IRS Says Employer Shared Responsibility Payment Not Subject to Statute of Limitations

The IRS Office of Chief Counsel recently issued a memorandum (https://www.irs.gov/pub/irs-lafa/20200801f.pdf) that responded with a resounding “No” to the question of whether an employer shared responsibility payment (ESRP) imposed under Internal Revenue Code §4980H is subject to any statute of limitations on assessment.

ESRP Background

Generally, an “applicable large employer” (those employing on average at least 50 full-time equivalent employees) is assessed an ESRP under §4980H if at least one of its full-time employees receives “health care assistance” and the employer either:

  • Does not offer minimum essential health care coverage to at least 95% of its full-time employees and their dependents for any month (the §4980H(a) penalty)
  • Offers minimum essential overage under a group health plan that is not affordable or does not provide minimum value (the §4980H(b) penalty).

An employee has received “health care assistance” if the employee enrolls in a health plan on an exchange and receives either the premium tax credit or cost-sharing reduction provided under the Code.

The §4980H(a) monthly penalty is $2,570 (for 2020) divided by 12 per full-time employee (minus the first 30 employees). The §4980H(b) monthly penalty is equal to $3,860 (for 2020) divided by 12 per each full-time employee receiving health care assistance for the month (but capped at the §4980H(a) monthly penalty amount). The penalty amounts are adjusted for inflation annually.

To determine the ESRP, the IRS collects information from both employers and full-time employees. Employers are required to submit Forms 1094-C and 1095-C to report whether minimum essential health coverage has been offered to full-time employees, and if so, whether such coverage provides minimum value and is affordable. The IRS then takes that information and references the Forms 1040 filed by full-time employees to determine which, if any, full-time employees received health care assistance during the year.

Statute of Limitations

With certain exceptions (e.g., in the case of fraud), Code §6501 provides that any tax imposed under the Code must be assessed within three years after the return was filed by the taxpayer. The U.S. Supreme Court, in Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff’d 793 F.2d 139 (6th Cir. 1986), held that the following requirements must be met in order for a filing to be sufficient to be a “return” that would begin the statute of limitations period:

(i) there must be sufficient data to calculate tax liability, (ii) the document must purport to be a return, (iii) there must be an honest and reasonable attempt to satisfy the requirements of the tax law, and (iv) the taxpayer must execute the return under penalties of perjury.

The IRS takes the position in the memorandum that the Beard test has not been met because Forms 1094-C and 1095-C do not report whether the full-time employee has received health care assistance, and therefore those forms do not include the information necessary to calculate the employer’s liability for an ESRP. Additionally, the IRS notes that there is no specific statute of limitations in §4980H that would apply rather than the provisions of §6501. For those reasons, the IRS has concluded that there is no statute of limitations period for assessing an ESRP.

Implications

Employers should consider the lack of a statute of limitations period when considering their exposure for liabilities related to an ESRP. For example, in the mergers and acquisition context, a buyer should consider exposure beyond the past three years if it were to learn that the seller has consistently failed to offer the required health coverage to its employees and their dependents.