Section 4980H Employer Shared Responsibility Payments (ESRP): The New "IRS Employment Tax Penalty"?

Many employers began to receive notices from the IRS in 2018 proposing the assessment of a payment against the employer for the tax years 2015 and 2016 under Section 4980H of the Internal Revenue Code.  The issuance of these notices by the IRS has now increased through 2019 to-date, and where employers may have received an initial notice in 2018 for the 2015 tax year, and now a second and additional notice proposing the assessment of a payment under Section 4980H for the 2016 tax year.  Additional IRS notices for 2017 are certainly to follow.

Section 4980H(a) imposes an “assessable payment” on any “applicable large employer” that fails to offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan (as defined under Section 5000A(f)(2)) for any month, and where at least one full-time employee of the applicable large employer has been certified to the employer under Section 1411 of the Patient Protection and Affordable Care Act as having enrolled for such month in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee.    The IRS issued final regulations under Section 4980H and where the provisions of Section 4980H are generally applicable for tax years beginning after December 31, 2014. For tax years beginning in 2015, an “applicable large employer” means with respect to a calendar year, an employer who employed an average of at least 100 full-time (including part-time equivalent) employees on business days during the preceding calendar year; however, for tax years beginning in 2016 and thereafter, the applicable large employer threshold was reduced to 50 full-time and part-time equivalents.

Referred to by employers and commentators as a “penalty” (and even by the IRS in certain publications), the assessable payment under Section 4980H is an “Employer Shared Responsibility Payment”, or “ESRP”.  The ESRP is actually an additional federal excise tax on employers and not a “penalty”.  This excise tax cannot be waived by the IRS, and its payment by an employer is not deductible.

The ESRP, if applicable, is based on:

  • the “applicable payment amount” (1/12 of $2,160 for 2016), and
  • the number of individuals employed by the applicable large employer as “full-time employees” during any month. reduced by a 30-person threshold.

The “applicable payment amount” in the ESRP calculation is adjusted annually for inflation based on the premium adjustment percentage for the calendar year, rounded down to the next lowest multiple of $10.  The term “full-time employee” in the ESRP calculation has a special definition and generally includes employees who work an average of at least 30 hours per week.

The IRS generally began its initial review of employers and the potential assessment of ESRPs in late 2017, but ramped-up the process in 2018 and beginning with the tax year 2015.  The IRS examination group responsible for the review is presently in Ogden, Utah.  Employers receive initial notice from the IRS through a “Letter 226-J” notification proposing the ESRP, and which considers information reported by the employer on its Form 14765, Employee Premium Tax Credit (PTC) Listing, and its filed Form 1095-C, Employer-Provided Health Insurance Offer and Coverage and Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage information returns.  The IRS then compares this information with any referenced employees who may have reported/claimed a Premium Tax Credit on their individual returns.

There are numerous issues, and defenses, related to the imposition of the ESRP against an employer, including whether the employer was an “applicable large employer”, whether the employer may have actually offered qualifying coverage to employees (and which was not accepted), whether certain applicable ‘safe harbors apply” (e.g. the “rate of pay” safe harbor in determining affordability), and simply whether information being reported by the employer, and the employee, concerning the coverage is accurate, or not.

The IRS ESRP examination and review program is also having its own “start-up” challenges, and where notice dates are not being properly recorded, appeals/protests are not being accepted as timely filed, and assessments of the ESRP are being made by the IRS at the same time the initial notices proposing the assessments are going out.

Employers receiving one or more of these ESRP notices are encouraged to contact experienced tax counsel, and to not “go it alone”, especially where the IRS itself is having difficulty administering its own program.

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