3 Common ACA Compliance Missteps HR Practitioners Need to Know to Sidestep IRS Penalties and Stay Ahead of the Game
By: Kelli Smith, Director of ACA Services at Selerix
As the IRS has become savvier about Affordable Care Act (ACA) requirements, agency penalties for non-compliance are becoming more common. These penalties often center on violations of requirements around the minimum value and minimum essential coverage that employers must offer employees, such as the requirements listed in this recent SHRM article.
This can be a frightening prospect for HR teams that may be struggling just to learn and understand the new regulations. To help ensure full compliance and avoid penalties, HR practitioners should know the common pitfalls of ACA reporting, so they can sidestep them and, at the same time, use this knowledge to gain an understanding of ACA compliance processes overall.
Let’s take a look at the three most common mistakes employers make regarding their ACA compliance. If you’re struggling with any of these heading into 2023, I’d love to talk more with you!
1. Failure to Keep Accurate Records
Proper record-keeping is essential when it comes to ACA compliance. To accurately report on Form 1095-C, the IRS requires employers to keep detailed records of employee hours and wages, as well as any health insurance coverage they offer. Failing to keep accurate records can lead to costly fines and penalties. To avoid this, employers should begin tracking data as soon as possible and keep meticulous records throughout the year.
Here’s a hypothetical, but common, story we hear.
Jones Inc. is a medium-sized family business located in the midwestern U.S. that manufactures automotive parts. When ACA compliance regulations began taking effect, Jones Inc. was diligent in tracking employee hours and wages, as well as any health insurance coverage it offered its workers. However, the company failed to consider ACA requirements that cover part-time employees.
Jones Inc.’s ACA compliance problems first came to light when one of its part-time employees filed a complaint with the IRS, alleging Jones Inc. had not offered them access to employer-sponsored health insurance. The employee said the company had failed to consider the ACA proviso that requires employers who have 50 or more full-time employees (or equivalent) to offer these benefits. Although Jones Inc.’s workforce consisted of 40 full-time employees and 10 part-time employees — each of whom worked an average of 30 hours a week — it was still subject to the ACA minimum threshold and should have been offering health coverage to all of those employees.
A subsequent audit by the IRS revealed that Jones Inc. had not maintained accurate records for ACA compliance for its part-time staff. It was hit with hefty fines and penalties for not providing those employees with benefits. To make matters worse, the company had also failed to provide any employees with Form 1095-C; this form is used by individuals to determine if they’re eligible for tax subsidies for health insurance they buy in the federal government’s Marketplace. Eligibility for subsidies is based on an individual’s household income, employer size, and other factors.
Due to its lack of adequate record-keeping related to ACA compliance standards and policies, Jones Inc’s failure cost them dearly in terms of time, resources, legal fees, and additional fines imposed by the IRS as a result of the company’s noncompliance. As a result of this ordeal, Jones Inc. has since hired a dedicated ACA specialist. This person is responsible for ensuring accurate tracking of employee hours and wages, as well as tracking any health insurance coverage the company offers. The hope is that this will avoid similar problems in the future. Which leads to the next important issue.
2. Misclassification of Employees
Misclassifying employees as independent contractors is one of the most common mistakes made by employers — and one of the most heavily penalized. Misclassifying an employee potentially has two costly consequences. First, it puts you at risk of stiff fines from the IRS. Second, it has the potential for other legal consequences if the IRS finds that workers are denied benefits or job protections that they would otherwise have been legally entitled to. To ensure proper classification, employers must evaluate their workforce on a regular basis and consult with legal counsel when there is any doubt about a worker’s status.
As I mentioned above, ACA regulations require companies with 50 or more full-time employees (or equivalent) to offer health coverage that meets ACA standards. This means employers don’t merely need to accurately track employee hours and wages, but that they also must correctly classify employees so they’re eligible for the health plans the company offers.
It’s important to note that misclassifying employees doesn’t just violate ACA regulations. Misclassifying workers can also lead to costly fines from agencies like the IRS or Department of Labor for failing to comply with ACA requirements.
The best way for businesses to avoid these problems is by taking proactive steps toward ACA compliance in all areas — including properly classifying their workers — and staying up to date on any changes in regulations or laws related to employee classification. This way, companies can consistently remain compliant.
3. Failure to Provide Proper Notices
Companies are required by applicable law to provide employees with certain notices each year that inform them of their rights and the employer’s responsibilities with respect to the company’s health plan(s). The ACA requires Summary of Benefits Coverage (SBC) be provided to employees and participants explaining benefits offered under the plan(s) at initial enrollment, special enrollment, and annually (OE).
In addition, there are other non-annual notification requirements that employers must provide. Among them include the ACA Exchange Notice and Initial General COBRA Notice which are provided to newly hired or newly benefit-eligible employees. Here are some more of the details:
Exchange Notice Regarding Availability of Health Insurance Marketplace, due within 14 days of hire: The Affordable Care Act (ACA) requires employers to provide the Marketplace (Exchange) Notice to all new hires. This notice provides information on the health insurance options available on the Marketplace as well as the impact of enrolling in the Exchange rather than any available employer-sponsored plans. This notice must be provided within the first 14 days of employment.
Summary of Benefits and Coverage (SBC), due at initial enrollment, special enrollment, and annually (Open Enrollment): The Affordable Care Act (ACA) requires health plans and health insurance carriers to provide an SBC to employees and participants explaining the benefits offered under the plan. The SBC should be included with plan application materials during open enrollment. If coverage automatically renews for participants, the SBC must be provided no later than 30 days prior to the start of the new plan year. You must provide the SBC within 90 days of enrollment for special enrollees. The SBC must be provided 60 days in advance of any mid-year change to the plan.
Initial COBRA Notice, due within 90 days of enrollment in a COBRA-eligible plan: Employers with 20 or more employees who are subject to COBRA and who sponsor group health plans must provide an initial COBRA notice to new participants and their covered dependents within 90 days after commencement of coverage under the plan. This notice is required to be distributed to both employees as well as dependents who enroll in COBRA-eligible plans.
Failing to provide these notices can result in significant fines and penalties from the government. HR teams should make sure notice requirements are met each year, and that includes sending notices before the mandated deadlines.
This can be challenging for companies with high turnover rates or that depend on seasonal workers; these companies may not have enough time to get the ACA notices properly completed and distributed.
Not only does accurate and timely notification help companies avoid IRS fines, but it also helps employers demonstrate their commitment to compliance and create a healthier work environment for everyone involved.
It’s important for employers to stay up to date on any changes in ACA regulations or laws so they can keep their people informed. Additionally, organizations should have clear policies regarding ACA compliance and offer regular training sessions for managers and HR representatives. This way, everyone is aware of their responsibilities when it comes to notification and other ACA requirements.
Stay Up to Date!
Staying up to date on all ACA compliance requirements can be challenging for HR teams that might not have experience with these types of regulations. However, by avoiding common pitfalls such as the three discussed here, employers can ensure full compliance with government regulations, and at the same time gain valuable insight into how ACA reporting works. Doing so will protect businesses from costly fines and penalties — while helping employees access the benefits they need and deserve!
Kelli Smith is the Director of ACA Services at Selerix, an industry-leading provider of benefits administration solutions, employee engagement, and ACA services for employers, brokers, and carriers.