In Chief Counsel Memorandum 20200801F, the IRS held that no statute of limitations applies to assessing the employer shared responsibility payment (ESRP) under IRC §4980H.
The ESRP is the payment required to be made by an employer under the employer shared responsibility provisions of the Affordable Care Act (ACA), often referred to as the “employer mandate”). The employer mandate generally incentivizes applicable large employers (ALEs) to offer adequate and affordable health insurance coverage to their full-time employees and full-time employees’ dependents. An ALE is an employer with at least 50 full-time employees, or their equivalent. If an ALE fails to offer health insurance or offers substandard coverage to its employees, the employer may be subject to a penalty (i.e., assessment payment). The IRS was tasked with oversight of enforcement and the imposition of penalties via IRC §4980H.
In reaching its conclusion that no statute of limitations applies to the payment or the penalties, the IRS observed that ESRP liability cannot be determined using tax returns filed by an applicable large employer (ALE) because no return contains all the data needed to calculate the ESRP. As a result, filing the returns to comply with IRC §4980H does not start the running of the standard three-year statute of limitations period for examinations.
Under IRC §4980H, employers are liable for an ESRP in one of two scenarios each month: (1) where the ALE fails to offer essential minimum coverage to at least 95% of its full-time employees, or (2) where the ALE offers full-time employees essential minimum coverage, but it is unaffordable. In the latter situation, the ESRP is based on the number of full-time employees who are certified as qualified for the PTC. As such, the ESRP for those employers cannot be determined until there is an exact count of how many employees are entitled to the PTC.
To determine how many full-time employees received a PTC, the IRS must cross-reference the employer’s Form 1094-C and 1095-C (which an ALE must file for each of its full-time employees) with the employee’s Form 1040. The potential ESRP liability is then calculated and the IRS sends Letter 226-J to the ALE, proposing the assessment.
In its Memorandum, the IRS said, “Even though there is no return that can be filed by an ALE to report and pay a determined liability under §4980H, ALE taxpayers have claimed that the filing of required information returns is sufficient to start the statute of limitations under §6501(a).” IRC §6501 provides the three-year statute of limitations for examination of a return and assessment of any liability or associated penalties.
The IRS applied the test in Beard v. Commissioner to determine if the return filed by the ALEs was enough to start the statute of limitations running. Under this test:
- There must be sufficient data to calculate tax liability;
- The document must purport to be a return;
- There must be an honest and reasonable attempt to satisfy the requirements of the tax law; and
- The taxpayer must execute the return under penalties of perjury.
Because the returns filed by the ALEs under IRC §4980H “do not contain sufficient data to calculate the liability,” the returns do not satisfy the first requirement of the Beard test and, therefore, do not start the running of the limitations period. The IRS reached this conclusion despite the ability to cross-reference with the full-time employee’s Form 1040 because the information contained solely in the employer’s return failed the first prong of the Beard analysis.
Interestingly, at the time of filing its Forms 1094-C and 1095-C, the ALE generally does not know whether its full-time employees are eligible for the PTC, whether it is liable for payments under IRC Section 4980H, or how much those payments would be.
This Memorandum allows the IRS to seek ESRPs indefinitely. To date, the IRS has systematically reviewed the tax returns and processed the ESRP assessments year-by-year. Relying on current IRS practices, it seems unlikely that the IRS would revisit assessments for earlier years given its current practices. However, it is now a possibility.
The Memorandum also affects how contingencies are addressed in an ALE’s accounting practices. Depending on its facts and circumstances, the Memorandum can now raise questions regarding the employer’s timing in releasing liabilities based on guidance contained in ASC 450, Contingencies. Further, an employer that previously released a liability based on an expiring statute of limitations may need to consider if it now needs to reestablish this contingent liability.
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