Mergers and acquisitions can bring about Affordable Care Act reporting issues for both target and acquiring companies, two EY leaders say.
Published Feb. 8, 2023 By Michael Toth and Belinda Sharp Cline
Michael Toth is the financial services market leader for ACA Compliance and Reporting in EY’s Workforce Tax Services Practice. Belinda S. Cline is a senior manager in EY’s National Indirect Practice and technical lead for the ACA Compliance and Reporting practice. The views expressed are those of the authors and are not necessarily those of HR Dive, Ernst & Young LLP or other members of the global EY organization.
Mergers and acquisitions can bring about Affordable Care Act reporting issues for both target and acquiring companies.
Among other things, it’s crucial to understand who bears responsibility for ACA reporting in the year of the transaction, and what additional ACA reporting liabilities the acquirer may incur. A sequence of key questions should be addressed when evaluating ACA reporting issues for such transactions.
If the target company, as an employer or group of employers under common control, averaged 50 or more full-time or full-time equivalent employees in the year before the acquisition, the target company is considered an ALE (or an ALE group member) and therefore is subject to ACA requirements during the calendar year of the acquisition.
If the target company is not an ALE in the year of acquisition, it could be argued that the target company will not become an ALE for the acquiring year by virtue of being acquired by an ALE. In any case, the acquiring company (assumed to be an ALE) must provide Forms 1095-C, Employer-Provided Health Insurance Offer and Coverage, to the target company’s employees who enroll in self-insured coverage offered by the acquiring company if it is effective for all or part of the acquisition year.
If the target company is an ALE, the question most often becomes: How will the acquiring company accomplish ACA reporting during the acquisition year? The ACA reporting requirements are ultimately the obligation of the legal entity that is the employer.
When only assets of a target company are acquired, the employees of the target company who become employees of the acquiring company in the transaction are treated as new employees of the acquiring company. Therefore, the acquiring company is responsible for the ACA reporting for the acquired employees from the date of acquisition forward. All ACA reporting obligations prior to the date the employees’ transfer to the acquiring company remain with the target company.
When a company acquires at least an 80% equity interest in an ALE or an ALE group member, the target company remains responsible for ACA reporting for all target company employees for the entire year of acquisition. This obligation is usually consolidated by ALE groups, so the acquiring company will need to make sure its new group member meets its obligations in the year of acquisition. In some cases, the acquiring company will roll the new member into its existing reporting processes. In other cases, the acquiring company can make arrangements for the target company to continue to report under its former ALE group member’s reporting processes, at least for the remainder of the transaction year.
The acquisition of the equity of a company, using cash, stock or a combination thereof, may raise questions that affect the treatment of acquired employees from an ACA reporting perspective, including:
When the equity of an ALE or ALE group member is acquired, the target company’s full-time employees will be considered ongoing full-time employees. Accordingly, these employees will need to be offered (or continue to be offered) the requisite ACA coverage as of the acquisition date. Keep in mind that only one Form 1095-C per employer identification number may be issued for any calendar-year reporting period. As a result, when an employer’s ALE group member status changes mid-year due to a transaction, the reporting for the year is not bifurcated — the target company’s Forms 1095-C for the calendar year of the transaction must cover all 12 months, even if the coverage offered to its employees was changed following the transaction.
The acquiring company is also indirectly responsible for the target company’s ACA obligations for prior years. This includes not only responsibility for timely and accurate reporting, but also for employer shared responsibility provisions (ESRPs) incurred prior to the transaction.
As reporting penalties and ESRPs are the obligation of the actual employing legal entity, acquiring the equity of a target company will mean that any assessments following the acquisition will come due while the target company is an asset of the acquiring company. In other words, any penalties or ESRPs assessed will continue to be the obligation of the target company when it becomes a subsidiary of the acquiring company and thus will reduce its value to the acquirer. Therefore, it is important to engage in sufficient due diligence during an acquisition to assess the potential for such liabilities and build in contractual protections.
It is important to note that there is no statute of limitations for assessing ESRPs — either the A Penalty (failure to offer coverage to at least 95% of full-time employees) or the B Penalty (failure to offer affordable coverage that meets the minimum value standard).
Therefore, doing adequate due diligence covering these obligations, including having access to historical filings of Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Forms 1095-C, is important.
Transactions can create a myriad of ACA reporting issues. Companies should consider these issues carefully and consult with their advisors to evaluate the avoidance or limitation of potential liabilities.
