Employers have long struggled with the issue of not having SSNs for certain dependents on their health plans and/or getting bounce backs on 1095-C filings due to incorrect dependent SSNs.
In the early years of 1095 filings, employers were protected by regulatory guidance, providing that if a “good faith effort” could be shown, penalties for non-compliance would not be applied. However, seven years have passed since the first filings were required, and the IRS now presumes that enough grace was provided to “work out the kinks”. Therefore, the IRS has expressly removed the “good faith effort” protection for filing 1095s beginning with filings for the 2022 plan year that have just been completed.
While the good faith protection is gone, issues with missing or incorrect SSNs still remain. This leaves employers with the reality that they must properly document their outreach efforts to obtain SSNs or face potential penalties for these errors.
What are the penalties?
Information reporting penalties are outlined in the IRS document Instructions for Forms 1094-C and 1095-C.
Applicable Large Employers are subject to the employer-shared responsibility penalty payments of the ACA. These penalties are both well-established and well-known. However, they are not the only penalties that may be levied. Employers that fail to comply with the information reporting requirements may also be subject to reporting penalties for failure to file correct information returns and failure to furnish correct payee statements (1095-Cs).
For the 2022 tax year, the following penalties apply for failing to file/provide correct information returns:
- Failure to File: This means failure to file a return or failure to file a correct return (meaning filing an incorrect return). This applies to Form 1094-C and the accompanying Form 1095-Cs. The penalty is $290 for each return for which the failure occurs. The total penalty for a calendar year is capped at $3,532,500.
- Failure to Provide: This means failing to provide a return to plan participants or failure to provide a correct return (meaning providing an incorrect return). This applies to the Form 1095-Cs that must be provided to plan participants. The penalty for failure to provide a correct payee statement is $290 for each statement for which the failure occurs. The total penalty for a calendar year is capped at $3,532,500.
- Intentional Disregard: Special rules apply that increase the per-statement and total penalties if there is intentional disregard of the requirement to file the returns and furnish the required statements.
Penalties may be waived if the failure was due to reasonable cause and not willful neglect.
Getting the Penalties Waived
Notice the last sentence above: “Penalties may be waived if the failure was due to reasonable cause and not willful neglect.”
In a world where missing and incorrect SSNs for dependents remain a reality that many employers struggle with, this sentence is our friend! While compliance will not be nearly as easy as the former “good faith effort” standard, understanding the requirements for avoiding the penalties is an important first step for employers. In short, it all comes down to understanding the definition of Reasonable Cause. If the reasonable cause criteria are met, the authorities have indicated that the penalties will be waived.
What is Reasonable Cause?
The IRS has a very specific definition of Reasonable Cause. The IRS regulations outline a complex and layered definition of Reasonable Cause . . . with five different layers. Following are the key elements thinned down for how they apply to these troublesome SSN issues for 1095 filings:
General Rule: The penalty for a failure relating to an information reporting requirement is waived if the failure is due to Reasonable Cause and is not due to willful neglect.
Reasonable Cause: The relevant, reasonable cause elements require that the failure must arise from events beyond the filer's control. Here the IRS presents several possibilities for such impediments, but the relevant section can be paraphrased: Certain Actions of a person providing necessary information with respect to the return or statement.
Certain Actions: The relevant certain action elements require that the person who must provide the information to the employer either does not provide the information or provides incorrect information upon which the filer relied in good faith. To substantiate, the employer, upon request of the IRS, showing that the failure was attributable to the person who was supposed to provide the information. documentary evidence upon request of the IRS showing that the failure was attributable to the person who was supposed to provide the information.
Special Rules for SSNs: There are special rules relating to the availability of a waiver of penalties where the filer's failure relates to an SSN, and the failure is attributable to the actions of the person. Specifically, the employer must act in a Responsible Manner.
Responsible Manner: Employers will be deemed to have acted in a responsible manner only if they satisfy the requirements of the Special Rules for Missing/Incorrect SSNs.
After all these layers are outlined, it comes down to this: If an employee does not provide an SSN or provides an incorrect SSN, the baseline criteria for Reasonable Cause is triggered. However, In order to avoid penalties, employers must also respond by acting in a Responsible Manner. This means following and documenting a 3-Step Process for trying to obtain the requisite SSNs.
The 3-Step Process for SSN Outreach
A Reasonable Cause penalty waiver requires the employer to make one initial solicitation and two annual solicitations for the SSN (if the prior solicitations did not yield results).
- Initial Solicitation. Must occur at the time an employee first elects coverage under the benefit plans or first adds a dependent without an SSN.
- First Annual Solicitation. Must be made on or before December 31 of the year in which the initial coverage election becomes effective (or by January 31 of the following year for elections in the preceding December).
- Second Annual Solicitation. Must generally be made by December 31 of the year immediately following the calendar year in which the coverage becomes effective.
Upon Receipt of an SSN
Upon receiving an SSN or a corrected SSN as a result of one of the solicitations, employers must then include that SSN on any information returns filed after the date that the employer receives the SSN.
What if initial and subsequent annual solicitations haven’t been made? An employer who has previously not made any solicitations may rectify this by:
- Making two consecutive annual solicitations in subsequent years (make-up solicitations) AND
- If an SSN is received, include that SSN on any information returns due after the date the employer receives the SSN.
While this action protects employers on a go-forward basis, penalties may still apply for years prior to which the make-up solicitations were made.
Method of Solicitation
The regulations specify a detailed process for satisfying solicitation requirements. Following is a summary of the key elements of the solicitation standards set by the IRS.
If solicitation is via mail, the following elements must be included:
- Notification must inform the individual that he or she must provide the required SSN
- Notification must inform the individual that a $50 penalty may be imposed by the IRS if he or she fails to furnish the required SSN
- Notification must include a Form W-9 or an acceptable substitute form on which the payee may provide the SSN
- Notification must include a return envelope for the payee to provide the SSN, which may be, but is not required to be, postage prepaid.
If solicitation is via phone, the procedure must be reasonably designed and carried out in a manner that is conducive to obtaining the SSN.
- Caller must speak to an adult member of the household
- Caller must verbally request the SSN
- Caller must inform the individual that they must provide the required SSN
- Caller must inform the individual that a $50 penalty may be imposed by the IRS if he or she fails to furnish the required SSN.
If solicitation is via email or other electronic means, the following elements must be included:
- Same written requirements as via mail (above)
- Must follow standard IRS electronic notification procedures.
If It Isn’t Documented, It Didn’t Happen
The IRS requires that the employer maintain contemporaneous records showing that the solicitation was properly made. In addition, the employer must be able to provide such records to the IRS upon request.
Employers are urged to keep detailed documentation on solicitation attempts. It is the combination of the actual solicitation AND the documentation of the solicitation that will shield an employer from a potential penalty.
What about the dreaded name mismatch?
Employers experience frustration when 1095 bounce back notifications indicate an error in the SSN, but the number actually appears to be correct by all their records. This common problem usually indicates a name mismatch issue. Examples include:
- An employee gets married (or divorced) and changes their name with the Social Security Administration from Susan Archer to Susan Barclay, but Susan hasn’t yet notified you, the employer, of the change.
- Or vice versa, where Susan has notified you, the employer, but the change hasn’t been filed or completed processing with the Social Security Administration.
- An employee’s employment record indicates Harry Houdini. However, the SSN records read Harold Houdini.
- An employee’s payroll records read Carson Polansky, but his SSN record indicates Carson S. Polansky.
- There are three (3) John Smiths in your employ, and the SSNs have somehow gotten mixed up between the employees.
All of these situations will likely result in a 1095 bounce back and will require manual intervention to discover and correct. If any such errors are not corrected for the specific filing year, the standard solicitation rules outlined above should be followed.
Is reasonable cause a new thing?
No. The Reasonable Cause and Responsible Action processes have been in place for some time as they apply to the process of securing Tax ID numbers of all sorts from many different types of companies and for many different purposes. For example, banks for people opening accounts, employers needing to secure SSN for payroll purposes, etc.
With the removal of the “good faith effort” compliance rule, the filing and providing of Form 1095 documents simply became subject to the standard process that has been in existence for other information returns and tax filings.
The information filer penalties, Reasonable Cause framework, and solicitation rules are outlined in 26 CFR § 301.6724-1.