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.
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:
Penalties may be waived if the failure was due to reasonable cause and not willful neglect.
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.
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.
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).
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:
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.
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:
If solicitation is via phone, the procedure must be reasonably designed and carried out in a manner that is conducive to obtaining the SSN.
If solicitation is via email or other electronic means, the following elements must be included:
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.
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:
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.
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.