ACA Enforcement: Documentation is Key

On September 21, 2016 By Tevis

Don’t be fooled by the Affordable Care Act’s (ACA) governing Agencies (i.e. Internal Revenue Service and Departments of Labor and Health and Human Services) history of transitional relief. We anticipate that Congress will welcome the assessment of penalties at this time. Certainly, we have some unknowns regarding the fate of numerous ACA provisions. In the meantime, we recommend that plan sponsor (or their related vendors) preserve all ACA reporting data and its supporting documentation.

Why It Matters

ERISA Compliance: Benefit Disclosures. The Employee Retirement Income Security Act (ERISA) requires ERISA plan documents to describe the plan’s terms and conditions, including eligibility rules. Department of Labor (DOL) regulations require that an ERISA plan’s Summary Plan Description (SPD) include a statement of the eligibility requirements for participation and any conditions that must be met in order to receive benefits, in a language easily understood by the average plan participant. At $147/day per plan participant (ERISA penalties increased effective August 1, 2016), the penalties can be significant. We expect the same range of penalties for ACA compliance failures.

IRS Audits and Appeals. ACA imposes potential penalties on applicable large employers (ALEs) that do not offer affordable minimum value health care benefits to most full-time employees and their dependent children (Sections 4980H(a) and (b)) and requires the annual reporting of such benefits on Forms 1094-C/1095-C. Now that the IRS has collected its first year of 1094/1095 Forms, the agency is tasked with finding employees on those Forms who are also receiving subsidized health care coverage through an Exchange. The Internal Revenue Service (IRS) has already begun sending out letters to plan sponsors implying potential penalties for noncompliance. ALEs should be ready to appeal the IRS’s penalty determination, which will include the production of documents showing the ALE’s compliance with the ACA Large Employer Mandate.

Documentation Methods and Recordkeeping

ERISA Recordkeeping Rule. ERISA requires records to be kept and made available to the Agencies for examination for a period of not less than six years. Generally, under ERISA rules, the plan administrator is responsible for ERISA plan recordkeeping (ledgers, checks, invoices, bank statements, contracts, agreements, administrative guidelines, plan documents, insurance policies and documentation, documents evidencing participant notice distribution processes, open enrollment materials, etc.). DOL regulations regarding electronic retention are designed to ensure that electronic records are as secure, legible, and as usable as paper copies.

ACA Potential Applicability. ACA regulations do not provide any specific rules on ACA-compliance documentation procedures; however we expect the Agencies to implement the six-year rule on recordkeeping. Since many plan sponsors rely on third parties (insurance carriers, TPAs, payroll administrators, 1094/1095 and 5500 preparers, etc.) for the day-to-day management of a plan, it may be a good idea to check with any applicable vendors holding plan records to make sure they maintain the complete documentation, not just summaries, for six years and agree to release the documentation upon termination of its relationship with the plan sponsor.

Documenting ACA Compliance

  1. ALE Status. ALEs are employers with an average of 50 or more full-time/Full Time Equivalents (FTE) in the prior calendar year. ALEs must comply with the ACA’s Large Employer Mandate or face potential penalties. Employers close to or over the 50-employee count, especially, should document the method used to determine ALE or non-ALE status.
  2. Tracking Hours Worked. For ALEs, tracking and documenting each employee’s hours of service is essential for determining ALE status as well as to fulfill the health care coverage requirements of the Large Employer Mandate. ALEs should be ready to show the IRS that the internal policy used to determine an employee’s hours of service is in compliance with ACA regulations, along with specific data for each employee (i.e., start date, hours worked monthly, time off, termination date). ALE’s tracking the hours of service of variable hour employees using the Look-Back Measurement methodology should also document each variable hour employee’s Measurement, Administrative, and Stability Periods.
  3. Plan Eligibility Rules. In order to comply with ACA’s Large Employer Mandate, ALEs must offer health care coverage to full-time employees that work on average 30 or more hours per week (130 hours or more per calendar month). ALEs that hire employees who are not reasonably expected to work full-time will need to document the method they use to determine the full-time status of “variable hour employees,” in compliance with the final regulations (i.e. Look-Back and Monthly Measurement Methods). Even though the ACA does not explicitly require written documentation of these eligibility rules, ERISA does. Plan sponsors should have a written policy that accurately documents how eligibility (including variable hour employee eligibility) for health care coverage is determined (i.e. Summary Plan Descriptions, Employee Handbook, etc.).
  4. Offers of Coverage by the ALE. ALEs should maintain detailed records to demonstrate that an offer of coverage was made and to whom. Importantly, these records will substantiate the information reported by ALEs on the 1094/1095 B and C Forms, subject to the following rules:

For example, if an ALE makes offers of coverage during its open enrollment period by mail or electronically to each eligible employee, these offers of coverage might be documented by (a) retaining a copy of the enrollment package or online enrollment materials; (b)¬†attaching a description of the employer’s procedures for distributing the enrollment packages, and if sent electronically, a copy of the email notifying employees of the availability of enrollment materials; (c) attaching a list of the employees to whom the packages were distributed or received email notifications, including their mailing/emailing addresses; (d) attaching a contemporaneous declaration from the responsible employee stating that the regular procedures were followed; and (e) attaching signed waiver forms from employees who declined coverage.

  1. Offers of Coverage by Other Entities. In the case of an ALE member that is relying on an offer of coverage being made on its behalf by another organization, such as a PEO or as a member of an aggregated ALE group, the ALE member should obtain records from that other organization, on a timely basis, that demonstrate that the other organization made the offer of coverage.

In addition, in the case of an offer of coverage made by a staffing firm on behalf of a client employer, the client employer should maintain records demonstrating that the fee the client employer paid to the staffing firm for an employee enrolled in health coverage through the staffing firm was (or would have been) higher than the fee the client employer paid (or would have paid) for the same employee if that employee did not enroll in health coverage through the staffing firm. Such records might include a fee schedule or invoice from the staffing firm to the client employer reflecting the additional charge for coverage through the staffing firm.

  1. Limited Non-Assessment Periods. For purposes of reporting on Forms 1094/1095, an employee in a Limited Non-Assessment Period is not considered an employee during that period, relieving the ALE from assessable penalties under 4980H. ALEs should document these penalty-free periods:
  1. ACA-Compliant Health Care Coverage. The plan sponsor must maintain records for each individual offer of coverage regardless of the type of plan offered.

Copyright © 2016 Alfred B. Fowler, Attorney at Law · All Rights Reserved. Reprint with permission only. This Benefits Alert is published as an information source for our clients and colleagues. It is general in its nature and is no substitute for legal advice or opinion in any particular case.

Tags: , ,