For the 2017 tax year, the IRS has made it even more difficult for large employers to avoid penalties under the Patient Protection and Affordable Care Act (ACA), and major questions remain about how employers can avoid penalties due to missing or incorrect Social Security numbers.
The ACA imposes large penalties on applicable large employers who fail to timely file Forms 1094 or 1095 with the federal government, or who fail to timely furnish Form 1095 to an employee. These forms document that the employer offered and, if applicable, provided health coverage under the ACA to the employee in 2017. The penalty is currently $250 per form, subject to a maximum of $3 million, although there are circumstances in which the penalty can be reduced or, in the case of intentional conduct, increased.
The penalties under Sections 6721 and 6722 of the Tax Code are generally mandatory unless due to reasonable cause under Section 6724. Moreover, the penalty applies not only to unfiled information returns, but also to any form containing missing or incorrect information. Forms with incorrect names, birthdates, or Social Security numbers can be costly.
In previous years, the IRS allowed forms to be filed beyond the normal deadline without penalty. Not anymore. In the past, the IRS has also refused to assert a penalty against an employer who furnished missing or inaccurate information — including Social Security numbers — provided the employer made a “good faith” effort to comply with the rules. Again, not anymore. As of yet, the IRS has not established any good-faith exception applicable to the 2017 tax year.
Finally, the IRS has established a process by which employers can solicit tax identification numbers (TINs), such as Social Security numbers, and not be liable if the TIN is missing or inaccurate. Unfortunately, this safe harbor remains somewhat confusing.
Specifically, the safe harbor requires an employer to solicit the TINs of the employee and his or her dependents initially, and at certain prescribed times thereafter. A solicitation can be made in writing (by mail or electronically) or over the telephone. A written solicitation must be made on a Form W-9 or on a document that that is “substantially similar” to Form W-9.
The problem is, a Form W-9 generally requires the employee to certify, under penalty of perjury, that certain things are true, including:
- That the individual is subject to backup withholding. This is not related to ACA reporting.
- That the Foreign Account Tax Compliance Act (FACTA) code indicating that the individual is exempt from FACTA reporting is correct. Again, this is not relevant to ACA reporting and will be inapplicable.
- That the individual is a U.S. citizen or a “resident alien,” which generally refers to a permanent resident with a green card, or another individual with a substantial physical presence in the United States. Some full-time employees receiving offers of coverage under the ACA (such as non-resident aliens) will not fall into either category and will be unable to sign the certification.
Form W-9 and its instructions also refer to a “payee” and “payments” throughout, which is misleading with respect to ACA reporting for health coverage. Unfortunately, the IRS has not provided any guidance that addresses these issues. Nonetheless, if a large employer does not solicit on the W-9, any missing or incorrect TIN will be subject to penalties.
Given the hard deadline and applicable penalties, large employers should be diligent in completing Forms 1094 and 1095 for the 2017 tax year.
UPDATE (Jan. 3, 2018): The IRS has finally issued relief with respect to Forms 1094 and 1095 for the 2017 tax year. Specifically, in IRS Notice 2018-06, the IRS extended the deadline for furnishing Form 1095 to individuals from January 31, 2018 to March 2, 2018. However, the IRS did not extend the deadline to file Form 1094 with the IRS (which remains February 28, 2018 or, if filing electronically, April 2, 2018), although other extensions could apply in some circumstances. Finally, the IRS will continue to provide relief from penalties for entities that make a “good-faith effort” to comply with the reporting rules but nonetheless include missing and inaccurate information (including SSNs), provided the forms were timely filed.