What Should Employers Do With Exchange Notices?
As an employer, you may receive a notice from a health insurance Exchange that an employee has applied for coverage and is eligible for a premium assistance tax credit. These Exchange notices have generated both confusion and concern among employers. This Article explains the notice process, its relationship to the assessment of employer shared responsibility tax penalties under the Affordable Care Act ("ACA"), and the range of possible responses by the employer. The Article also describes proactive measures that employers may want to consider to avoid triggering unnecessary payroll tax audits or worker retaliation claims under the Fair Labor Standards Act ("FLSA").
When an individual applies for health insurance coverage through an Exchange, as part of the application process the individual may indicate that his or her employer did not offer health insurance coverage, or that the employer’s offer of health insurance coverage was not "affordable" or did not provide "minimum value" as defined by the ACA. If the individual indicated one of these criteria on the application, and the individual appears to meet the income criteria for premium-subsidized Exchange coverage, then the employer will receive a notice from the Exchange that its employee has been determined to be conditionally eligible to receive a premium assistance tax credit.
This "notification" process merely serves as an early warning system to the employer that an employer shared responsibility tax penalty under the ACA may be assessed in the future. (Recall that one of the prerequisites for the assessment of ACA penalties is that a full-time employee must apply for and receive premium-subsidized coverage through an Exchange.) Importantly, the receipt of an Exchange notice does not mean that an employer is being assessed a shared responsibility tax penalty under the ACA by the Internal Revenue Service. In fact, Exchange notices are sent to all employers, including employers who are not subject to penalties under the ACA because they have fewer than 50 full-time equivalent employees and therefore are not required to offer health insurance coverage. The actual assessment of ACA penalties by the Internal Revenue Service will be done through a separate "certification" procedure that has yet to be established. Once the certification procedure is operational, the employer will have the right to appeal the assessment of an employer shared responsibility tax penalty.
1. The "Do Nothing" Response. If it appears that the information in the Exchange notice is correct, then the employer does not need to respond to the notice at all. Failing to respond to an Exchange notice does not prevent the employer from disputing the assessment of a shared responsibility tax penalty in the future under the certification procedure. If an employer shared responsibility tax penalty is erroneously assessed by the Service in the future, then the employer can appeal an erroneous assessment through the separate certification appeal process.
If the Exchange notice contains information that is inaccurate or incorrect, however, then the employer may decide to respond to correct the record and possibly avoid the assessment of an ACA tax penalty in the future. Alternatively, the employer may decide to do nothing and wait and see if a tax penalty eventually is assessed by the Internal Revenue Service. Responding to the notice will involve an administrative burden that may lead the employer to conclude that waiting for the certification procedure to become operational is the best response.
- The "Informal Letter" Response.
An employer may respond to an Exchange notice without invoking the Exchange’s formal appeal procedure by writing a letter to the employee, with a copy being provided to the Exchange. An informal letter response generally would inform the employee that the employer had received an Exchange notice and then respond by providing accurate information to the employee. For example, the letter might state that the employer has less than 50 full-time equivalent employees and is not required to offer health insurance coverage under the ACA to its employees. Or, if the Exchange notice indicated that the cost of the employer’s coverage was not affordable for the employee, the letter may state that an offer of health insurance coverage was made to the employee and describe the lowest cost for self-only coverage.
In communicating with the employee, it is crucial that the tone of the letter be cordial and informational to avoid future potential retaliation claims under Section 18C of the FLSA. Section 18C prohibits an employer from discriminating against an employee with respect to compensation, terms, conditions or other privileges of employment because the employee has applied for and received a premium assistance tax credit. Additional proactive measures to prevent future Section 18C claims are discussed below.
- The "Formal Appeal" Response.
The employer may decide to respond to an inaccurate Exchange notice by invoking the Exchange’s formal appeal process. If it appears that an employee has provided inaccurate information that could result in the assessment of an ACA tax penalty, correcting the record at the early warning notification stage might eliminate the need to pursue an appeal at the tax assessment certification stage. In addition, correcting the record may prevent an ineligible employee from receiving an advance premium assistance tax credit, only to later discover when the employee prepares his or her income tax return that the premium assistance tax credit must be repaid to the Internal Revenue Service. Again, if the formal appeal procedure is pursued, the employer should take care to avoid the perception that the employee is being "punished" for applying for a premium assistance tax credit.
Although the "do nothing" response may be the preferred course of action, employers should consider whether a response may ward off a future potential problem. For example, if the employer uses independent contractors, and an individual has indicated to the Exchange that he or she is an "employee" of the employer when in fact the individual is an independent contractor, the employer should consider a response to correct this misclassification at the early warning notification stage. Waiting to correct the record in this situation may create a problem at the later certification stage. Although the certification stage procedure has yet to be finalized, it is possible that the Internal Revenue Service may coordinate the certification stage procedure with its employer payroll tax records. In that event, misclassification of an independent contractor as an employee, if left uncorrected at the early warning notification stage, could result in a payroll tax audit at the certification stage to determine if other workers of the employer are being misclassified as independent contractors for payroll tax withholding purposes.
In addition to evaluating the merits of responding to an Exchange notice, all employers should consider carefully who in the organization will receive, review, and possibly respond to Exchange notices in order to avoid potential worker retaliation claims under Section 18C of the FLSA. Section 18C prohibits an employer from discriminating against an employee with respect to compensation, terms, conditions or other privileges of employment because the employee has applied for and received a premium assistance tax credit. If possible, the designated recipient for Exchange notices should not be involved in the employer’s workforce management decisions. Security measures should be taken to ensure that the identity of an employee who is the subject of an Exchange notice is kept confidential from supervisors or other persons who may be involved in future decisions concerning compensation, transfers and re-assignments, lay-offs and terminations, or reductions in hours below the 30 hours per week necessary to maintain full-time employee status under the ACA.
The decision to respond (or not) to an Exchange notice involves a nuanced analysis of multiple factors that are unique to each employer. If you would like to discuss the appropriate response for your company’s situation or receive additional guidance in formulating a written response, please call Adam Cockerill at 402-343-3808 or email him at email@example.com.