New Statute of Limitation Will Help Limit ACA Liabilities in M&A Deals, But Buyers Should Remain Diligent | Jackson Walker

To the satisfaction of companies routinely engaged in mergers and acquisitions, U.S. Congress recently amended the tax code through the Employer Reporting Improvement Act to add a six-year statute of limitations on the “employer shared responsibility payments” under the Affordable Care Act (ACA) for an employer’s failure to offer health insurance providing minimum essential coverage and/or health insurance that is affordable. These penalties can be substantial, and, unfortunately, an employer often does not know if it is subject to either penalty unless and until the IRS combs through the employers’ and the employees’ tax records and determines that an employee qualified for a federal premium tax credit under the ACA because his or her employer failed to offer health insurance that met the ACA’s coverage and/or value requirements.

Due to a backlog at the IRS, it could take years for the IRS to notify the employer of any penalties. Even worse, the IRS took the position that there was no statute of limitations on assessing the ACA penalties because Congress did not include a statute of limitations, and an employer’s ACA filings did not constitute a “return” for purposes of the IRS’ typical three-year lookback period for assessing taxes on filed returns.^[1] Accordingly, an employer’s potential ACA penalties hung out there like a sword of Damocles, while the IRS had all the time in the world to sift through almost a decade’s worth of tax records to find a hit.

The new statute of limitations certainly helps with minimizing potential liabilities. However, buyers are not completely out of the woods. The six-year statute of limitations does not start until the later of the due date for an employer’s Form 1095-C or the date that it is actually filed. So, if an employer fails to file its Forms 1095-C, the statute of limitations does not start until the filings are made.

A significant portion of deals with concerns over ACA liabilities involves a target company that failed to file Forms 1094-C and 1095-C in one or more years. Often, the target company did not realize it had employed an average of more than fifty full-time equivalent employees (FTEs) during a given year (which triggers the ACA responsibilities) or failed to count certain classes of employees towards the fifty FTE threshold, such as union employees or temporary employees, resulting in a failure to file Forms 1094-C and 1095-C as required under the ACA. If a target company did not file the ACA forms with the IRS, the statute of liabilities clock will not start unless and until it files a correction. It is also worth noting that there are additional ACA penalties for failing to file the Forms 1095-C and to furnish them to employees.

Accordingly, notwithstanding the new statute of limitations, buyers should remain diligent in reviewing a target company’s ACA compliance, in both offering insurance that meets the ACA’s standards as well as complying with its filing and reporting requirements.

[1] See Memorandum of the Office of Chief Counsel, Internal Revenue Service, February 21, 2020.  Release number 20200801F.

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