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IRS Issues ACA Reporting Instructions For 2021 Tax Year

Accounting Support • Jul 22, 2021
The IRS updates the instructions for filing Forms 1094-C and 1095-C almost every year. To stay compliant, organizations must have an idea of new updates.
IRS Issues ACA Reporting Instructions For 2021 Tax Year

Organizations with 50 or more full-time or FTE workers are required to stay compliant with ACA’s healthcare mandate. This mandate requires such Applicable Large Employers to offer minimum essential coverage to workers. Employers need to submit an annual report to the IRS to avoid penalties.

To submit the annual report, organizations must file Form 1094-C and 1095-C. Any mistake to these forms may cause serious troubles for employers. The IRS updates the instructions for filing Forms 1094-C and 1095-C almost every year. To stay compliant, organizations must have an understanding of new updates.

Draft ACA Reporting Instructions for The Year 2021

The IRS recently updated the instructions of draft 1094-C and 1095-C for the 2021 tax year. The modifications and new terms are identified in this article. 

For the tax year 2021, the Form 1094-C instructions will remain the same, however there are an two new codes that are being added to the Form 1095-C. IRS has added these new codes for use on Line 14: 1T and 1U. 

1T Code

There is an addition of 1T code in Line 14 of Form 1095-C. According to draft instructions, the 1T code will be used when the applicable person and their spouse get a Health Reimbursement Arrangement (HRA) coverage offer from the employer. In code 1T, the primary residence zip code of employees was used to check the affordability. It is important to notice that this new addition excludes dependents as the HRA coverage recipients are extended.

1U Code

The other addition in Line 14 of Form-1095 is code 1U; it does not differ much from code 1T. The only difference lies in the criteria to determine the affordability. According to the instructions for the 1U code, it will be used when an applicable person and their spouse get HRA coverage from the employer. However, in Code 1U, the employee’s primary employment site zip code affordability safe harbor is used to determine the affordability.

Other Codes

Various other codes 1V, 1W, 1X, 1Y, and 1Z are also included in Line 14 of Form 1095-C. These codes are exclusively reserved for future  use. When the IRS releases its final instructions, one or more of these codes may be used for particular offers of coverage situations. 

Employers must note that the 2021 instructions are the same as they were for the 2020 tax year. The codes 1L, 1M, 1N, 1O, 1P, 1Q, 1R, 1S were first introduced in the draft for the 2020 tax year. These codes and their instructions are present in the draft instructions for the 2021 tax year. 

Both codes are related to HRA coverage but have different affordability criteria. HRAs are specific health plans that are based on accounts. Employers offer HRAs to their employees to help them control health-related costs and medical expenses. These are non-taxed reimbursements offered to workers to help pay for monthly health insurance payments and other health insurance-related costs. 

Initially, organizations were allowed to extend HRAs as qualifying coverage offers as required by the ACA’s Employer Mandate. It was a part of Executive Order No. 13813. The executive order was introduced under the Trump administration in 2019 and became applicable to the plans beginning January 2020.

A Brief Overview of ACA Healthcare Mandate for Freshers

According to the Employer Mandate, Employers are required to file Form 1094-C & 1095-C. Furthermore, employers have to submit their ACA reporting information to the IRS annually.

ACA’s Employee mandate requires Applicable Large Employers (ALEs) or employers with 50 or more full-time employees to offer Minimum Essential Coverage (MEC) to workers. This mandate is also applied to employers with equivalent full-time employees. Such ALEs are required to provide MEC to at least 95% of their full-time workforce and their dependents. The coverage must meet the Minimum Value (MV) and is Affordable for the employee. Otherwise, they will be subject to penalties under Internal Revenue Code (IRC) Section 4980H.

Why Compliance to Employer’s Mandate is Important?

In case of non-compliance with the ACA’s employer mandate, organizations will receive a penalty letter. IRS issues penalty letter 226J and such employers have to pay heavy fines. The IRS is issuing these penalty letters from the 2019 tax year to date. For the tax year 2019, the agency issued the prosecutor penalty notice as Letter 5669. 

Take Care of These Few Things

After Complying with healthcare law’s employer responsibilities, the organization still needs to take care of a few things. The most important of them is filing Form 1094-C and Forms 1095-C correctly. Otherwise, organizations may have to face complexities including penalties. A recent report by the Treasury Inspector General for Tax Administration proposed that the agency also issue penalty letters to organizations that complied with the Employer Mandate. Such organizations fail to report their ACA data correctly.

Organizations must know how to minimize the risks and maximize compliance. Having a proper idea of how to fill and submit forms and a complete understanding of the instructions is equally important. If you need assistance in meeting the ACA’s Employer Mandate requirement, there is a detailed article to help you. 

For new ALE’s, they must have information on ACA penalty amounts, affordability percentages, and filing deadlines. Furthermore, they must be familiar with steps for responding to penalty notices, and best practices for minimizing IRS penalty risk. There are detailed articles present on our website to help organizations make their ACA healthcare compliance process much easier.

The Takeaway

The ALE’s and organizations with fifty or equivalent employees are required to provide minimum essential coverage to their workers. Then, they need to fill forms 1094-C and 1095-C to the IRS. In the 2021 tax year, there is an addition of two codes in Line 14 of Form 1095-C. In code 1T instructions, the employees will be able to receive ME with affordability based on their residential zip code. Whereas the affordability of employee's minimum essential coverage in code 1U will be defined on their employment site’s zip code.

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