As we turn the corner and head towards the end of summer, the annual task of planning a hectic 4th quarter schedule, full of end-of-year duties, W-2s, and yes, once again – ACA 1095-C reporting. This year, more than ever, extra attention should be paid to this task to ensure that any 1095-C issued is complete and correct. The IRS quietly dropped a key good-faith effort penalty relief rule two years ago, and employers are just now starting to understand some of the implications.
As a refresher, employers who are subject to the ACA’s employer mandate must implement one of two methods to identify full-time employees (known as the monthly method and the lookback method, respectively). Then, using that data, they must issue a form 1095-C to the IRS for any employee who was determined to be a full-time employee for at least one calendar month in the tax year. Failure to do can result in late fees, penalties, and interest.
However, in years past, issuing a 1095-C that had errors, but otherwise was filed on time, was allowed to be corrected without penalty. Many employers still struggle with generating correct 1095-Cs (and it is one heck of a form to understand!) and relied on this good faith effort relief to make any necessary corrections after the fact. In most cases, corrections were only made if the IRS found that a potential ACA penalty was owed by the employer, and indeed it was these types of errors that usually resulted in the “false positive” penalty determination.
During the COVID pandemic, the IRS issued a revision to the reporting rules that sunset this good-faith effort relief. The new rule said that starting with the 2021 1095-C returns, incorrect 1095-Cs would now result in penalties and interest if not corrected on a prompt basis (typically within a couple of months of when they were issued). That means employers have had two cycles of 1095-C reporting where this new rule applied (2021 and 2022), but due to the timing of the announcement, many employers were unaware of the change. COVID of course was dominating everyone’s time when the announcement was made, so it is easy to see why it was overlooked.
As the 2023 1095-C reporting season comes into view, employers need to be prepared to be especially diligent in reviewing their 1095-Cs and ensuring they are correct and complete to avoid these penalties. Depending on the year of the error, the fees can be more than $250 per form. Keep in mind that, like W-2s, each 1095-C is two forms – one for the IRS and one for the employee, so each erroneous form could cost up to $500 or more dollars.
As of the date of this writing, I have yet to see any penalties issued for the 2021 filings, but we do expect to start seeing them in Q4 2023. If you do receive a penalty notice for any ACA related item, please reach out to your MMA Midwest team for aid. We will review and recommend potential courses of action based on the type and scope of the penalty, in consultation with our internal and external legal resources. Also reach out if you need aid from a third-party solution to help with your reporting – our HR Technology Team can help by pairing you with the right partner.