IRS Legal Memorandum Concludes That No Statute of Limitations Applies to Code § 4980H Penalty Assessments

The IRS Chief Counsel’s Office has released a memorandum concluding that there is no statute of limitations on assessment of employer shared responsibility penalties under Code § 4980H because no tax return is filed to report an employer’s liability for the penalties. As background, applicable large employers (ALEs) may be liable for an employer shared responsibility penalty under Code § 4980H(a) if they fail to offer minimum essential coverage to a sufficient number of full-time employees. Alternatively, an ALE may be subject to a Code § 4980H(b) penalty if it offers minimum essential coverage to the required number of full-time employees, but the offered coverage is not affordable or does not provide minimum value. ALEs report information about offers of coverage on Forms 1094-C and 1095-C (C Forms). A Code § 4980H(a) penalty may be triggered if any full-time employee obtains a premium tax credit for coverage purchased on an Exchange; if triggered, the penalty is based on the ALE’s total number of full-time employees. Under Code § 4980H(b), a penalty is assessable only with respect to full-time employees who actually receive a premium tax credit. As the memorandum points out, neither penalty can be determined until it is known whether a full-time employee received a premium tax credit, and the Section 4980H(b) penalty cannot be determined until the exact number of full-time employees receiving premium tax credits is known.

Noting that Code § 4980H does not have a section-specific limitations period, the memorandum explains that the Code’s general three-year statute of limitations begins to run only upon the filing of a “return.” The Supreme Court has established a four-part test to determine whether a document filed with the IRS is a “return” for this purpose, including a requirement that the document provide sufficient data to calculate tax liability. The memorandum concludes that the C Forms do not satisfy this requirement because they do not provide information regarding a full-time employee’s eligibility for a premium tax credit—an essential piece of information to calculate the employer shared responsibility penalty. The IRS can calculate the penalty only by cross-referencing information on the C Forms with full-time employees’ individual tax returns.

EBIA Comment: The C Forms’ instructions advise filers to keep copies of information returns and supporting documents for at least three years from the returns’ due date. Although Chief Counsel memorandums cannot be cited as precedent and are not binding on the courts, ALEs should consider this memorandum’s conclusions when evaluating their document retention policies and should take the instructions’ reference to three years with a grain of salt. A much longer retention period may be prudent. For more information, see EBIA’s Health Care Reform manual at Section XXVIII.H (“Payment of Premium Tax Credits, Notification From Exchange, and Assessment of Employer Penalties”). See also EBIA’s Form 1094/1095 Workbook at Section XII.D (“How Long Should Records Be Retained?”).

Contributing Editors: EBIA Staff.