Robert Sheen is founder and CEO of Trusaic, a purpose-driven technology company focused on pay equity, DEI and healthcare.
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With the end of the IRS’s good faith period, it's time for HR to sit down with the organization’s leadership team to have a short meeting, or possibly a long one, to assess the organization's Affordable Care Act (ACA) liability risk.
The biggest issue is the so-called hammer penalty. If through some oversight, the organization failed to meet the 95% threshold for offering minimum essential coverage and one employee who is eligible for coverage is not offered it, then the penalty is $2,750 multiplied by the total number of employees. An organization with 1,000 employees would face a fine of $2,750,000 for just that one error.
Let's unpack why the risk exists and what to do about it.
Research Findings
Our recent research report, "The Challenge of ACA Compliance: Data on how organizations are managing ACA reporting," sheds some light on which organizations are at risk and why. The first important finding is that 27% of organizations say complying with ACA is not burdensome. If that’s the case, the meeting between HR and leadership may be a short one. However, 20.5% say compliance is overly burdensome with the remaining 52.5% saying it's somewhat burdensome. In organizations where the process is burdensome, the risk of oversight needs attention.
Why is there such a wide range of opinions on whether ACA compliance is burdensome or not? It comes down to the nature of your workforce. If you have a mainly well-paid, stable white-collar workforce where health coverage is given as a matter of course, then compliance is relatively easy. If the workforce has many employees in relatively low-wage jobs, working variable hours and/or in dispersed locations, then you rapidly run into complexities in data collection, analysis, tracking offers of coverage and reporting of that coverage that are far worse than most people imagine.
The next important research finding was the seemingly positive fact that over three-quarters of survey respondents were confident (scoring at least 8 out of 10 on confidence) that they were 100% compliant. Disturbingly, this confidence is utterly unwarranted. One in four respondents also reported having been flagged and audited by the IRS for potential ACA non-compliance.
The reason to do a risk assessment of ACA liability now is that compliance is getting harder, and the IRS is getting stricter. Compliance is becoming more challenging as more states are implementing their own ACA regulations in addition to federal regulations. Moreover, the removal of the cap at 400% of the poverty level has made an additional 3 million workers eligible for ACA benefits. Furthermore, the affordability cap has been lowered from 9.5% to 8.5%, which means that employers must ensure that they do not impose more than 8.5% of their employee's pay to meet the affordability safe-harbor requirement.
The IRS is getting stricter in the sense that 2020 was the last year of the IRS's “good faith transition relief.” In the good faith period, the IRS recognized that ACA compliance was a new challenge for employers and so was lenient when employers made mistakes in their ACA filings. This lenience is over. Furthermore, the IRS has now had the time to build up its enforcement processes so it will be more effective at catching employers who have made mistakes in their compliance or reporting. It’s worth being aware that there is no statute of limitations on penalties; an error made years ago could still trigger penalty assessments.
What Should Organizations Do To Mitigate ACA Risk?
There are a few fundamental things an organization can do to mitigate its ACA risk. Here are the top four:
• Recognize that you need to get three things right. You need a compliant plan, you need to execute that plan accurately and you need to do reporting accurately and completely. These are three related but separate things, and they all need to be done well.
• Access relevant expertise. The ACA regulations can be painfully complex. Focus group participants routinely bemoaned the fact that there was no one to go to for answers when they faced difficulties in interpreting the law. Organizations either need to make the investment in in-house expertise or else partner with an outsourcer who has that expertise.
• Do the analysis monthly; don’t wait until the end of the year. If you wait until the end of the year to do your ACA analysis, then by the time you catch any oversights in offering coverage, it will be too late to fix them. Be sure you are on top of ACA compliance every month.
• Consider using the lookback measurement method. This method is complex; however, it has many advantages and can reduce your risk of noncompliance as well as more efficiently use costs associated with offering healthcare coverage.
Conclusion
Many organizations seem to have underestimated the liability risk associated with ACA. They have not put in place the resources needed so they can be sure their processes are capable of handling all the complexities that arise due to the nature of their workforce. It is time for the HR department and the organization’s leadership team to get together and do an honest assessment of liability risk and, following that assessment, take corrective action.
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