Information Reporting Provisions of AHCA Unchanged from Earlier Bill

Yesterday, the House of Representatives narrowly passed the American Health Care Act (AHCA) on a near party-line vote, 217-213.  The legislation would repeal many provisions of the Affordable Care Act (ACA) but would retain and expand many of the ACA’s information reporting requirements.  After the House failed to pass the AHCA in late March, Republicans have worked to secure additional support for the legislation.

Although Republicans made changes to the legislation to enable it to pass the House, those changes do not substantively effect the information reporting provisions, including the new health insurance coverage credit reporting under section 6050X beginning in 2020, Form W-2 reporting of employer offers of coverage beginning in 2020, and the additional reporting required by providers of minimal essential coverage under Code section 6055.  (See earlier coverage here.)

The legislation faces an uncertain future in the Senate, where budget reconciliation rules and tepid support from some Republicans may make it difficult to secure passage.

House Republicans Pull ACA Replacement Bill

Facing likely defeat, Republicans have pulled the American Health Care Act, which would have made numerous changes to the information reporting provisions and employment tax provisions of the Affordable Care Act (ACA) (earlier coverage).   The legislation would have also created a new information reporting requirement by adding Section 6050X to the Code.  The House was scheduled to vote on the legislation this afternoon, but Republicans have struggled to appease both conservative Republicans, who wanted a more completed repeal of the ACA, and moderate Republicans, who were concerned about the potential loss of coverage that could result from the legislation. The decision to pull the bill increases the likelihood that the ACA’s information reporting regime under Sections 6055 and 6056 will remain in place, along with the additional Medicare tax and other provisions of the ACA.

House Republicans’ ACA Repeal-and-Replace Bill Would Change Health Coverage Reporting Requirements

A House Republican bill, entitled the American Health Care Act, would repeal many provisions of the Affordable Care Act (ACA) but retain and expand the information reporting rules.  Released on March 6, the proposal consists of two parts: (1) a bill drafted by the House Ways and Means Committee, to eliminate the ACA’s taxes and income-based subsidies, zero out penalties for the individual and employer mandates, and establish a new individual tax credit; and (2) a bill drafted by the House Energy and Commerce Committee, to freeze and reform Medicaid.

The Ways & Means bill would help taxpayers pay for health insurance by expanding health savings accounts, and by providing an advanceable, refundable tax credit—the “health insurance coverage” credit—for purchasing state-approved, major medical health insurance and unsubsidized COBRA coverage.  Unlike the leaked bill obtained by Politico on February 24, the bills do not cap the tax exclusion for employer-provided health insurance.  Although the legislation is unlikely to pass in its current form, as it is headed for markup by the two Committees later this week, it does provide insight into the thinking of House Republicans.

Those hoping for a full repeal of the ACA’s reporting provisions will be disappointed as the ACA’s reporting regime would largely survive, at least temporarily.  Applicable large employers (ALEs), for instance, would still be required to file Forms 1094-C and 1095-C pursuant to Code section 6056, even though the bill would reduce penalties for failure to comply with the employer mandate to zero beginning in 2016.  Similarly, the Ways & Means bill does not eliminate the requirement for providers of minimum essential coverage to report coverage on Form 1095-B (or Form 1095-C) despite eliminating the penalty on individuals for failing to maintain coverage.

However, the Ways & Means bill would alter health insurance reporting in three ways.  First, the bill would establish new information reporting rules under Code section 6050X for the health insurance coverage credit beginning in 2020.  Second, the bill would expand information reporting under Code section 6055 regarding the ACA’s premium tax credits used for qualifying off-Exchange coverage in 2018 and 2019.  Third, the bill would repeal the additional Medicare tax and thereby eliminate employers’ corresponding reporting and withholding obligations beginning in 2020.

New Reporting Rules for Health Insurance Coverage Credits Beginning in 2020

The bill would replace the ACA’s premium tax credit with the health insurance coverage credit for purchasing eligible health insurance—state-approved, major medical health insurance and unsubsidized COBRA coverage—starting in 2020.  Generally, an individual is eligible for this credit only if he or she lacks access to government health insurance programs or offer of employer coverage.  The credit amount varies from $2,000 to $4,000 annually per person based on age, and phases out for those earning over $75,000 per year ($150,000 for joint filers).  The credit maxes out at $14,000 per family, and is capped by the actual amount paid for eligible health insurance.  Treasury would be required to establish a program for making advance payments of the credit, on behalf of eligible taxpayers, to providers of eligible health insurance or designated health savings accounts no later than 2020.

Reporting for Health Insurance Coverage Credit.  To administer the health insurance coverage credit, the bill would create Code section 6050X that would require providers of eligible health insurance to file information returns with the IRS and furnish taxpayer statements, starting in 2020.  The return must contain the following information: (a) the name, address, and taxpayer identification number (TIN) of each covered individual; (b) the premiums paid under the policy; (c) the amount of advance payments made on behalf of the individual; (d) the months during which the individual is covered under the policy; (e) whether the policy constitutes a high deductible health plan; and (f) any other information as Treasury may prescribe.  The bill does not specify how often providers would be required to file returns reporting this information with the IRS, but it would authorize Treasury to require a provider to report on a monthly basis if the provider receives advance payments.  A provider would also be required to furnish taxpayers, by January 31 of the year after the year of coverage, written statements containing the following information: (a) the name, address, and basic contact information of the covered entity required to file the return; and (b) the information required to be shown on the return with respect to the individual.

Employer Statement for Advance Payment Application.  The advance payment program would require an applicant—if he or she (or any qualifing family member taken into account to determine the credit amount) is employed—to submit a written statement from the applicable employer stating whether the applicant or the qualifying family member is eligible for “other specified coverage” in connection with the employment.  Other specified coverage generally includes coverage under an employer-provided group health plan (other than unsubsidized COBRA continuation coverage or plan providing excepted benefits), Medicare Part A, Medicaid, the Children’s Health Insurance Program, and certain other government sponsored health insurance programs.  An employer shall provide this written statement at the request of any employee once the advance payment program is established.  This statement is not required if the taxpayer simply seeks the credit without advance payment.

Employer Coverage Reporting on Form W-2.  The bill would require reporting of offers of coverage by employers on the Form W-2 beginning with the 2020 tax year.  Employers would be required to report each month in which the employee is eligible for other specified coverage in connection with employment.  This requirement would likely demand a substantial revision to the current Form W-2, which is already crowded with information.  The Form W-2 reporting requirement appears to be intended to replace the reporting rules under Section 6056 based on a statement in the Ways and Means Committee summary.

Although the budget reconciliation rules limit Congress’s ability to repeal the current coverage reporting rules, the Ways and Means Committee states that Treasury can stop enforcing any reporting not required for tax purposes.  Given the elimination of penalties for individuals who fail to maintain minimum essential coverage and ALEs that fail to offer coverage, this statement may serve as a green light to undo many of the Form 1095-B and 1095-C reporting requirements once the ACA’s premium tax credits are eliminated and Form W-2 reporting is in place in 2020.

Reasonable Cause Waiver.  The bill would make these new information returns and written statements subject to the standard information reporting penalties under Code section 6721 (penalties for late, incomplete, or incorrect filing with IRS) and Code section 6722 (penalties for late, incomplete, or incorrect statements furnished to payees).  The bill also extends the reasonable cause waiver under Code section 6724 to information reporting penalties with respect to the new health insurance coverage credit returns, so that the IRS may waive such penalties if the failure is “due to reasonable cause and not to willful neglect.”

Transitional Reporting Rules for Premium Tax Credits in 2018 and 2019

The Ways & Means bill would allow the ACA’s premium tax credits to be used for off-Exchange qualified health plans in 2018 and 2019 before eliminating the credits in 2020.  The premium tax credit is a refundable, income-based credit that helps eligible individuals and families pay premiums for coverage under a “qualified health plan,” which, under current law, only includes plans sold on ACA Exchanges, and does not include catastrophic-only health plans.  The bill, however, would expand the definition of qualified health plan to include off-Exchange and catastrophic-only health insurance plans that otherwise meet the requirements for a qualified health plan, so that these types of plans would also be eligible for the premium tax credit.  Advance payment of the credit is only available for coverage enrolled in through an Exchange.

To aid in the administration of the expanded credit, the bill would amend Code section 6055(b) to require providers of minimum essential coverage to report certain information related to premium tax credits for off-Exchange qualified health plans.  Because employer-sponsored coverage does not qualify for the credit, employers sponsoring self-insured plans generally would not be required to report additional information on the Form 1095-C beyond that already required under Code sections 6055 and 6056.  Health insurance issuers who provide coverage eligible for the credit would be required to report annually to the IRS: (a) a statement that the plan is a qualified health plan (determined without regard to whether the plan is offered on an Exchange); (b) the premiums paid for the coverage; (c) the months during which this coverage was provided to the individual; (d) the adjusted monthly premium for the applicable second lowest cost silver plan for each month of coverage; and (e) any other information as Treasury may prescribe.  These new reporting requirements would apply only in 2018 and 2019, before the premium tax credit is scrapped and replaced by the health insurance coverage credit in 2020.

Repeal of Additional Medicare Tax

The bill would also repeal the additional Medicare tax under Code section 3101(b)(2), beginning in 2018.  This 0.9% tax is imposed on an employee’s wages in excess of a certain threshold (e.g., $200,000 for single filers and $250,000 for joint filers).  Under current law, employers are required to withhold and remit additional Medicare taxes when it pays wages to an employee over $200,000.  The additional Medicare tax has complicated the process for correcting employment tax errors because unlike other FICA taxes (and more like income tax withholding) the additional Medicare tax is paid on the employee’s individual income tax return.  As a result, the employer cannot make changes to the amount of additional Medicare tax reported after the end of the calendar year.  The elimination of the additional Medicare tax will likely be welcomed by employers and employees affected by it.  In addition, the bill would also repeal the net investment income tax that expanded the Medicare portion of FICA taxes to non-wage income for individuals with incomes in excess of certain thresholds.

What to Expect Next

The fate of the legislation is uncertain, and it will likely undergo substantive changes before House Republicans move the bill to the floor.  A key issue that House Republicans are reportedly debating is how to structure the health insurance coverage tax credit.  Additionally, the decision to eliminate the cap on tax breaks for employer-provided health insurance that was included in the draft language leaked in late February may mean that the legislative proposal will need to be amended to include another funding source.  However these issues are resolved, the legislation makes it clear that a health insurance reporting regime is likely to survive Republicans’ ACA repeal-and-replace efforts.  We will continue to monitor further developments on the proposal and its impact on the information reporting regime for health insurance coverage.

IRS Webinar Answers ACA Information Reporting Questions

Last week, the IRS released a webinar on identifying and correcting errors on information returns related to the Affordable Care Act (ACA).  The ACA requires health insurers and some employers to file information returns with the IRS and furnish a copy to the recipient.  The 2015 returns are due by May 31, 2016, if filing on paper, or June 30, 2016, if filing electronically through the ACA Information Reporting (AIR) System.  The IRS webinar addressed frequently asked questions on four topics: correcting specific forms; TIN solicitation and correcting TIN errors; correcting AIR filing; and penalties, exceptions, and penalty relief.

Form-Specific Corrections

To correct errors on Forms 1095-B, 1094-C, and 1095-C, an entity must complete the proper form with the corrected information and mark it as a corrected return.  An entity should not file a return that includes only the corrected information.  Employers used to filing Forms W-2c to correct Forms W-2 will find this approach different from the process with which they are familiar.

To correct a Form 1095-B previously filed with the IRS, an entity should file a complete and corrected Form 1095-B that is marked as corrected, with a Form 1094-B Transmittal (which cannot and should not be marked as corrected).  To correct a Form 1095-C previously filed with the IRS, an entity must file a complete and corrected Form 1095-C that is marked as corrected, with a Form 1094-C Transmittal that is not marked as corrected.  Next, the entity must furnish the employee with a copy of the corrected Form 1095-C.  Employers using the qualifying offer method or the qualifying offer method transition relief for 2015, however, are not required to furnish the copy to the employee in certain cases.

To correct a Form 1094-C that is the authoritative transmittal previously filed with the IRS, an entity should file a standalone Form 1094-C.  An entity need not correct a Form 1094-C that is not the authoritative transmittal.

Some filers have expressed confusion as to why they must file corrected returns given that the IRS has indicated that a recipient of a Form 1095-B or Form 1095-C need not correct their tax return to reflect information reflected on a corrected form.  The webinar makes clear that regardless of that approach, filers must correct returns timely.  In terms of timing, an entity should file a correction as soon as the error is discovered if the filing deadline has already passed.  If an entity has already furnished Forms 1095-B or 1095-C to recipients but finds an error before filing with the IRS, the entity needs to file with the IRS a regular return, i.e., not marked as corrected, containing the accurate information. A new original, i.e., not marked as corrected, form should be provided to the responsible individual or employee as soon as possible.

TIN Solicitation and Error Corrections

In an effort to assuage a key concern of many filing entities, the IRS stated that an error message for missing and/or incorrect information is not a proposed penalty notice.  However, when an entity receives an error message regarding a name/TIN mismatch, the entity should file a correction if it has correct information.  If the entity lacks the TIN, it may use the date of birth and avoid penalties for failure to report a TIN, provided that the entity followed the three-step TIN solicitation process under Notice 2015-68: “(1) the initial solicitation is made at an individual’s first enrollment or, if already enrolled on September 17, 2015, the next open season, (2) the second solicitation is made at a reasonable time thereafter, and (3) the third solicitation is made by December 31 of the year following the initial solicitation.” The webinar is unclear whether the receipt of an error message triggers an obligation for filers to engage in a new round of TIN solicitation.

If an entity has not solicited a TIN, e.g., the individual was already enrolled on September 17, 2015, and the next open season is not until July 2016, the entity may be unable to correct the error before the return filing deadline.  In this case, the entity should still file a correction when it obtains the TIN or the date of birth if the TIN is not provided.  If a Penalty Notice 972CG is issued, the entity will have the opportunity to show whether good-faith relief or a reasonable-cause waiver applies.

AIR Filing Corrections

The IRS also clarified AIR’s transmission responses, which are defined under IRS Publication 5165.  An AIR filing will generate one of five responses: accepted, accepted with errors, partially accepted, rejected, or not found by AIR.  “Accepted with errors” means that AIR found at least one of the submissions had errors, but did not find fatal errors – i.e., the submission had unusable data – which would prompt a “rejected” response.  “Partially accepted” means AIR accepted some of the submissions and rejected others.  If AIR rejected any attempted filings, the entity must cure the problem and transmit the return again rather than use the correction process.

If AIR identifies errors, an entity will receive an acknowledgement in XML with an attached Error Data File.  Again, this error message is not a proposed penalty notice.  Rather, to assist the entity, the Error Date File includes unique IDs to identify the erroneous returns, and error codes and descriptions to identify the specific errors.  After locating and identifying the error, the entity must prepare corrected returns, which must reference the unique IDs of the returns being corrected.  AIR will assign unique IDs to the corrected returns, which the entity can then transmit through AIR.

Penalties and Penalty Relief

ACA-related information reporting is subject to the general penalties under Sections 6721 and 6722 of the Code for failure to (1) furnish correct copies to employees and insured individuals or (2) file complete and accurate information returns with the IRS.  The penalty for each incorrect information return is $260 and up to $3,178,500 for each type of failure, for entities with over $5 million in average annual gross receipts over the last three taxable years.  Only one penalty applies per record, even if the record has multiple errors, such as incorrect TIN and incorrect months of coverage.  For late returns, penalty amounts per return start at $50 and increase to $520, depending when the correction is filed and whether the failure was due to intentional disregard.  Further, a penalty may apply if an entity is required to file electronically because it has 250 or more returns but the entity files on paper and fails to apply for a waiver using Form 8508.

The IRS has provided good-faith relief to entities that file or furnish incorrect or incomplete – but not late – information, including TINs or dates of birth, if the entity can show that it made a good-faith effort to comply with the requirements.  Good-faith relief does not apply to egregious mistakes, e.g., where an entity transmits returns with just names and addresses and no health coverage information.  Further, good-faith relief does not excuse an entity from the continuing obligations to identify and correct errors in returns previously filed with the IRS.  An entity must correct errors within a reasonable period of time after discovering them (corrections must be filed within 30 days).  Importantly, if subsequent events, such as a retroactive enrollment or change in coverage make the information reported on a Form 1095-B or Form 1095-C incorrect, the entity has an affirmative obligation to correct the return even though it was correct when initially filed.

In addition to the good-faith relief, inconsequential errors and omissions are not subject to these penalties.  An error or omission is inconsequential if it does not stop the IRS from correlating the required information with the affected person’s tax return, or otherwise using the return. Errors and omissions are not inconsequential, however, if they pertain to the TIN and/or surnames of the recipient or other covered individuals, or if the return furnished to a recipient is not the appropriate form or substitute form.  Many errors relating to addresses or to an individual’s first name may be inconsequential, and are not required to be corrected.

Another exception is available for a de minimis number of failures to provide correct information if the filing entity corrects that information by August 1 of the calendar year to which the information relates, or November 1 for 2016.  For a calendar year, penalties do not apply to the greater of 10 returns or half a percent of the total number of returns the entity is required to file or furnish.

Finally, a filer may qualify for a reasonable cause waiver under Section 6724 of the Code for a failure that is due to a reasonable cause and not willful neglect.  To establish “reasonable cause,” an entity must show that it acted responsibly before and after the failure occurred and that the entity had significant mitigating factors or the failure was due to events beyond its control.  Significant mitigating factors include, for instance, that an entity was not previously required to file or furnish the particular type of form, and that an entity has an established history of filing complete and accurate information returns.  Events beyond an entity’s control include fire or other casualty that make relevant business records unavailable and prevent the entity from timely filing.