July 8, 2016
By HELEN KARAKOUDAS, CHRS | Director, ACA Insights
A flood of Affordable Care Act subsidy notices has hit the mailstream. These letters were dated June 21, 2016. Similar letters had been trickling out from a few state exchanges – and were creating some concern, but not widespread anxiety.
The backlog of subsidy notifications now landing from HealthCare.gov and from all the other state exchanges is a different story.
Employers are crying out, “Oh, no! We have a letter from the government. We have to act ASAP!” after reading that their organization has 90 days from the date of the notice to request an appeal.
Chill out: Doing nothing may be the right answer
Every one of these letters is a mechanical alert about a possible penalty trigger – an alert set in motion by one-sided, unverified information. In each of these notifications, the Department of Health and Human Services (HHS) is telling you which employees got a subsidy for a health plan they enrolled in through an exchange.
You’re getting the letter because, by law, an exchange has to notify you when someone who might have been eligible for coverage through their place of employment instead got subsidized coverage through the marketplace alternative.
A letter mechanically coming from an exchange is part of an early warning system. Its purpose is to vet whether the employee who got the subsidy can keep the subsidy. How such a notice resonates with an employer depends on the organization’s “pay” or “play” strategy.
The first thing an employer must do when receiving one of these notices is determine how much staff time will be devoted to responding.
What to consider before responding full-throttle
Filing an appeal is optional.
Responding is going to be time-consuming. The best course of action, in many cases, is to do nothing. Here’s why:
If you had adopted a Pay strategy and either did not offer coverage or offered coverage that was not ACA-compliant, you now know that you will be in the penalty phase for the calendar year listed on the notice. This means that:
- If you are offering coverage but that plan is substandard or does not meet the affordability test, you now have the piece of information you were missing when you chose the strategy to pay the lesser of the two coverage penalties: How many employees would go on the exchange and get a subsidy when they enrolled in a plan? With every subsidy notice that lands, your answer is getting clearer. Take the number of subsidy notices you have for eligible employees in 2016 (for example), multiply that number by $270 per month, and the light switch has just gone on for what the IRS may eventually be notifying you about.
- If you are offering no coverage to anyone – having chosen to pay the larger of the two coverage penalties – then, because of a notice about a subsidy given in 2016 (for example), you can expect that the IRS eventually will be looking for $180 per month per every employee who was eligible in 2016 and did not get an offer (not just those for whom you received subsidy notices).
- You should wait for the IRS to send you a penalty notice. Responding to the subsidy notices would mean nothing – you did not offer the right coverage, so there is nothing to appeal. Even if the employee was part-time and not eligible for coverage, they were likely eligible for the subsidy.
If you are in compliance with the coverage mandate of the ACA, you will not be facing an IRS penalty regardless of the marketplace determination of an employee’s eligibility for a subsidy.
- Subsidies are based on an individual’s modified adjusted gross income, as filed on the employee’s annual tax return.
- An employer is obligated to provide affordable health coverage based on the safe harbor used to determine affordability.
- You offered coverage to eligible employees that met the standard for minimum value and which was affordable. Crunching of the 1095 data by the IRS – which has yet to happen – will eventually show that.
The subsidy appeals process can drag on.
- You have 90 days from the date of the notice to file an appeal.
- It takes another 90 days for your filing to be reviewed.
- If what you filed leads to a decision that the employee can keep their subsidy, you have no further recourse about the subsidy – but that does not necessarily mean you are subject to a penalty.
- If what you filed leads to the employee being notified that they will lose their subsidy, the employee has 30 days to enter their own appeal directly to HHS.
- Review of the employee’s appeal by HHS takes another 90 days, during which you may be asked for more information.
- The final decision can take as long as 10 months.
A finding in the subsidy appeals process is limited.
- The IRS is under no obligation to accept any of the findings in a subsidy appeal. A subsidy notice will tell you that “… filing an appeal won’t necessarily affect whether you have to pay an employer shared responsibility payment to the IRS, because the IRS will determine independently whether you have to pay.”
- From the Affordable Care Act Information Returns (AIR) processing of data from the exchanges, insurers, employers’ 1095-C forms, and employees’ individual tax returns, the IRS will assess ACA compliance penalties. “Only the IRS, not the Marketplace, can determine whether this employer will owe an employer shared responsibility payment,” a subsidy notice says.
There are gaps in the already-convoluted notification and appeals process.
- Subsidy notices are sent to the address the employee entered when applying for coverage on the exchange – not the address on file for the organization’s EIN.
- If the employee received coverage through a state-run exchange, the appeals process may vary depending on the state.
- Some state-run exchange have opted to have the federal marketplace manage their notifications and appeals.
- Federally run exchanges will likely be generating the most subsidy notices.
Chasing ghosts is what larger employers and those with a high turnover can easily find themselves doing in trying to respond to each notice. That’s because every notice is about an employee keeping a subsidy – not about the employer’s entire compliance effort. Subsidy notices do not factor in:
- The number of exemptions – 80 for Calendar Year 2015 – that an employer has for the heavier of the two coverage penalties (the penalty for offering no coverage).
- That for Calendar Year 2015, offers had to be made to 70% of the employees eligible for coverage.
- The non-assessment period that part-time employees go through when their eligibility is tested using the look-back measurement method.
An example of how you can get a subsidy notice when you were, in fact, in compliance with the coverage mandate:
- A newly hired variable-hour employee is in a non-assessment period while they are going through their initial measurement period. During this time, they enroll in a plan on an exchange and get a subsidy for it. The employer will not be subject to a coverage penalty because the law allows a non-assessment period for testing.
- The IRS will match this individual’s subsidy for each month with the employer’s Form 1095-C submission stating that the employer was in a non-assessment period with respect to having to offer the employee coverage. No penalty will be in place, but you would have gotten a subsidy notice.
If you had a Play strategy, other points to review before acting
As you sort through these notices, it’s critical to weigh:
- your degree of confidence in determining eligibility for health coverage
- your promptness in offering a compliant health plan once eligibility was determined
- your recordkeeping for what was offered and when
- the size of your workforce
- your turnover rate
Some software vendors are including the appeals process for subsidy notices as part of their offering – for a fee. With this being the first year for such data management, it may be difficult for some to execute on this.
If you worked with a vendor that offered full eligibility tracking and determination, you should have the records to show when an employee did not meet the eligibility requirement or was in a non-assessment period.
If you worked with a vendor that offered just form-generation services, you will not have all the records needed. Remember, 1095-C forms were required only for eligible employees. You likely will be missing records that would show which employees were part-time and thereby not eligible for coverage.
Subsidy notices do include this sentence:
“Remember, it’s a violation of the Fair Labor Standards Act to discriminate against any employee because he or she received APTC or CSRs.”
Once you get past the acronyms – which refer to the two types of subsidies that an employee can get on an exchange (Advanced Premium Tax Credit and Cost-Sharing Reductions) – it’s important to be aware of what this is saying about an employer’s legal exposure because of subsidy notices.
Because of a whistleblower provision in the ACA, an employee who loses their job or any aspect of their job could claim that loss was retaliation for the employer receiving a subsidy notice with their name on it.
- The burden of proof would fall on the employer to show that the subsidy notice did not cause discrimination on the job.
- This risk surfaces whether an appeal is filed or not.
Keep the ACA form-processing timeline in mind
The reality is that no employer has, as of yet, been assessed a coverage penalty by the IRS.
Penalty notices – the letters that will require your full attention – are most likely to start landing after the IRS does its final data crunching sometime in late fall.
Only IRS notices will bring clarity to how coverage penalties will be enforced. They will have their own appeals process. And that process will be worth every employer’s time to address.
A version of this article first appeared on LinkedIn Pulse.