IRS Limited Non-Assessment Periods Help Avoid ACA Penalties

The Employer Shared Responsibility Provisions (ESRP) under the Affordable Care Act may seem straightforward, but, in reality, complying with them can be challenging and time-consuming.

An area that many Applicable Large Employers (ALEs) struggle with is knowing when they are required to extend an offer of coverage to their full-time employees. The IRS allows for certain grace periods, in which not extending an offer of coverage immediately to a full-time employee is allowed. These grace periods are known as Limited Non-Assessment Periods.

A Limited Non-Assessment Period, according to the IRS, “generally refers to a period during which an ALE Member will not be subject to an assessable payment under section 4980H(a), and in certain cases section 4980H(b), for a full-time employee, regardless of whether that employee is offered health coverage during that period.”

So, it’s important to understand Limited Non-Assessment Periods. They could help your organization avoid penalty assessments from the IRS.

There are six different scenarios for claiming a Limited Non-Assessment Period when filing annual Forms 1095-C with the IRS.

1. First-year as ALE period. January through March of the first calendar year in which an employer is an ALE, but only for an employee who was not offered health coverage by the employer at any point during the prior calendar year. This rule applies only during the first year that an employer is an ALE. It does not apply if, for example, the employer falls below the 50 full-time employee threshold for a subsequent calendar year and then increases employment and becomes an ALE again.
2. The waiting period under the Monthly Measurement Method. If an ALE member is using the Monthly Measurement Method to determine whether an employee is a full-time employee, it may claim a Limited Non-Assessment Period for the beginning of the first full calendar month in which the employee is first otherwise (but for completion of the waiting period) eligible for an offer of health coverage. The period may continue to be claimed for no later than two full calendar months after the end of the first calendar month.
3. The waiting period under the Look-Back Measurement Method. If an ALE Member is using the Look-Back Measurement Method to determine whether an employee is a full-time employee and the employee is reasonably expected to be a full-time employee at his or her start date, the period beginning on the employee’s start date and ending no later than the end of the employee’s third full calendar month of employment.
4. Initial measurement period and associated administrative period under the Look-Back Measurement Method. If an ALE Member is using the Look-Back Measurement Method to determine whether a new employee is a full-time employee, and the employee is a variable hour employee, seasonal employee, or part-time employee, the initial measurement period for that employee and the administrative period immediately following the end of that initial measurement period can be claimed as a Limited Non-Assessment Period.
5. The period following a change in status that occurs during the initial measurement period under the Look-Back Measurement Method. If an ALE Member is using the Look-Back Measurement Method to determine whether a new employee is a full-time employee, and, as of the employee’s start date, the employee is a variable hour employee, seasonal employee, or part-time employee, but, during the initial measurement period, experiences a change in employment status such that, if the employee had begun employment in the new position or status, the employee would have reasonably been expected to be a full-time employee, the period beginning on the date of the employee’s change in employment status and ending no later than the end of the third full calendar month following the change in employment status may be claimed as a Limited Non-Assessment Period. If the employee is a full-time employee based on the initial measurement period and the associated stability period starts sooner than the end of the third full calendar month following the change in employment status, the Limited Non-Assessment Period would end on the day before the first day of that associated stability period.
6. First calendar month of employment. If the employee’s first day of employment is a day other than the first day of the calendar month, then the employee’s first calendar month of employment is a Limited Non-Assessment Period.

Want more information? You can find more on the requirements of Limited Non-Assessment Periods in the Federal Register, Volume 79, No. 29 (Feb. 12, 2014).

Limited Non-Assessment Periods are indicated on Line 16 of the 1095-C, so it’s important to make sure you are claiming them correctly. Failing to do so could result in 4980H penalties presented in IRS Letter 226J.

As a reminder, under the ACA’s Employer Mandate, Applicable Large Employers (ALEs) are organizations with 50 or more full-time employees and full-time equivalent employees) and are required to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is Affordable for the employee or be subject to Internal Revenue Code (IRC) Section 4980H penalties.

Employers should also note that the IRS is currently issuing Letter 226J penalty notices to employers identified as having failed to comply with the ACA’s Employer Mandate for the 2018 tax year. The agency is also issuing failure to file and furnish penalties for the 2017 tax year via Letter 5005-A.

Employers looking to gain a better understanding of ACA compliance, including best practices for minimizing IRS penalty risk, new state filing requirements, and how to calculate affordability, should download The 2021 ACA Essential Guide for Employers.

If your organization needs assistance identifying ACA penalty exposure this year, contact us to have an ACA Penalty Risk Assessment performed at no cost to you.

*Article Written By JOANNA KIM-BRUNETTI