Marketplace Subsidy Notices – Appeal or Not?

Employers occasionally receive notices from the public Marketplaces (i.e., Exchanges) indicating that an employee is receiving a subsidy (premium tax credit or cost-sharing reduction) for individual Marketplace coverage. These notices are important because an employee’s subsidy eligibility can potentially trigger employer shared responsibility penalties under Internal Revenue Code §4980H. However, receipt of a Marketplace notice does not mean the employer automatically owes a penalty, and employers are generally not required to appeal the notice.

Instead, any potential §4980H penalties are ultimately determined later by the IRS through reconciliation of the employer’s ACA reporting on Forms 1094-C and 1095-C. As a result, some employers choose not to appeal Marketplace subsidy determinations and instead address any penalty issues directly with the IRS if a Letter 226J is later issued.

That said, Marketplace notices can still serve as a useful indicator that an employee may have incorrectly received a subsidy (if the employee was offered minimum value, affordable coverage by the employer); or that there may be an affordability or offer of coverage issues worth reviewing.

For employers that choose not to appeal, it may still be worthwhile to communicate with affected employees if there is reason to believe they may not actually qualify for Marketplace subsidies due to the employer’s offer of coverage.

Background

The Affordable Care Act (ACA) requires public Marketplaces to notify employers when an employee receives subsidized Marketplace coverage and to provide an opportunity for employers to appeal the determination. We are aware of only a handful of states that actually send out such notices. Most often we see such notifications from Minnesota and Washington.

Each Marketplace has flexibility in administering its own appeal procedures, so appeal processes can vary by state. Information regarding federally facilitated Marketplace appeals and some state Marketplace processes is available here. The forms and processes for all other states may be found by visiting the state’s Marketplace site.

The process generally involves filing a paper appeal, providing documentation (e.g., SBC indicating minimum value, rate sheet showing employee contributions for single coverage, and rate of pay information for employees), and in some cases, participating in a hearing.

Note: Marketplace notices are not IRS penalty assessments. Rather, they are informational notices generated by the Marketplace regarding an employee’s subsidy eligibility. Employer shared responsibility penalties under §4980H are assessed separately by the IRS after reviewing the employer’s ACA reporting filings. If the IRS later proposes a penalty, it will generally issue Letter 226J, which includes a separate IRS appeal and response process.

Should Employers Appeal the Marketplace Notices? Maybe Not…

Small Employers (fewer than 50 FTEs)

Small employers have no penalty exposure under §4980H. The only reason such an employer may want to appeal would be in the interest of employee relations. The appeal could prevent an employee from incorrectly receiving a Marketplace subsidy that might have to be paid back at the end of the year via the individual’s personal tax return. However, it may be easier to have a conversation directly with the employee suggesting they confirm their eligibility for a premium tax credit rather than working through the appeal process.

Applicable Large Employers (50 or more FTEs)

For applicable large employers (ALEs), a notice from the Marketplace does not necessarily mean the employer will owe a penalty payment under §4980H. Such penalties are assessed by the IRS after reconciliation of the ACA employer reporting on Forms 1094-C and 1095-C. That being said, an employer might choose to handle the appeal differently depending on whether a part-time or full-time employee is involved.

Part-Time Employees
Because ALEs are not required to offer coverage to part-time employees under §4980H, Marketplace notices involving part-time employees don’t suggest any potential penalty risk for the employer.

As with small employers, the primary concern may instead involve employee relations and ensuring employees understand potential subsidy repayment obligations.

Full-Time Employees
For full-time employees, the analysis typically falls into two categories:

• If the employee was NOT offered minimum-value, affordable coverage, there is nothing to appeal; rather, it serves as an indication that the employer will probably owe a penalty under §4980H for at least some months of the year.
• If the employee was offered minimum-value, affordable coverage, the employer has two options: (i) appeal by providing proof that minimum value, affordable coverage was offered; or (ii) don’t appeal, consider communicating potential subsidy liability to the employee, and then reconcile with the IRS if a Letter 226J is received in the future.

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