What is ACA reporting?
And how it affects your business
In 2010, President Obama signed the Affordable Care Act (ACA). This law helps millions of Americans obtain healthcare coverage annually. So how does that affect business owners like you? As part of the ACA, the United States government requires businesses to include reporting about the healthcare coverage they offer employees.
This reporting can be complicated, and it’s essential to understand how your business can ensure compliance with the Internal Revenue Service (IRS) requirements for ACA reporting. In this article, we’ll take a look at ACA reporting in greater detail. First, let’s briefly discuss the ACA.
What’s the ACA?
As mentioned, the Affordable Care Act is a law that passed in March 2010. While it's commonly known as the ACA, some have also dubbed it “Obamacare,” after President Barack Obama. According to the U.S. Centers for Medicare & Medicaid Services, the ACA has three goals – making affordable health insurance available to more people, expanding the Medicaid program and supporting medical care methods designed to lower the cost of health care. The goal most relevant to business owners is the first one. That’s because the law provides consumers with tax credit subsidies that can lower costs for certain households. Therefore, the law requires certain businesses called Applicable Large Employers (ALE) to report certain metrics to the IRS. Let’s take a look at how the government defines ALEs.
What’s an applicable large employer?
Much of the ACA reporting process applies to what the IRS calls Applicable Large Employers. These ALEs have at least 50 full-time employees, including full-time equivalent employees. However, how your business categorizes full-time or part-time employees could be different than how the government categorizes eligible employees.
The IRS categorizes full time employees and full-time equivalents as the following:
A full-time employee for any calendar month is an employee who has on average at least 30 hours of service per week during the calendar month, or at least 130 hours of service during the calendar month.
A full-time equivalent employee is a combination of employees, each of whom individually is not a full-time employee, but who, in combination, are equivalent to a full-time employee. An employer determines its number of full-time-equivalent employees for a month in the two steps that follow:
- Combine the number of hours of service of all non-full-time employees for the month but do not include more than 120 hours of service per employee, and
- Divide the total by 120.
If your business is an ALE, it is subject to the employer shared responsibility provisions and the employer information reporting provisions. The employer shared responsibility provisions (sometimes called the ACA employer mandate) state that a company must either offer minimum essential coverage (MEC) to full-time employees or potentially have to make employer shared responsibility payments to the IRS.
The employer information reporting provisions state that employers must send reports to both employees and the IRS. It’s important to note that if your business sponsors self-insured health plan coverage, it still has reporting responsibilities as a provider of MEC. Let’s take a look at the current reporting requirements for ALEs.
What are the current ACA reporting requirements?
While the ACA requirements can differ year over year, there are specific requirements that ALEs must meet. For ACA reporting, the goal is to ensure that employers offer minimum essential coverage to at least 95 percent of employees. If a business isn’t, they are subject to penalties for non-compliance imposed by the IRS.
So how does a business report ACA compliance? Section 6055 and 6056 of the ACA outline what’s required. It comes down to filling out certain forms. You should know and understand the two important reporting forms: IRS Form 1094-C and IRS Form 1095-C.Both of these ACA forms help the IRS monitor the type and cost of coverage offered to employees. Let’s look at the information needed for each of these forms:
This form acts as a cover sheet and represents the total 1095-C filings submitted for the season. It includes:
- Organization identifying information, including name, address and Employer Identification Number (EIN)
- Information about whether the organization offered coverage to at least 95% of its full-time employees and their dependents
- The total number of 1095-Cs issued to employees
- Information about members of the aggregated applicable large employer group, if any
- Full-time employee counts by month
- Total employee counts by month
- Whether an organization is eligible for certain transition relief (including certifications)
This is for Applicable Large Employers who offer group health plans. This form details the employer's offer of coverage to avoid employer mandate penalties. It includes:
- Who’s a full-time employee for each month of the year
- Employee identifying information, including name, address and Social Security number (SSN)
- Employer identifying information, including name, address and Employer Identification Number (EIN)
- Information about the health coverage offered by month, if any
- Employee's share of the monthly premium for lowest-cost, self-only minimum value coverage
- Months the employee was enrolled in coverage
- Months the employer met an affordability safe harbor concerning an employee and whether another relief applies for an employee for a month
- If the employer offers a self-insured plan, information about the covered individual’s enrollment in the plan (including spouses and dependents), by month; this information includes Social Security numbers or, if these numbers aren’t available, date of birth
Besides the proper forms, you’ll also want to know about the affordability threshold. This number represents the maximum amount employers can charge employees for the least expensive, self-only benefits plan. The affordability threshold is represented as a percentage of the employee’s household income. The IRS considers multiple factors before setting the affordability threshold, and it slightly changes each year. For example, in 2020, the affordability threshold was 9.78 percent. For the 2021 tax year, it rose to 9.83 percent. As of this writing, the 2022 tax year affordability threshold is set at 9.61 percent.
Keeping track of this percentage is important for your business because it can determine if your benefits plan pricing is compliant with the ACA. While it’s unlikely that you’ll know your employees’ household income, there are different ways to calculate the affordability of your plans that the IRS approves. These safe harbors utilize employee information the employer already has for each employee. An ALE can calculate using any of the following safe harbors:
- Employees' W-2 wages: Reported in Box 1, generally as of the first day of the plan year.
- Employees' pay rate: The hourly wage rate multiplied by 130 hours per month as of the first day of the plan year or, for salaried employees, 9.61 percent of the monthly salary as of the first day of the 2022 coverage period.
- The federal poverty level (FPL), as published by the Department of Health and Human Services (HHS): Employers can utilize the published FPL rate six months prior to the beginning of the plan year. That means a non-calendar-year plan could have a different affordability threshold if it uses the FPL table that will be published in January 2022
Finally, it’s essential to know the reporting deadlines for ACA reporting. As of this writing, for the 2021 tax year, the following deadlines are in place:
- February 28, 2022 – IRS paper-filing deadline
- March 2, 2022 – Recipients/employees deadline
- March 31, 2022 – Electronic filing deadline
Ensuring that you’re filling out the proper paperwork and submitting it on time should be a key focus of your business. That’s because those who fail to meet the reporting deadlines or compliance with ACA reporting can face costly penalties. Your business could even be subject to different penalties for filing incorrect information and supplying an employee with an incorrect payee statement.
If you’re late or fill out forms incorrectly, the IRS may notify you that your business is liable for a penalty payment. These penalties can be expensive: up to $280 per form for failing to provide an employee with an accurate Form 1095-C or 1095-B. Separately, the IRS may impose a separate $280 per-form penalty for filing an inaccurate form with the IRS. That’s a potential cost of $560 per employee in penalty fees!
These filing penalties are distinct from the ACA penalties in place if a business fails to supply adequate coverage:
- The Section 4980H(a) penalty: issued to ALEs that fail to offer minimum essential coverage to at least 95 percent of their full-time employees and their dependents is $2,750 per employee, or $229.17 a month, for the 2022 tax year. The assessed amount will deduct 30 full-time employees from the total number of full-time employees.
- The Section 4980H(b) penalty: issued per each employee that receives a premium tax credit/subsidy from a state or federal ACA marketplace exchange when the ALE does not offer a coverage option that meets the affordability threshold, is $4,120 per employee or $343.33 a month, for the 2022 tax year.
The IRS sends a Letter 226-J to notify ALEs that they may be liable for an employer shared responsibility payment.
As you can see, these penalty costs add up rather quickly. Now that we’ve talked about ACA reporting requirements in detail, let’s talk about businesses that the government doesn’t consider ALEs.
What if my business is not an ALE?
If you’re a small business with less than 50 employees, there’s a considerable difference in ACA reporting requirements. Self-insured companies need to fill out IRS Form 1095-B (and Form 1094-B transmittal) to report the name, address and Social Security number (or date of birth) of employees and family members who have coverage under the plan. Small businesses that aren’t self-insured don’t need to file anything.
How do I ensure my business meets ACA requirements?
After reading this, you might wonder how your business can be sure it is meeting ACA requirement standards. As you’ve seen, it takes a lot of coordination between multiple facets of your business to ensure you correctly file the necessary paperwork. As a small business, the last thing you want is to pay expensive penalties for not filing the appropriate forms, completing forms incorrectly, or missing deadlines.
One of the biggest steps you can take to ensure accuracy is to check for errors. While this may sound simple, minor mistakes can cost you big money. A common error involves employee names. For example, the IRS requires that employee information on Forms W-2 and Form 1095-C match an employee’s social security card. Therefore, it’s important to double check these. But luckily, you don’t have to do this checking manually. Many automated systems can do this automatically.
Speaking of systems, one of the most valuable systems for your business for ACA reporting is an integrated payroll system. Integrated payroll systems can provide functionality that stretches far beyond an employee's paycheck, with functionality that can include: payroll management, talent acquisition, benefits administration, scheduling and time and attendance, employee onboarding and offboarding, and more. As a reminder, an integrated payroll system condenses payroll and HR functions into one software solution.
Because so many of these elements are necessary to complete ACA reporting paperwork, having an integrated solution can save your small business precious time and money.
In addition to an integrated payroll solution, another possibility is to outsource the entire process. You’ve already seen how outsourcing payroll and HR can make sense for your business. But many companies also offer the ability to handle your ACA reporting as well. So if your business already outsources payroll, check with your payroll service provider to see if they can help with ACA reporting.
In this article, we’ve talked about how the Affordable Care Act can affect your business. From correct reporting to the penalties your business can face if it incorrectly submits forms or fails to comply with all of the ACA reporting requirements. As a small business owner, you have plenty to worry about – consider hiring a partner who can help you manage ACA reporting for your business.
Ready to work with a partner who can help?
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