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November 17, 2017

HRB 134 - 1) Employer Shared Responsibility Penalty Assessment Procedures; 2) Qualified Small Employer HRA (QSEHRA) Guidance; 3) Select 2018 Cost of Living Adjustments; and 4) Proposed 2019 Benefit and Payment Parameters (article)

HRB 134 - 1) Employer Shared Responsibility Penalty Assessment Procedures; 2) Qualified Small Employer HRA (QSEHRA) Guidance; 3) Select 2018 Cost of Living Adjustments; and 4) Proposed 2019 Benefit and Payment Parameters

Released November 17, 2017 I Download as a PDF

Employer Shared Responsibility Penalty Assessment Procedures

In recent days, the IRS has signaled its intent to begin assessing the Affordable Care Act’s employer shared responsibility (ESR) excise taxes.  As a reminder, the ESR provisions provide that if an employer does not offer adequate, affordable coverage to its full time employees, and at least one employee qualifies for premium assistance, i.e., the individual’s income is between 100 and 400 percent of the federal poverty level, then one of two penalties can be assessed:

  • The ‘no coverage’ excise tax, pursuant to IRC Section 4980H(a), applies if the ALE fails to offer minimum essential coverage to at least 95% [70% in 2015] of its full-time employees working 30 or more hours per week; and at least one employee qualifies for the premium tax credit.
  • The ‘inadequate or unaffordable’ excise tax penalty, pursuant to IRC Section 4980H(b), applies if the employer offers minimum essential coverage, but it either does not meet the minimum value standard, or is unaffordable; and at least one employee qualifies for the premium tax credit.


The chart below reflects the amount of penalties for purposes of calculating the ‘no coverage’ excise tax (IRC § 4980H(a)), and the ‘inadequate or unaffordable’ excise tax (IRC § 4980H(b)) for 2015 through 2018.


‘No Coverage’ Excise Tax

IRC § 4980H(a)

‘Inadequate or Unaffordable’ Excise Tax

IRC § 4980H(b)


















Up until the last few days, no guidance had been issued on how these penalties might be assessed.  The IRS has just now released guidance in the form of Q&As, specifically, Q&As 55-58 contained in the Making an Employer Shared Responsibility Payment discussion of the IRS’ Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act


In a nutshell, the IRS will send a “Letter 226J” to an applicable large employer (ALE) if it determines, based on the ALE’s Forms 1095-C submitted to the IRS, the individual’s tax filer information and information received from the marketplace, that for at least one month in the year, one or more of the ALE’s full-time employees received premium tax credit to pay for coverage, and the ALE is not qualified for the affordability safe harbor or other 2015 transitional relief.  The IRS is poised to begin sending these Letter 226-Js within the next few months; these Letters relate to the 2015 calendar year. 

The Letter 226-J will include a description of the IRC Section 4980H penalties, a schedule to make penalty payments, an ALE response form, a list of employees receiving premium tax credit, procedures if ALE disagrees with proposed penalty, actions the IRS will take if ALE fails to respond, as well as IRS contact information.  The IRS provides a sample Letter 226-J for viewing, as well as overview for “Understanding Your Letter 226-J”.


The ALE would need to respond to the IRS within the timeframe specified in the Letter (generally, within 30 days) either affirming that it agrees that the excise tax is due, or that it does not believe the excise tax is due.  The employer’s response is accomplished by filing a Form 14764, “ESRP Response” to the IRS.


The IRS will then send acknowledgement of ALE response by sending a “Form 227”. If ALE disagrees with the proposed payment amount contained in Form 227, the ALE can request a pre-assessment conference with IRS Office of Appeals.  If ALE fails to respond to either Letter 226-J or Letter 227, the IRS will then proceed to assess the amount of the proposed ESR payment and issue a notice and demand for payment (Notice CP 220J).


The most important  takeaway is for employers who may be impacted to have ready access to their 2015 offers of coverage, as well as their 2015 IRC Section 6056 reporting documentation, accomplished on the Form 1095-C series.  If an employer receives a Letter 226-J, it should ensure that it responds timely, and it should work closely with its tax and legal adviser throughout this process. 


Implementation Guidance: Qualified Small Employer Health Reimbursement Arrangements

One of the components of the President’s Executive Order released last month calls for the government agencies to seek ways to expand the rules surrounding health reimbursement arrangements (HRAs) to allow payment of individual premium (see Executive Order Directing Modifications to the Affordable Care Act, CBIZ Health Reform Bulletin 133, 10/16/17).   Under current law, an HRA can only reimburse individual health premium if the HRA is a retiree-only HRA, or a qualified small employer HRA (QSEHRA).


In response to the Executive Order, the Internal Revenue Service issued guidance (Notice 2017-67) providing clarifications and addressing implementation of QSEHRAs.  


As background and previously discussed in our Health Reform Bulletin 124, beginning January 1, 2017, certain eligible small employers can establish a qualified HRA for purposes of paying or reimbursing medical expenses including premium for health coverage through the individual market, incurred by their eligible employees and their family members.  The summary below incorporates the IRS guidance into the existing framework of QSEHRAs.


What employers can sponsor a qualified HRA? Generally, a small employer who employs fewer than 50 employees and offers no group coverage to its employees is eligible to sponsor a QSEHRA. Following are some clarifications to these requirements. 


For purposes of determining employer size, an eligible small employer is one who employs fewer than 50 employees on business days during the preceding calendar year.  Where a group of employers is treated as a single employer under the IRC control group rules (IRC Sections 414(b), (c), (m) or (o)), if any member of a control group provides disqualifying health coverage to its employees, then all members of the control group are disqualified from offering a QSEHRA.


With regard to second criteria for a QSEHRA, an eligible employer is one who does not currently offer group health insurance to its employees.  This determination is made on a monthly basis. 

Who are eligible employees? An eligible employee is defined as any employee of the eligible small employer. Retirees, former employees and non-employee owners are not eligible to participate in a QSEHRA. However, certain employees need not be offered coverage under a qualified HRA including:

  • Employees who have not completed 90 days of service;

  • Employees who have not attained age 25;

  • Part-time or seasonal employees. For this purpose, a part-time employee is one who customarily works less than 35 hours per week; a seasonal employee is one who customarily works less than 9 months per year;

  • Employees covered by a collective bargaining agreement where health benefits have been the subject of good faith bargaining; and

  • Employees who are nonresident aliens with no U.S. source of income.


If an individual’s status changes such that he/she is no longer in the excluded categories listed above, then the QSEHRA must be made available to that employee no later than the day immediately following the date the employee is no longer in the excluded category.


What are the requirements of a qualified HRA?  A qualified HRA is an arrangement that:

  • Is funded solely by the eligible small employer; like any HRA, no employee contributions can be made under this arrangement; and,

  • Provides, following the employee’s proof of coverage, for the payment or reimbursement for medical care expenses, as defined in IRC Section 213(d)), including premium for health coverage through the individual market, incurred by the eligible employee or his/her family members.  The annual amounts of payment and reimbursement are subject to inflationary adjustments. For 2017, the annual amount of payments and reimbursements is capped at $4,950 for employee-only, or $10,000 for arrangements that provide for payments or reimbursements for the employee’s family members.  For 2018, the total amount of payments and reimbursements increases to $5,050 for employee-only; $10,250 for family coverage. 


It should be noted that while an HRA integrated with an employer’s group health plan can pay or reimburse Medicare Part B or Part D premium, caution should be exercised by employers paying this type of premium due to Medicare secondary payer rules. 


The HRA must be made available on uniform basis. However, certain variations of payments or reimbursements based on family size or age are permitted. In addition, the amount of available reimbursements are adjusted on a pro-rated basis for employees who enter the HRA mid-year.  It is important to note that the HRA must be operated on the same terms for all eligible employees of the eligible employer; an eligible employee is not permitted to waive participation in the program.


What are the reporting and disclosure obligations of a QSEHRA? There are two reporting and disclosure obligations of a QSEHRA:

  • Form W-2 reporting. An employee’s total permitted benefits received under a QSEHRA must be reported on the Form W-2.  These amounts are reported in Box 12, using Code FF of the Form W-2, without regard to the amount of payments or reimbursements actually received. If the QSEHRA permits use of carryover amounts from prior years, those amounts would not be included in the amount reported for the current year.

  • Written notice to employees. Employers establishing a qualified HRA are required to provide a written notice to eligible employees about the availability of the program at least 90 days prior to the beginning of the program year.  The IRS guidance clarifies that for employers sponsoring a QSEHRA during 2017 or 2018, an initial written notice must be provided to eligible employees by the later of February 19, 2018, or 90 days before the first day of the plan year of the QSEHRA.  In addition, employers are encouraged to provide employees with information regarding the QSEHRA as soon as possible to allow employees to make informed decisions about health coverage.  For newly eligible employee, the initial written notice must be furnished on or before the first day the employee becomes eligible to participate in the QSEHRA.


Contents of notice.  The notice must include the following type of information:

  1. A statement of the amount of each permitted benefit for which the employee might be eligible. To the extent the permitted benefit varies based on the number of family members covered under the arrangement or their ages, the written notice for an employee may include either each available permitted benefit, or the permitted benefit for which that employee is eligible.  For a newly eligible employee whose permitted benefit is prorated, the notice must either include the prorated amount to which the employee is eligible, or specify that the prorated amounts are based on months of coverage, and include the information necessary to calculate the prorated amount.  The notice must also include the date on which the QSEHRA is first provided to the eligible employee.

  2. A statement that the eligible employee is required to provide the information relating to his/her permitted benefit amount to any marketplace in which the employee applies for advance payment of the premium tax credit (PTC).  Further, the notice must provide an explanation that the permitted benefit may affect the eligibility and amount of any PTC and that the employee should retain the written notice because it may be needed to calculate the PTC on the employee’s individual income tax return.

  3. A statement that if the employee is not covered under minimum essential coverage (MEC) for any month, then the employee may be subject to the ACA’s individual shared responsibility penalty for such month, and that reimbursements under the arrangement are includible in gross income.


Method of providing the notice.  This annually written notice can be provided in paper, or electronically, as long as the IRS’ electronic distribution rules are followed.


Coordination with Health Savings Accounts.  Employer contributions to a health savings account that are part of a Section 125 (cafeteria) plan can continue be made without jeopardizing employer eligibility for a QSEHRA.  However, if the QSEHRA coverage is not HSA-compatible, an employee will lose HSA eligibility.


What laws impact QSEHRAs? While a QSEHRA is exempt from the Affordable Care Act’s insurance market provisions, it would still be considered a “group health plan” for purposes of the ACA’s Cadillac tax, scheduled to take effect in 2020, as well as the Patient Centered Outcome Research (PCOR) fee.  An employer sponsoring a QSEHRA is not required to file or furnish a Form 1095-B.  Further, a QSEHRA would not subject to COBRA continuation of health coverage requirements.


Penalties for non-compliance.  Any violations relating to the QSEHRA rules could result in the IRC Section 4980D penalties of up to $100 per day, per participant.


Select 2018 Cost of Living Adjustments

In Revenue Procedure 2017-58, the IRS released 2018 inflationary or cost of living adjustments specific to certain provisions of the Affordable Care Act, as follows.


Small Business Tax Credit (SBTC).  Small businesses and tax-exempt employers who provide health care coverage to their employees under a qualified health care arrangement are entitled to a tax credit, as established by the Affordable Care Act.  To be eligible for the small business tax credit, the employer must employ fewer than 25 full-time equivalent employees whose average annual wages are less than $53,400 (indexed for 2018; the wage ceiling in 2017 was $52,400).  The tax credit phases out for eligible small employers when the number of its full-time employees (FTEs) exceeds 10; or, when the average annual wages for the FTEs exceeds $26,700 in the 2018 tax year (the phase-out wage limit for 2017 was $26,200).  As a reminder, only qualified health plan coverage purchased through a SHOP marketplace is available for the tax credit, and only for a 2-consecutive year period.


Individual Shared Responsibility Penalty.  The Affordable Care Act imposes a penalty for individuals who fail to maintain minimum essential coverage (MEC).  For 2018, the flat dollar penalty amount for failure to maintain MEC remains unchanged from 2017 ($695).  The penalty is calculated based on the greater of 2.5 percent of family income; or $695 per adult, $347.50 per child (family maximum: $2,085).


Premium Tax Credit for Coverage under a Qualified Health Plan.  Individuals who buy coverage through the marketplace and meet certain income criteria may be eligible for an advance credit payment wherein a portion of the premium is made directly to the insurer to cover the cost of coverage.  The amount of an individual’s premium tax credit is reduced by the amount of any advance credit payments made during the year.  If the advance credit payment for a taxable year exceeds the premium tax credit limit, the individual would owe the excess as additional tax, subject to certain inflationary limits.  For tax years beginning in 2018, the limitation on tax imposed for excess advance credit payments is determined using the following table:


Household Income (as percent of poverty line)

Limitation amount for unmarried individuals (other than surviving spouse and head of household)

Limitation amount for all other taxpayers

Under 200%



Between 200% and 300%



Between 300% and 400%




Increase in Tax Information Reporting Penalties.  The IRS can assess penalties when certain tax information is not provided on a timely basis. Specifically, penalties may be assessed for failure to file information returns or provide payee statements, such as the Form W-2 and Form 1099, and notably, the Affordable Care Act’s Forms 1094 and 1095, or related payee statements.  Beginning in 2018, these penalties will increase, as follows:

  • The penalty for failure to file a correct information return is $270 for each return for which the failure occurs, with the total penalty cap of $3,282,500 for a calendar year.

  • The penalty for failure to provide a correct payee statement is $270 for each statement for which the failure occurs, with the total penalty cap of $3,282,500 for a calendar year.

Special rules apply that increase the per-statement and total penalties if there is intentional disregard of the requirement to file the returns and furnish the required statements.


2019 Benefit and Payment Parameters

On November 2, 2017, the Department of Health and Human Services (HHS) published proposed Benefit and Payment Parameters for 2019, together with a Fact Sheet. These uniform standards are intended for health insurers and the marketplace to ensure health coverage options for consumers, as well as provide planning guidance for insurers and employers. Following are certain highlights of these rules that may be of interest to employers.


HHS Inflationary Percentage for 2019. The Affordable Care Act directs the Secretary of HHS to determine an annual premium adjustment percentage that is used to set the rate of increase for three parameters detailed in the law.  The proposed premium adjustment percentage for 2019 is 1.2516634051 or approximately 25 percent (for 2018, the premium adjustment percentage was approximately 16.17 percent). 

This percentage is calculated based on the projections of average per enrollee employer-sponsored insurance premiums from the National Health Expenditures Accounts that is calculated by the CMS Office of the Actuary. The percentage adjustment is applicable to:


  1. The maximum annual limitation on cost sharing.  The Affordable Care Act imposes certain cost-sharing restrictions, such as deductible and out-of-pocket limits on health plans. These annual out of pocket limits apply to insured plans offered through the marketplace, and insured and self-funded plans offered outside marketplace. Below are cost sharing limitations for 2017 and 2018, together with the proposed 2019 limitations:



Self-only Coverage


Other than Self-only Coverage








2019 (proposed)




  1. The required contribution percentage by individuals for minimum essential health coverage for purposes of determining eligibility for a hardship exemption under the individual shared responsibility requirement (IRC Section 5000A). One of these exemptions occurs if the cost to the individual to purchase coverage exceeds 8.05 percent (for 2018; this is proposed to increase to 8.3 percent in 2019) of household earnings. This affordability standard is distinct from the employer’s shared responsibility affordability standard and distinct from the affordability standard for being entitled to premium assistance.


  1. The assessable payment amounts under IRC Section 4980H(a) and (b) relating to employer shared responsibility. For 2019, the proposed ‘no coverage’ excise tax (IRC § 4980H(a) is calculated at $2,020; and the proposed ‘inadequate or unaffordable’ excise tax (IRC § 4980H(b) is calculated at $3,120 (see the Chart on page 1 of this HRB for 2015-2018 amounts).


Annual Open Enrollment Period.  For the 2019 plan year, the annual open enrollment period for obtaining coverage through the marketplace will run from November 1, 2018 through December 15, 2018.


Federal Exchange User Fees.  Insurers participating in the federal marketplace are subject to a user fee to help pay for the operational expenses of the marketplace. For 2017 and 2018, the user fee rate is 3.5% of the monthly premium charged by the insurer. Based on CMS’ enrollment and premium projections, the 3.5% user fee in 2019 will remain the same.   Insurers in state-based exchanges that use the federal exchange platform will be charged 3 percent.



About the Author: Karen R. McLeese is Vice President of Employee Benefit Regulatory Affairs for CBIZ Benefits & Insurance Services, Inc., a division of CBIZ, Inc. She serves as in-house counsel, with particular emphasis on monitoring and interpreting state and federal employee benefits law. Ms. McLeese is based in the CBIZ Kansas City office.


The information contained herein is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations. The information contained herein is provided as general guidance and may be affected by changes in law or regulation. The information contained herein is not intended to replace or substitute for accounting or other professional advice. Attorneys or tax advisors must be consulted for assistance in specific situations. This information is provided as-is, with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.

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