IRS Requesting More Detail in ACA Audits

As we’ve previously noted,?IRS?enforcement of the ACA’s Employer Mandate is ramping up.?

Most recently, the agency began requesting more detailed information from employers being audited for suspected non-compliance issues.

We’ve heard from our partners, brokers, and new clients that the?IRS?is specifically asking employers to provide detailed calculations for determining?ACA?full-time and full-time equivalent counts.?

Currently, the?IRS?appears to be cross-referencing previous years’?ACA?filings to substantiate claims of potential non-compliance in the new penalty assessment notices, specifically relating to full-time employee counts.

For example, a recent IRS penalty?letter?makes mention of receiving filings for 2017, but only received three Forms 1095-C for the 2018 tax year. The letter then states, “Please submit the detailed full-time employee calculation to substantiate the number of forms received for 2018… or submit the appropriate number of forms ….”?

This language indicates that the agency has identified a disconnect between the employer in question’s?ACA?filings for separate years. As such, the?IRS?is requesting proof of full-time and full-time equivalent employee counts as they directly correlate to the number of?Forms 1095-C?required for filing.

This is a significant development and a departure from how the?IRS?issued penalties in the past. Substantiating the full-time counts will be very difficult for many employers that have been relying on their self-serve?ACA?tools in their payroll or ben-admin systems.?

If you receive a notice like this, it’s important to take action quickly. Below we cover?how to calculate full-time and full-time equivalents, as well as outline best practices for documenting these important details in the event of an ACA audit.

What is ACA full-time?

ACA full-time is an employee who averages 30 hours of service a week or 130 hours a month. Here’s an example of what that looks like.

Pizza Parlor restaurant employs 80 workers and 45 of them are employees that work at least 30 hours a week or 130 hours a month. The 45 workers who average 30 hours a week or 130 hours a month are considered full-time employees.

What is ACA full-time equivalent?

A full-time equivalent employee is a combination of employees, each of whom individually is not a full-time employee, but who, in combination, are equivalent to a full-time employee.?

For example, two employees who each work an average of 15 hours per week are equivalent to one full-time employee. In other words, full-time equivalent employees are the sum of hours of employees who aren’t designated as full-time but in combination are treated as one full-time equivalent employee.

To determine if an organization is an Applicable Large Employer for a year, in general, the organization?counts its full-time employees and full-time equivalent employees?for each month of the prior year and calculates the average number of full-time and full-time employees during the year.?

Additionally, these counts are critical for filing and furnishing Forms 1095-C each year, so it’s important to get it right and to document your calculations.

Reinforcing ACA calculations

The recent IRS enforcement activity demonstrates that the agency is asking employers to prove their methods for calculating ACA full-time and full-time equivalents.?

Now that you know how to perform the calculations, here’s how you should go defending your determinations.

• Classify employees correctly.?First and foremost, make sure you’re accurately coding employees. Proving ACA calculations is a lot simpler when there is accurate and current information about each employee. Details such as hours worked, job title, location, hire dates, designation, and worker classification are incredibly important for determining whether an employee is a designated full-time employee.
• Store employee details digitally.?Best practices encourage storing your ACA information digitally. This will allow for easy retrieval of information in the future and will make defending your ACA calculations more efficient.
• Monitor monthly.?ACA compliance becomes significantly more manageable when you develop a routine process each month. During this time, review new hires, verify employee hours worked, and ensure all necessary employee information has been entered correctly. Taking these actions in small amounts each month can prevent a monumental task at the end of the year as well as give you the opportunity to ensure timely offers of coverage that are required to avoid ACA penalties. Additionally, monthly monitoring provides you with an opportunity to stay organized. And remember, the previous year’s employee counts are used for determining ALE status. Addressing employee details each month, when the information is fresh, will ensure greater accuracy.
• Partner with an ACA compliance expert.?As recent IRS enforcement activity proves, maintaining sound ACA compliance can be challenging. Now that the agency is requesting more detailed information, partnering with a vendor in ACA compliance can reduce the burden on your staff, minimize penalty risk, and maximize compliance. So far, our?ACA Complete?solution has helped prevent over $1 billion in ACA penalties.

If you haven’t received an?ACA?penalty notice from the?IRS, you may soon. To get ahead of any risk the agency might identify, get your?ACA Vitals?score. This will help you uncover key risk areas within your organization and allow you to take proactive steps toward improving compliance, building better processes, and mastering ACA Compliance.

Get: ACA Vitals Score

For information on ACA penalty amounts, affordability percentages, important filing deadlines, steps for responding to penalty notices, and best practices for minimizing IRS penalty risk,?download the ACA 101 Toolkit.