Can IRS Assess ACA Penalties Forever?

By Ramesh Raghunathan, PhD, Chief Operating Officer

The Short Answer

The Office of Chief Counsel  at the Internal Revenue Service (IRS) recently released a Memorandum that states that the ACA Employer Shared Responsibility Payment (ESRP) imposed by section 4980H of the Internal Revenue Code is not limited by any statute of limitations, and that it could potentially assess these payments indefinitely upon a failure to comply.

ACA Penalty Basics

Applicable Large Employers (ALE) must offer health insurance that is affordable and provides minimum value to 95% of their full-time employees (FTE) and their children up to the end of the month in which they turn age 26, or be subject to penalties.  The graphic below summarizes the coverage requirements and the penalties that apply if any full-time employee purchases coverage on the Marketplace and receives a federal premium subsidy or Premium Tax Credit (PTC).

Why No Statute of Limitations?

The IRS Memorandum that was released on 02/21/2020 states that there is no applicable statute of limitations on assessment because there is no tax return filed to report an employer’s liability for the ESRP.  IRC Section 6501 Limitations on assessment and collection indicates that the amount of any tax shall generally be assessed within three years after the return was filed. Accordingly, if an employer is required to make a return and reports on that return a liability for the payment under section 4980H, the general period of limitations under Section 6501 will apply.

The Supreme Court test (“Beard Test”) to determine whether a document is sufficient for statute of limitations purposes has several elements, the first of which is that there must be sufficient data to calculate tax liability. Generally, an ALE will not know whether FTEs are eligible for the tax credit, and therefore, it will not know whether it has a potential liability under section 4980H at the time it files Forms 1094-C and 1095-C. Thus, the filing of those information returns is insufficient to satisfy the Beard Test and would not start the statute of limitations for assessment of a payment owed under section 4980H.

So, What Should the Employers Do?

While this Memorandum has not been tested in court, it sets out the position of the IRS that employers may be on the hook indefinitely.  In light of this, employers should consider taking the following steps:

• Reevaluate your ACA compliance plan and make sure you are truly in compliance with the law
• Ensure compliance with the Employer Mandate for prior years – filing late is better than not filing at all
• Retain all ACA related records (e.g., eligibility calculations, affordability, offer of coverage, etc.) starting with the 2015 tax year, indefinitely
• Review each year’s Form 1094-C and institute a process to ensure that IRS communications sent to the contact person identified in the form reaches the appropriate individuals
• Reevaluate the process to respond to IRS communications such as Letter 226J in a timely manner

CXC Solutions offers industry leading ACA reporting services that have been thoroughly vetted by employee benefits attorneys and have been used to generate over 2 million 1095 forms to date. If you need help with evaluating your current ACA strategy in order to make sure it meets the stringent IRS regulations, please contact us at info@cxcsolutions.com.