In the last two days, we’ve had two separate customers receive penalty letters from the IRS for heart attack inducing penalty amounts that resulted from the same mistake in filling out the 1094-C form for the 2015 tax year.
To recap some of our past instructions:
- You must read and understand the instructions for filling out the 1094-C and 1095-C forms from the IRS. These instructions can be found here.
- If you are filing electronically, we recommend that you print out the paper copy of the 1094-C form prior to uploading your electronic file. Review this form for accuracy and make sure that all parts of the form are filled out that need to be filled out. The information that appears on the paper form is what will be included in the electronic file.
Don’t Make This Mistake
From the IRS instructions:
An ALE Member must file one or more Forms 1094-C (including a Form 1094-C designated as the Authoritative Transmittal, whether or not filing multiple Forms 1094-C), and must file a Form 1095-C for each employee who was a full-time employee of the ALE Member for any month of the calendar year.
(From page 1, emphasis added)
A Form 1094-C must be filed when an ALE Member files one or more Forms 1095-C. An ALE Member may choose to file multiple Forms 1094-C, each accompanied by Forms 1095-C for a portion of its employees, provided that a Form 1095-C is filed for each employee for whom the ALE Member is required to file. If an ALE Member files more than one Form 1094-C, one (and only one) Form 1094-C filed by the ALE Member must be identified on line 19, Part I as the Authoritative Transmittal, and, on the Authoritative Transmittal, the ALE Member must report certain aggregate data for all full-time employees and all employees, as applicable, of the ALE Member.
(From page 2, emphasis added)
To translate the IRS-speak:
- Think of the 1094-C as a “cover letter” that must be sent with any batch of 1095-C forms. (It is similar to the W-3 form when submitting W-2’s, or the 1096 form when submitting 1099’s.)
- An employer may send multiple batches of 1095-C forms to the IRS. Each batch must be accompanied by a 1094-C form.
- An employer must file one and only one 1094-C designated as the authoritative transmittal for each tax year. This 1094-C is special; it includes the company-wide totals.
- If you file only one batch of 1095-C forms (which is the case for most of our customers, then the 1094-C form submitted with those forms must be the Authoritative Transmittal.
- If you submit a set of corrected 1095-C forms, then the 1094-C form that is sent with that is not an authoritative transmittal.
Line 19. If this Form 1094-C transmittal is the Authoritative Transmittal that reports aggregate employer-level data for the ALE Member, check the box on line 19 and complete Parts II, III, and IV, to the extent applicable. Otherwise, complete the signature portion of Form 1094-C and leave the remainder of Parts II, III, and IV blank
(From page 7)
On the 1094-C entry window, the checkbox for Line 19 is at the bottom of the Part I section as shown below:
If this box is not checked, then the program will not fill out parts II, III and IV according to the instructions when the 1094-C form is printed. It will also not include this information in the electronic file that is generated (the same rules apply to the electronic form).
Part III prints on a separate page from Parts I and II. If you only have a one-page form when you print the 1094-C, the authoritative transmittal box is not checked.
If you do not check the authoritative transmittable box, then the IRS will never receive the information that must be reported in Parts II and III. This is the mistake that resulted in the penalty letters.
What the IRS does…
If you fail to file an Authoritative Transmittal, the IRS does not send a relatively friendly letter to you saying “Hey we think you forgot to file your Authoritative Transmittal, ’cause we never got one. Could you maybe send it over when you get a chance?”
Part III of the form includes the boxes where you indicate that you offered “Minimum Essential Coverage” (a key requirement of the Affordable Care Act). When Part III is never reported to the IRS, they simply assume that you never offered MEC coverage to any of your employees.
This is what generates the heart-attack inducing penalty amounts. The IRS takes the total number of forms filed and reported on line 18, and assesses the harshest penalty for each of these employees for each month of the year. (This despite the fact that you did not have the same number of employees working for each month of the year.)
If you receive one of these penalty letters, you will see the same number (that you reported on line 18 of the 1094-C form) repeated for each month in the ESRP Summary Table column (b). The IRS uses this number as the basis for calculating penalties.
What to do…
If you get a penalty letter, check your 1094-C form for 2015 to make sure that you checked the Authoritative Transmittal box, especially if the IRS has listed the same number of employees for all 12 months on the ESRP Summary Table.
Follow the instructions from the IRS to dispute the penalties if you did not have the Authoritative Transmittal box checked. Find out from the IRS whether you need to file a 1094-C form that indicates it is a corrected form or simply file an Authoritative Transmittal 1094-C form.
If you made this mistake for 2015, check your 2016 1094-C form also. Find out if you made the same mistake, and follow the direction of the IRS to file an Authoritative Transmittal for 2016 as well, before they send out penalty letters for the following year.
If there are other penalties for employees that receive a premium tax credit on the exchange, you will need to research these employees individually and determine if you have documentation to dispute the penalty assessments. It is possible for the penalty letter to include both types of penalties, so even if you file an authoritative transmittal 1094-C form to take care of the MEC coverage penalty, you may need to investigate employees the IRS shows as having received a PTC as well.