By Elizabeth F. McNamara

The town could be facing as much as a $1.3 million penalty from the IRS because of a clerical error pointing to noncompliance with the federal Affordable Care Act (ACA) in 2015 and 2016.

Due to changes in town administration and a lack of documentation, town officials were caught unaware when, in December, the IRS sent a letter saying the town owned a $400,000 penalty for ACA noncompliance in 2016. (November had seen in a new Town Council, prompting both the departure of then-Finance Director Linda Dykeman and the dismissal of then-Town Manager Gayle Corrigan.) It turned out the town had gotten a letter earlier in 2018 indicating a $900,000 penalty for 2015. 

After the December letter was received, officials figured out the penalties stemmed from one employee’s decision in 2015 to seek a subsidy under the ACA while working part-time for the town.

Under the ACA, organizations with more than 50 full-time employees have to offer health insurance to 95 percent of employees. (In 2015, the percentage was 70; in 2016, it went to 95 percent.) The Town of East Greenwich meets that standard. It also offers health coverage for part-time employees but it is prorated, so it’s more costly to the worker. 

According to Acting Town Manager Joe Duarte, the employee took the ACA tax credit thinking she qualified for it. But seeking a subsidy (tax credit) under the ACA raised a red flag to the IRS, Duarte said, prompting the IRS to look at East Greenwich more carefully.

In responding to the IRS’s investigation in 2015, someone from the town “checked off the wrong box,” Duarte said, indicating to the IRS the town did NOT offer health coverage to 95 percent or more of its employees. It was based on that submission that the IRS issued the penalties. 

After getting the letter in December and learning about the earlier letter, Duarte contacted the town’s insurer, which provided a lawyer to work with the town on its response. Dykeman had sent a response to the first letter saying the town was compliant but did not provide documentation. The town has since attempted to provide that documentation. The  paperwork has been completed and submitted to the IRS, Duarte said. Now it’s just a matter of waiting for the IRS to respond. The recent federal government shutdown, however, has slowed the process.

The penalties call to mind another whopping payment the town had to pay recently – a $1.7 million settlement the town paid in 2017 for the then-Fire District’s illegal imposition of impact fees between 2002 and 2013 (read more about that here) – and it comes just as town officials are gearing up for a tough budget year. Although hopeful the IRS will relent, officials said it would be helpful if resolution comes before the budget needs to be approved in June.

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