What If An Employer Cannot Pay Government Fees (Taxes)?


Many employers incorrectly believe there is a chance they can play the “audit lottery” and avoid all ACA related penalties………….

We are entering the last quarter of the 2016 calendar year which means the penalties related to section 4980H for 2015 will soon be assessed against employers. At the latest, the 2015 section 4980H penalties will be assessed in the first quarter of 2017. Whenever the penalties are assessed, the government will be presented, perhaps for the first time in history, with an interesting conundrum. The conundrum is how the government should handle the scenario of an employer who owes a section 4980H penalty, but is unable to pay the total penalty while staying in business.

The section 4980H penalties are the main mechanism for funding the subsidies provided to certain individuals under the Affordable Care Act (ACA). The government is expecting to take in billions of dollars of revenue from employers who decide to “pay” instead of “play” under the section 4980H penalties. Therefore, for the ACA to be funded the government must penalize any employer who does not satisfy the law’s requirements. However, if a section 4980H penalty is going to put an employer out of business, the government is really going to be stuck between a rock and a hard place. If the government does not enforce the penalty, there won’t be enough money to fund the subsidies. However, if the government enforces the penalty, people may lose their jobs simply because their employer no longer exists.

This predicament of a small employer being unable to pay its section 4980H penalty is not far-fetched. A number of employers who contacted me late this summer had done nothing as far as ACA compliance. To be clear, by nothing, I mean these employers had not offered full-time employees coverage or even bothered to file the Forms 1094-C and 1095-C. Many of these employers incorrectly believe there is a chance they can play the “audit lottery” and avoid all ACA related penalties. The problem with this strategy is the government has the necessary information to tell who owes a section 4980H penalty. The government will know from other filings if an employer who should be filing the Forms is not filing the Forms 1094-C and 1095-C. If the government does not see the Forms 1094-C and 1095-C for a particular employer who the government believes should have filed the Forms, the employer will likely find itself in the middle of a trilogy of problems in the form of an IRS audit, penalties related to not filing the Forms 1094-C and 1095-C, and perhaps most troubling on the hook for a massive section 4980H penalty.

Besides employers ignoring the law, there is also a large group of employers who are acting on advice from providers who don’t have an adequate knowledge of the ACA, the Code, or ERISA. The problem is a lot of providers in the space are only good at selling and lack the proper knowledge to provide valuable advice. This is not surprising, as entrepreneurs frequently flock to new industries particularly when a brand new industry is created. To date there has been no way for an employer to distinguish between providers who can provide value compared to providers who can just tell a good story. That is a problem for small employers who are often unable to afford the advice of the most reputable service providers.

Exasperating the issue for an employer who did nothing through sheer ignorance or acted on bad advice of a provider is the penalty is likely to be for two years, both 2015 and 2016. The reason is an employer still does not know whether the steps it has taken, if any, towards ACA compliance have been successful because no penalties have been assessed to date. If an employer has fallen short of its ACA obligations in 2015, it is likely the same actions were taken in 2016 because the employer may have been unaware it was doing anything wrong. This may be the biggest adverse consequence of the government delaying the reporting of the Forms 1094-C and 1095-C and, consequently, delaying the assessment of the section 4980H penalties.

In the worst case scenario an employer will be responsible for a section 4980H(a) penalty in both 2015 and 2016. In 2015, the section 4980H(a) penalty equals $2,080 multiplied by the number of full-time employees minus 80. In 2016, the section 4980H(a) penalty increases to $2,160 multiplied by the number of full-time employees minus 30. If an employer has 150 full-time employees, the section 4980H penalty for 2015 and 2016 would be $145,600 and $259,200 respectively. This would be a total penalty of $404,800. If an employer has 250 full-time employees, the section 4980H penalty for 2015 and 2016 would be $353,600 and $475,200 respectively. This would be a total penalty of $828,800.

These penalties would most likely be crippling for any employer of that size who often operate with a low profit margin. This does not even account for any penalties the employer may incur as a result of filing an incorrect information return (the Forms 1094-C and 1095-C) or furnishing an incorrect payee statement (the Form 1095-C that must be furnished to certain employees) which could add another significant penalty for both 2015 and 2016 particularly if no Forms are filed.

Typically, the government would enforce the penalties to the letter of the law. However, I cannot think of any other penalty provision that could financially destroy so many small employers. The government may be forced to handle the section 4980H penalties differently because of the severe impact it could have on employers and their employees.

Perhaps the best leverage an employer who is penalized for the 2015 tax year has is that it was never provided asection 1411 notice. We know this because no section 1411 notices were sent out in 2015. Under a strict reading of the law, both the section 4980H(a) penalty and section 4980H(b) penalty require the employer receiving a 1411 notice certifying a full-time employee of the employer has received a premium tax credit from an Exchange before a penalty can be assessed. These notices were intended to warn an employer of the possibility of a section 4980H penalty. As a result of not receiving a notice, an employer could argue it cannot be assessed a section 4980H penalty in 2015. This will undoubtedly end up in court.

To date, score has not been kept in the ACA industry which has caused employers, particularly at the smaller end of the market, to be in the dark on whether their compliance efforts or ignorance has been successful. The penalties phase of the ACA will begin the score keeping process. If an employer has fallen short, it could face penalties that it is unable to pay. How the government handles this is still a mystery that we should begin to learn about soon.