What’s the 411 on 1094 and 1095 Filing Obligations?

The passage of the Affordable Care Act (“ACA”) made it so that certain taxpayers, including Applicable Large Employers (“ALEs”), are required to file IRS Forms 1094-C and 1095-C annually, where they report information regarding health care coverage offered to employees. Below are common questions that arise concerning taxpayer filing obligations related to Forms 1094 and 1095.

The ACA requires all entities offering health coverage to disclose information about any health coverage offered to a covered individual and full-time employees through Forms 1095-C. These forms must be filed with the Internal Revenue Service (“IRS”), along with Forms 1094-C. These forms are utilized by the IRS in determining whether any penalties are due by the employer under the ACA reporting and disclosure requirements.

The ALEs are required to file Form 1095-C and Form 1094-C. On the other hand, the insurance provider completes the Form 1095-B and Form 1094-B.

Generally, employers with fifty or more full-time employees must complete Forms 1094-C and 1095-C to report the information required under the ACA. The form asks for information regarding the health coverage that the employer offer their employees and those employees’ dependents. Specifically, Form 1095-C asks the employer to report information about the type of health insurance offered to applicable employees. The Form 1094-C is a summary of the aggregated 1095-C forms filed by an employer for a given calendar year. The ACA requires that these forms be provided to employees by January 31, following the calendar year in which the coverage was provided.

For both Form 1094-C and 1095-C, the filings are due by February 28, for paper filers and by March 31, for e-filers. Forms 1094-C and 1095-C must be filed regardless of whether an ALE offers coverage or whether the employee enrolls in any coverage offered.

Section 6721, 6722, and 6723 of the Internal Revenue Code (“IRC”) provide for penalties to be assessed when required information returns are incorrect, incomplete, filed late, or not filed at all. An employer who fails to prepare required information returns such as Forms 1094-C and 1095-C will likely be assessed penalties for both the failure to file them and the failure to furnish employees with them.

Section 6721, specifically, provides a three-tier penalty structure for the failure to timely file correct information returns. The penalty tier is based on when, if at all, filers meet their obligations.

The penalty for the late filing, incorrect filing, or an absolute failure to file information returns is:

• Tier 1: $50 for each failure, up to a maximum of $500,000 per year if the failure is corrected on or before 30 days after the information return’s due date;
• Tier 2: $100 for each failure, up to a maximum of $1,500,000 per year if the failure is corrected on or before Aug. 1 of the calendar year in which the information return was required to be filed; and
• Tier 3: $250 for each failure, up to a maximum of $3,000,000 per year, if the required information returns are not filed in a complete and accurate manner on or before Aug. 1 of the calendar year in which the information returns are required to be filed.

Small businesses, which are defined for purposes of this statute as having gross receipts of less than $5 million, have lower maximum penalties. The statute also provides a safe harbor for certain de minimis errors.

Section 6722 provides for a penalty when a payee statement is not timely and/or correctly furnished. Section 6722 imposes a penalty for failure to furnish correct payee statements on or before the required date, and for any failure to include all of the information required to be shown on the statement or the inclusion of incorrect information. Generally, the penalty is $50 for each failure but the total amount that may be imposed is limited to $100,000 during any calendar year.

In cases involving intentional disregard of the filing requirements, the penalty is $100 for each failure and there is no limit on the total amount of the penalty that may be applied in any calendar year. As with the failure to file information returns, the failure to furnish payee statements carries an additional penalty for intentional disregard and, if there is intentional disregard, there is no cap on the penalty.

Finally, Section 6723 establishes a penalty for failing to timely comply with a specified information reporting requirement. The penalty under Section 6723 is $50 for each failure but the total amount that may be imposed is limited to $100,000 during any calendar year.

In our experience, in cases that involve these types of issues, a taxpayer can avoid the penalties under Sections 6721, 6722, and 6723 by showing their failure to file was due to reasonable cause and not willful neglect. To show reasonable cause, a taxpayer must prove that either (1) the failure was due to impediments beyond the filer’s control, or (2) significant mitigating factors impacted the filer’s ability to meet the filing requirements. Finally, a taxpayer seeking relief from the penalty based on reasonable cause must have acted in a responsible manner both before and after the filing error or the late filing occurred.

The recent Employer Reporting Improvement Act and the Paperwork Burden Reduction Act have brought some changes to these reporting requirements including the following:

• Employers who receive a Letter 226J (which is a letter issued to ALEs that may potentially owe a liability in this area) will now have ninety days to respond to the notice instead of the thirty days previously given to employers to respond. The ninety-day response time applies to any assessment proposed in taxable years beginning after December 23, 2024.
• A 6-year statute of limitations also now applies to the IRS’ assessment of ACA Penalties. Now the IRS has six years from the due date for the return (or the return filing date, if later) to assess these penalties. This new statute of limitations applies to returns due after December 31, 2024. Previously, the IRS took the position there was no statute of limitations for such assessments.

Taxpayers who face penalties as a result of their failure to file timely information returns should seek professional legal guidance as soon as possible. Failing to address issues raised by the IRS in a timely manner can result in heightened penalties in the end. Our team of experts has years of experience in this specific area, and with our group of professionals including multiple former IRS executives, our firm is able to provide taxpayers clear direction and assistance if needed.