IRS Annual Reporting for the Healthcare Industry- Part 1
On April 7, 2017, the Treasury Inspector General for Tax Administration (“TIGTA”) issued a report that assessed the status of the IRS’ ability to process employer compliance with the Affordable Care Act, which is determined via Form 1094 and 1095 annual reporting. As many in the industry suspected, the IRS experienced numerous issues with evaluating forms for 2015 – the first year reporting became mandatory.
This suspicion led to a widely-held belief in the industry that 2015 was a “test run” for the IRS and that enforcement for 2015 violations may not occur. However, the TIGTA report does state the system issues the IRS was having earlier have been resolved and testing would be complete in March of this year, allowing the IRS to finally process 2015 returns. This serves as a serious wake-up call. Reporting is here to stay and the IRS is looking at those reports which means it’s a good time to review your processes to ensure compliance with the mandate. More specifically, start with properly identifying your full-time employees.
This can be a difficult task for employers in the healthcare sector. The ACA has two classes of employees – full-time and part-time, while healthcare employers typically see full-time, part-time, PRN and contract employees as different classes. So, how do you reconcile them?
You start with identifying which employees are full-time under the ACA. The IRS defines a full-time employee as an employee who averages 30 hours of service per week or more – which works out to 130 hours of service per month. The regulations outline two ways to count these hours – the Monthly Method and the Lookback Method.
The Monthly Method is straightforward. Employees who accumulated 130 hours of service in a calendar month are considered full-time for that month. Obviously, this works well with employees who are clearly full-time and don’t switch to part-time intermittently. The good news is that it’s likely most of your employees fall into this set of circumstances, and it’s easy to track them. However, PRNs and contract employees may not be. They may have hours that vary based on several factors such as desired workload, filling in for other people, demand for services and more.
That’s where the Lookback Method comes into play. The Lookback Method gives the employer the opportunity to evaluate certain employees over the course of a measurement period and are only required to offer coverage if those hours exceed a 30 hour/week threshold. Conceptually, this system works quite well for the PRNs and contract employees, as the varying schedules don’t have an immediate impact – you can look at their hours over a year and determine if they’re eligible or not.
So, which one is correct? That depends on how much investment you want to make on tracking employees. The Monthly Method is the easier of the two. You’re only concerned with looking at someone’s hours once per month, and if it’s 130 or more, they’re full-time. The Lookback Method requires software, proper training for hiring managers (in order to avoid issues with defining someone as variable instead of full-time/part-time), and has both a 12-month lead-in and a 12-month administrative tail associated with each plan year.
In my next blog “IRS Annual Reporting for the Healthcare Industry – Part 2”, we’ll outline how these two methods apply to PRNs and contracted employees. In the meantime, need more background on the Monthly and Lookback Methods? Contact a member of the ‘A’ Team.
- The IRS Reporting Dilemma
- ACA Repeal and Replace Roadmap Replay
- We’re Going Back to the Future (of Healthcare Reform)
- Compliance Support Page
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