Line 16 Codes
The codes that appear on line 16 of the 1095-C may be the most difficult thing to understand about this form. You can think of the codes as your way of telling the IRS why your company should not be subject to a penalty. There are multiple reasons why you are not subject to a penalty. The Compile 1095-C option combines information from both your payroll records and the health benefits records in the Human Resources program to determine the appropriate code to report for each month on line 16.
Because this may be difficult to understand we have built in a feature to help explain why the system chooses the codes that it does for line 16 of the 1095-C. After the 1095-C information has been compiled, a tooltip is available for each month showing you the code(s) that apply and the reason behind the code(s).
The first thing to keep in mind is that you are not required to offer insurance coverage to part time employees. There are a many details that go into determining the full or part time status of an employee. In general terms, though, an employee’s status is determined by measuring their hours over a given period and determining whether the hours meet a specific threshold. The employee retains that status over a specific period of time.
Under the Look-Back Measurement method, when an employee is hired you can say that you don’t know whether an employee will be a full or part time employee and apply a measurement period of multiple months. When this period is up, the employee’s status is determined based on hours of service and that status applies for multiple months (called the stability period) until the next measurement period is completed and you make the determination all over again.
When you use the Monthly Measurement method, every employee’s hours are checked each month to determine whether or not the employee’s status is full or part time. This full or part time status applies until the end of the next month, when the process is repeated.
In addition to the time needed to determine an employee’s status, the IRS recognizes that time is needed for the employer to identify full time employees and make an offer of coverage, for the employee to consider whether to accept or decline the offer of coverage, and time needed to enroll the employee in coverage in timely fashion. This is the purpose of the administrative or waiting period.
The “2A” code is used to report that an employee did not have any hours of service in the calendar month. The employer is not under an obligation to provide coverage to an employee that did not work in a month.
The “2B” code is used to report that an employee was not a full time employee for the month. This refers to the employee’s status as established by their prior measurement period, whether that was several months under the lookback period or the prior month under the monthly measurement period.
The “2C” code is used to report that an employee enrolled in coverage. The employer is not subject to a penalty when an employee enrolls in coverage that meets the requirements of the ACA.
During the measurement period (for the lookback method) and during the waiting period, the employer is not under an obligation to provide coverage to the employee. This is reported on line 16 as a “2D” code, for the Limited Non-Assessment Period. This is a period of time that is limited by certain rules, during which the employer is not subject to an assessment for not providing coverage to the employee.
The first month that an employee works is generally covered by a “2D” code as well.
The “2F”, “2G” and “2H” codes are used to report that you offered the employee affordable coverage that was not accepted. The code used depends on which of the three affordability safe harbors you used to determine that the coverage you offered to employees was affordable.
There are often cases where multiple codes apply in a given month. In this case, the program will select the “best” one that applies. The only real guidance provided by the IRS is to use the “2C” code instead of any other code when employees enroll in coverage.
(There are a couple of other codes but we are going to skip over those for now.)
There may be situations where no code applies and the box for one or more months on line 16 is left blank. In this situation, there is a possibility that your company could be subject to the (b) penalty ($250/month). However, for this to happen, the employee that was not covered would have had to enrolled in individual coverage through an ACA health insurance exchange for that month, received a subsidy for that coverage, and have been eligible to receive the subsidy. A blank box on line 16 should not necessarily mean you will be penalized.
There are also cases where no code applies, and you should not be subject to a penalty. For instance, if an employee has a break in service of less than 13 weeks and their status before the break was that of a full time employee, it is not clear if any code applies for the month in which they return to service. (In this situation, the employer is required to re-instate coverage the first of the following month. If this was done, then a “2C” code will be reported in the following month.)
The next post will take a look at the Compile 1095-C process, the Line 16 report that can be used to review the codes for each employee, and the explanations available via the tooltips that explain which codes apply to each month and which one was choosen.