The Internal Revenue Service (IRS), in a recently released memorandum from the Office of Chief Counsel (Chief Counsel Memorandum), has taken the position that the Employer Shared Responsibility Payment (ESRP) imposed by section 4980H of the Internal Revenue Code is not limited by any statute of limitations, and that it could assess these payments for years — potentially indefinitely — after a failure to comply.  

The employer mandate under the Affordable Care Act (ACA) provides that an applicable large employer (generally employers with at least 50 full-time or full-time equivalent employees) may be subject to the ESRP under two distinct circumstances: (1) failing to offer minimum essential coverage to at least 95% of its full-time employees, and (2) offering minimum essential coverage to full-time employees, but the coverage is not “affordable” within the meaning of the ACA. In both circumstances, the employer is subject to the ESRP only if at least one full-time employee obtains a premium tax credit on a healthcare exchange. Employers are required to furnish each full-time employee with an IRS Form 1095-C and to file those forms with the IRS together with Form 1094-C. These forms attest to whether the employer offers minimum essential coverage to its full-time employees.  

Typically, the filing of a tax return triggers a three-year (or in some instances a six-year) statute of limitations. Many practitioners expected that the filing of Forms 1094-C and 1095-C would trigger the start of the statute of limitations for the ESRP as well. However, in the Chief Counsel Memorandum, the IRS Office of Chief Counsel stated that Forms 1094-C and 1095-C are not sufficient to start the statute of limitations period. The Office of Chief Counsel based its position on Beard v. Commissioner, 82 T.C. 766, (1984), aff’d 793 F.2d 139 (6th Cir. 1986), which addresses when a tax return is sufficient to start the statute of limitations period. Under Beard, a tax return does not start the statute of limitations period if it does not contain sufficient data from which to calculate tax liability. The Office of Chief Counsel noted that employer liability under the ESRP is based not only on whether health coverage is offered to full-time employees (which is included in Forms 1094-C and 1095-C), but also on whether any full-time employees obtained a premium tax credit on a healthcare exchange, which is not evident from Forms 1094-C and 1095-C. Consequently, the Office of Chief Counsel determined that neither Form 1094-C nor 1095-C contains sufficient information to calculate the amount of an ESRP. In the absence of a sufficient return to start the statute of limitations period, the IRS believes that no limitations apply and, as a result, it can assess the ESRP on employers indefinitely. 

While the Chief Counsel Memorandum has not been tested in court, it sets out the position of the IRS and significantly raises the stakes with respect to ACA compliance.

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