Employers complying with the Affordable Care Act (“ACA”) by filing Form 1095-C increasingly face another question: Are they in compliance with their I-9 obligations?
The Affordable Care Act (ACA) requires employers with 50 or more employees to provide certain employees with a Form 1095-C, a copy of which must also be provided to the IRS. This form reports the health insurance coverage offered to the employee in the prior year. It is used by the IRS to assess the employer’s compliance with the ACA’s employer shared responsibility provision, as well as to determine whether the employee qualifies for a federal subsidy for coverage purchased through the Health Insurance Marketplace. When reporting the offer of coverage, employers must list the employee’s name, birth date and Social Security Number (SSN). Employers with self-insured plans must also provide this information for any spouse or dependents with coverage under the employer’s plan through the employee.
Upon receipt of the Form 1095-C, the IRS verifies whether the individual’s name and tax identification number is correct by matching it against a file containing all SSNs and all identification numbers issued by the IRS. If a match is not found, the IRS may issue a Notice 972CG proposing the imposition of penalties for failure to timely file a correct information return. To avoid the penalty, an employer has 45 days to respond with information or show that any failure to provide correct information is due to “reasonable cause” (rather than willful neglect) to have the penalty waived.
To demonstrate “reasonable cause,” an employer must show that it acted in a “responsible manner” by following specific procedures, and that the failure was either a result of significant mitigating factors or was due to events beyond the employer’s control. We will talk more about reasonable cause below.
If the employer can obtain information to correct the error, it should do so quickly. The penalty increases the longer it remains uncorrected. Beginning with returns due in 2016, the following penalties apply for failure to timely file a correct information return:
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Time of Filing
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Employers with Gross Receipts of $5 Million or Less
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Employers with Gross Receipts of Greater than $5 Million
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Not more than 30 days late
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$50 per return up to a maximum penalty of $185,000
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$50 per return up to a maximum penalty of $529,500
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31 days late through August 1
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$100 per return up to a maximum penalty of $529,500
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$100 per return up to a maximum penalty of $1,589,000
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After August 1
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$260 per return up to a maximum penalty of $1,059,500
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$260 per return up to a maximum penalty of $3,178,500
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What if the employer cannot obtain information from the employee to correct the error?
The IRS regulations include specific actions the employer must take to avoid the fines listed above if the information to correct the error cannot be obtained. If the reason the employer cannot provide a correct SSN is that the employee has failed to provide it, the employee may be subject to his or her own $50 fine for each failure.
The employer may demonstrate reasonable cause and avoid the fines listed above, by:
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Making the initial request for the SSN timely;
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Making subsequent annual requests no later than December 31 in the year in which the Notice 972CG is received;
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Making subsequent annual requests in a manner dictated by the regulations; and
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If a corrected SSN is received as a result of the request, using the corrected number starting with the first information report due after receipt of the corrected number.
An employer receiving a Notice 972CG must also think about whether either the notice or the information gained in trying to respond to it raises a question about I-9 compliance.
The Form I-9 must be completed by all employers after each hire to confirm the employee’s authority to work in the United States. The employer is responsible for determining if documents presented satisfy the I-9, appear to be genuine, and relate to the employee.
Even when the I-9 was completed correctly and original documents were reviewed, if the employer becomes aware of information that would create “constructive knowledge” that the employee is not authorized to work, steps to confirm work authorization – or to terminate employment if the employee is not authorized to work – must be taken to avoid potential liability. These steps must be also taken in a manner that avoids unlawful discrimination.
The SSN is not a required data point for an I-9 unless the employer is enrolled in E-Verify. However, some employees do present a Social Security card as part of I-9 compliance, in which case the SSN would be recorded on the I-9.
The first question for both benefits and I-9 compliance is whether the notice is based on the correct SSN, employee name and birth date. The Notice 972CG may be issued in error. Complying with the IRS process will provide an employee the chance to correct the error.
If the employee does not respond to employee requests for a corrected SSN, what then?
Putting aside the concern about whether failure to respond is insubordination requiring a disciplinary action, we will consider this question from the IRS and immigration compliance perspectives.
From the IRS perspective, if the employer has followed its process, no fine should be issued.
From the immigration perspective, the questions are whether the lack of response by the employee amounts to “constructive knowledge” that she is not authorized to work or gives rise to a duty to investigate further.
No direct guidance to answer these questions has been provided by either Immigration & Customs Enforcement (ICE), which enforces the I-9 work authorization laws, or the Office of Special Counsel (OSC), which enforces the anti-discrimination side of the I-9 process.
The scenario is strikingly similar to one that arose several years ago when the Social Security Administration (SSA) issued “no-match letters” to companies to assist in cleaning up payroll withholding accounts. If the SSN, name, and birth date do not match SSA records, the withheld payments go to the “suspense fund” rather than into the employee’s account. The no-match letters were an attempt to correct these records and credit the employees’ accounts accurately.
Unfortunately, ICE initially took the position that these no-match letters created a duty to investigate on the part of the employer regarding work authorization of the employees listed in the letters. ICE tried to promulgate regulations to this effect, but never finalized them because of public comments pointing out the many reasons why such rules would be unworkable.
The guidance from ICE after the failed regulation was that a no-match letter alone was not constructive knowledge for I-9 compliance purposes.
The no-match letter guidance is the closest we have to inform the Form 1095-C scenario. SSN mismatches may result from numerous causes, such as number transpositions in birth dates (month/year is listed in a different order in many countries) or name changes (including marriage or “Americanization”). The process to correct an SSN mismatch can take a long time. Also, unless the employer gives paid time off to go to the Social Security office, employees may be unable to afford to correct the error.
Based on the no-match letter guidance, and depending on the specific circumstances, the mere receipt of the Notice 972CG does not necessarily indicate that the employee is working unlawfully. In other circumstances, the process of trying to file a corrected return or showing reasonable cause may uncover information that does create constructive knowledge of unauthorized employment.
We recommend that employers receiving Notice 972CG contact their attorney to decide how to respond to it in compliance with the ACA, the tax code, and their I-9 obligations.
