June 4, 2021

ACA Penalties on the Rise: IRS Issuing Notices for Various Tax Years

The challenging year that was 2020 is now behind us, and many employers are looking to create new opportunities in 2021. However, the Internal Revenue Service (IRS) is looking to take action on Affordable Care Act (ACA) information return reporting for all open tax years, and has begun issuing notices regarding compliance.

ACA reporting requirements apply to applicable large employers (ALEs): employers with 50 or more full-time and full-time-equivalent employees. These employers are required to offer minimum essential coverage (MEC) that is affordable (the cost of coverage does not exceed a certain percentage of the employee’s household income) and provides minimum value (covers at least 60% of the cost of covered services) to at least 95% of their full-time employees and their dependents. The employers must report information to the IRS and provide a statement to employees. In particular, the employers have to file a Form 1095-B or 1095-C for each employee to whom minimum coverage is required, and a transmittal form (Form 1094-B or 1094-C) for the returns filed for the calendar year. The employers also have to furnish to each employee a statement with the information related to the individual.

Letter 5699, Missing Information Return (Form 1094/1095-C)

Letter 5699 is used to make initial contact with an employer that the IRS believes may have been an ALE, and therefore required to file ACA information returns. This letter provides the employer with a reason for the contact, general information about the filing requirements, and choices to explain their filing situation.

Letter 5005-A, Information Return Penalty Notice (Form 1094-C or 1095-C)

Letter 5005-A follows IRS Letter 5699. These penalty notices are issued to ALEs that were required but failed to furnish 1095-C forms to employees, or file Forms 1094-C and 1095-C with the IRS. To determine the penalty assessments, the IRS cross-references the number of W-2s filed by a specific employer for a particular year. Letter 5005-A provides information to the ALE about the penalties and next steps.

ACA penalties can be steep

The penalties for failing to comply with the reporting requirements can be significant. For 2020 Forms 1094-C and 1095-C filed late but within 30 days of the due date, the IRS may impose a penalty of $50 per information return up to a maximum penalty of $565,000. This penalty increases to $110 per return up to a maximum penalty of $1,696,000 between 30 days and August 1, and to $280 per return up to a maximum penalty of $3,392,000 if filed after August 1. These penalties can often apply twice per employee — one penalty per information return for late or incorrect furnishing to the employee, and one penalty per information return for late or incorrect filing with the IRS.

Address any letters or penalty notices from the IRS quickly and thoroughly.

Have you received either the failure to file notice (Letter 5699) or the penalty notice (Letter 5005-A)? Learn more about ACA reporting and compliance with guidance from industry professionals.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.

CLA exists to create opportunities for our clients, our people, and our communities through our industry-focused wealth advisory, outsourcing, audit, tax, and consulting services. Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor.

Jenna Hamilton and Karen Colsch

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