Editor’s Note: This article was updated on July 17, 2019, to correct information regarding churches with between 2 employees and 50 full-time equivalent employees and what is—or isn’t—required under the Affordable Care Act.
The Internal Revenue Service (IRS) is initiating hundreds of church exams to test compliance with the Affordable Care Act (ACA), a key IRS official overseeing exempt organizations announced late last month.
The update was delivered by Margaret Von Lienen, the Director of Exempt Organizations for the IRS, to the TEGE Exempt Organizations Advisory Council (Council), a national group fostering communication between the IRS and practitioners. I attended the update meeting as a member of the Council.
Von Lienen stressed the IRS would comply with the church audit rules. She said examination notices are currently going out and she expects them to continue through the rest of this year.
Though the total number of audits promised—in the hundreds—still will only affect a small percentage of churches overall, news of this specific enforcement effort should prompt all church leaders to double check whether their churches are compliant.
No one should panic. But everyone should verify all is well under their watch.
Representing a church that received an ACA penalty
I well understand the issues Von Lienen raised in her remarks. My firm represented a church last year that received an ACA penalty notice for more than $100,000 related to violations of IRC Sec. 4980H(a), the provision related to the employer shared responsibility rules. The church sponsored a group health plan, but one of its employees opted out of the church’s group health insurance. After opting out, the employee later signed up for coverage through an insurance exchange and received a related credit—one resulting in a substantial reduction in the cost for health insurance (as opposed to his cost for participating in the church’s group health insurance).
For employers covered by the ACA’s mandatory coverage provision, the only way for an employee to opt out of employer coverage is to go to another group plan, such as a spouse’s plan. The church allowed him to opt out of its group health insurance but failed to inform him that he was not eligible to sign up on the insurance exchange for any individual health plan. The church also did not require the employee to represent that the church was participating in another group health insurance plan.
An employer may be penalized $2,500 per employee (based on 2019 figures) for each employee over 30 employees if an employee buys individual health insurance through the exchange. While my firm successfully secured a waiver of the penalties in this specific church’s case, the penalty assessment demonstrates how easily any church can be assessed ACA penalties.
The ACA is extremely complex and contains no exceptions applicable to churches. The penalties can be severe, up to $100 per day per employee. Even minor infractions can trigger significant penalties. While many provisions only apply to churches with 50 or more full-time equivalent employees (FTEs), even smaller churches may run afoul of provisions applicable to health benefit plans with as few as 2 participants.
The specifics on the ACA audits
Von Lienen stated that any ACA-related exams would be conducted according to the church audit rules under IRC Sec. 7611. These rules require the IRS to have written evidence of noncompliance to trigger an initial notice of examination. Additionally, the examinations must be approved by a high-ranking Treasury official and provide notice of examination conference. The IRS is matching ACA mandatory filings with W-2s or other filings to create the mandated written evidence needed to support these examinations of churches.
The two places most likely to be scrutinized (because they have proven most problematic for churches in terms of compliance with the ACA):
- Opt-out process: The process in which churches allow employees to opt out of the group health insurance the church provides. While there are allowances for this process, there are rules to be followed to allow the opt-out to comply with the ACA.
- Use of individual health insurance: Before the ACA, churches would provide reimbursements to allow employees to buy their own health insurance or go under a spouse’s plan. While the ACA prohibits this, many churches have continued that practice, even though it is no longer allowed, especially for those employees eligible for Medicare (which might be much less expensive than group health insurance).
A complete discussion on ACA compliance is beyond the scope of this article. However, a brief review of the highlights follows:
- If the church has 50 or more FTEs, the vast majority of the ACA applies to it;
- If the church has between 2 employees and 50 FTEs, the church still must comply with certain portions of the ACA;
- Churches with between 2 employees and 50 FTEs are not required to offer group health insurance to its employees; and
- If the church offers access to group health insurance, and has 2 or more employees, the church must comply with group health benefit rules in the ACA.
Every church should audit itself for ACA compliance. Each church should at least take the following two defensive steps:
- Perform a self-audit or hire someone independently to conduct a compliance audit to verify compliance; and
- If the church discovers noncompliance, then the church should immediately correct the problem areas.
If the church is contacted by the IRS, then it should engage a licensed tax professional who is experienced representing churches in exams conducted by the IRS. This tax professional can:
- Work with the IRS during the pre-examination conferences. The church has the right to request a conference with the IRS, before the exam begins, to narrow the scope of the exam to relevant issues;
- Assist the church in working through that defined issue (or issues) with the IRS and perhaps keep the IRS focused on the narrow issues relating to the ACA; and
- Assist the church in determining the steps to correct the issues, if noncompliance is determined. For instance, paperwork sometimes gets mishandled, inadvertently triggering an examination. The professional can assist with straightening out that paperwork.
Until we begin seeing the IRS examination letters promised by Von Lienen, we will not know specific details. But this newsworthy announcement creates a reminder for churches to review their ACA compliance. Virtually all employers with more than one employee must comply with some portion of the ACA. There are no exceptions or exemptions for churches. If churches are unsure of their compliance, there is a good chance they are not compliant.
Frank Sommerville is an attorney, CPA, and shareholder in the law firm of Weycer, Kaplan, Pulaski & Zuber, P.C. He has been an editorial advisor for Church Law & Tax since 2009.