met or penalties will be levied. One way to avoid this is by preparing for filing season ahead of time by partnering with a comprehensive reporting solution that can take this burden off your hands.
Lag Time Between Processing and Penalty Letters.
The biggest issue is not with the IRS filing system but instead with the IRS penalty process. For years, penalty letters have come out several years in arrears. For example, last year, the IRS began sending out penalty letters for the 2020 reporting year just as the start of the 2022 reporting year was getting underway — and for 2023, the IRS has now moved on to 2021.
Capturing the needed past year’s data to respond to a letter can be a difficult task for any employer. Good record keeping and data storage are a must as there are no statutes of limitations on ACA IRS penalties.
Finding the Right ACA Compliance and Reporting Solution
Back in 2015, the first reporting year for the Patient Protection and Affordable Care Act (PPACA), there were very few solutions on the market. However, that’s no longer the case. Compliance and reporting solutions are not all equal and to find the most compliant one available, you should be wary when comparing these software platforms. When shopping for an ACA compliance and reporting solution, consider the following factors.
The Quality of the Data Determines the Success of the Solution.
Any compliance solution should have data rules in place that notify employers of common-sense mistakes. Many solutions on the market today do not have business rule parameters in place, which can lead to incorrect tracking and reporting.
When it comes time to file, employers can find themselves trying to clean up data that should have been flagged before the worst possible time of the year.
Common Data Errors and Mistakes in ACA Reporting Software
Some examples of common data mistakes that, if not flagged upon import, can cause potential coding issues or IRS penalties include:
Employee names are too long for the IRS forms. The XML filing submitted to the IRS has definitive character lengths. This can lead to reporting errors if these mistakes are not caught ahead of time.
Zip Codes must be 5 digits. Otherwise, the IRS filing will have an error.
Mismatched termination dates. Employee hire dates that come after a termination date.
Mismatched rehire dates. Rehire dates for previously terminated employees are required to accurately track variable-hour employees. Systems that fail to flag this data are likely not tracking rules of parity per the regulations.
Compliance Solutions Must Evolve to Keep Up with Changing ACA Reporting Requirements.
The IRS provides new filing schemas every year, and software platforms must keep up with those requirements. History has shown that many platforms are not keeping up with those changes, and clients experience filing issues at crunch time. Solutions that are up to par should have at least a 95% acceptance rate for IRS filings.
In addition, there are new state filing requirements coming online every year. Many compliance platforms are choosing to stay out of the state filings because of the necessary work to update software to meet the differing requirements for each state. This can leave employers needing additional software just for state filings.
Accurate Tracking Is a Must!
Your software must have accurate tracking, and here’s why:
First, there are two methods for tracking variable-hour employees, but these options are not available in every software platform. Employers should be certain the measurement method needed is available to avoid costly penalties. The regulations do not allow for changing the chosen method except under very strict circumstances.
Secondly, strict adherence to the rules of parity, commonly referred to as the 13-week service break, is essential to ensure that rehired employees aren't penalized in terms of hours of service.
According to this rule, any employee who is terminated but returns to service within 13 weeks must revert to the measurement period they were in at the time of termination — with all previous hours in that period considered for ACA status calculation. Unfortunately, this crucial rule is not implemented in many available software solutions.
Ensure Past Year Filings Are Accessible, Especially If You’re an ALE.
There is a possibility that employers did not realize they had to report or simply chose not to do so. When the IRS comes calling, employers need an outlet to remedy this failure to file. If the software you're using is unable to submit past year reporting files, you could find yourself having to hunt for a temporary and costly solution. By investing in a solution that saves past years’ filings ahead of time, you’re saving yourself from an IRS audit and the potential fines that could follow.
ACA ‘Light’ Reporting Solutions Aren’t the Bargain They Appear to Be.
There are many solutions on the market that fail to meet the full reporting suite mark. These “light” solutions may track and allow employers to input data, but come filing time, they do not apply coding to the 1095-C forms.
Instead, these tools leave it to the employer to choose the codes for Line 14 and Line 16. As mentioned above, the IRS coding tells a story, and an incorrect or incomplete story can mean thousands of dollars in penalties later.
As well, ACA "light" solutions may not be able to track employees and require the employer to track elsewhere before using the system. This leaves a huge burden on the employer, and most times, the need for a second solution that will provide this tracking capability.
ACA reporting is difficult enough for compliance teams, and adding the manual task of inputting data into multiple platforms is inefficient, labor-intensive, and costly. Before investing in a new solution to meet your needs, you should ask questions of the vendor to be certain all their needs can be met. Be sure that the software vendor has subject matter expertise behind the product to avoid the costly mistakes that can occur with all the issues outlined in this blog.
Partner with HRlogics ACA and Clear ACA Reporting Compliance Software
The ACA reporting process has come a long way over the past several years, but there are still issues to resolve. Employers need a source to rely on to help overcome these obstacles. Ensuring that you select a compliance partner that is responsive, reliable, and has subject matter expertise is of huge importance.
The ever-changing world of regulations doesn’t have to be daunting provided you have the resources you need to get the job done, which is where HRlogics ACA and Clear ACA reporting compliance software come in. Contact us to learn how our team of ACA compliance experts can help you overcome your reporting challenges ahead of next year’s filing deadline!