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The IRS seems to be re-invigorating its campaign to assess ACA employer mandate penalties by issuing IRS Letter 226J. Receiving this letter, which identifies Employer Shared Responsibility Payment (ESRP) assessments under the Affordable Care Act's employer mandate, can be alarming for any organization. The penalties identified in the letter can be significant. Fortunately, getting IRS Letter 226J doesn't guarantee you'll need to pay these penalties. With proper review and response, many organizations successfully reduce or eliminate proposed assessments.
Understanding Letter 226J
Letter 226J is the IRS's initial notification to Applicable Large Employers (ALEs) that they may be liable for an employer mandate penalty. These penalties typically stem from:
- Not offering minimum essential coverage to at least 95% of full-time employees (4980H(a) penalties)
- Offering coverage that wasn't affordable or didn't provide minimum value (4980H(b) penalties)
- Having full-time employees who received premium tax credits through the Marketplace
The letter includes Form 14765 (listing affected employees), Form 14764 (response form), and often a calculation table showing how penalties were determined.
Step 1: Act Quickly, But Thoroughly
Timeframe: You previously had 30 days from the date on the letter to respond. This timeframe has been increased to 60 days.
Immediate actions:
- Note the response deadline on your calendar
- Assemble a response team including HR, benefits, payroll, and potentially legal counsel
- Request an extension if needed (the IRS often grants 30-day extensions)
Step 2: Document Review and Validation
Begin by validating all information the IRS used to determine the proposed assessment:
- Review your filed Forms 1094-C and 1095-C for accuracy and completeness
- Examine the employee list on Form 14765 to verify employment status and offers of coverage
- Check indicator codes used on Form 1095-C lines 14 and 16 for each employee listed
- Verify affordability calculations for any 4980H(b) penalties
- Confirm full-time status determinations were correctly applied
Common errors to look for include:
- Incorrect coding of coverage offers
- Misclassification of employee status
- Missing safe harbor codess
Step 3: Preparing Your Response
Based on your review, determine your response approach:
If you agree with the assessment:
- Complete Form 14764 indicating agreement
- Make payment arrangements as directed
If you disagree with the assessment:
- Complete Form 14764 indicating disagreement
- Make corrections on Form 14765 for each disputed employee
- Prepare a detailed explanation letter
- Gather supporting documentation such as:
- Enrollment records
- Offer of coverage documentation
- Affordability calculations
- Measurement period records for variable-hour employees
- Evidence of coverage for disputed employees
Step 4: Submitting Your Response
Assemble your response package including:
- Completed Form 14764
- Corrected Form 14765 (if applicable)
- Detailed explanation letter
- Supporting documentation
- Contact information for follow-up questions
Use certified mail or another traceable delivery method and keep copies of everything submitted.
Step 5: Managing Follow-Up Communications
After your response, the IRS will send one of these letters:
Letter 227J: Acknowledges your response and provides next steps.
Letter 227K: Indicates the IRS agrees with your response and has reduced or eliminated the proposed penalty.
Letter 227L: States the IRS disagrees with some or all of your response and maintains the proposed penalty.
If you receive Letter 227L, you can request a pre-assessment conference with the IRS Office of Appeals within 30 days.
Preventive Measures for Future Compliance
To avoid future Letters 226J:
- Conduct regular audits of ACA reporting data
- Review and correct Forms 1094-C and 1095-C before submission
- Maintain comprehensive documentation of coverage offers
- Implement tracking systems for variable-hour employees
- Document affordability calculations
- Keep records of employee acknowledgments of coverage offers
- Consider working with BAS, a trusted ACA compliance vendor
Final Thoughts
Letter 226J isn't necessarily a final determination. With careful review and a well-documented response, many employers successfully reduce or eliminate proposed penalties. The key is responding thoroughly within the timeframe while providing clear evidence of your compliance efforts.
By understanding the process and maintaining comprehensive documentation, your organization can effectively address these challenging IRS notices if they arrive.
For information about BAS’ ACA data collection and reporting services, contact your account manager or solutions@basusa.com.
Benefit Allocation Systems (BAS) provides best-in-class, online solutions for: Employee Benefits Enrollment; COBRA; Flexible Spending Accounts (FSAs); Health Reimbursement Accounts (HRAs); Leave of Absence Premium Billing (LOA); Affordable Care Act Record Keeping, Compliance & IRS Reporting (ACA); Group Insurance Premium Billing; Property & Casualty Premium Billing; and Payroll Integration.
MyEnroll360 can Integrate with any insurance carrier for enrollment eligibility management (e.g., Blue Cross, Blue Shield, Aetna, United Health Care, Kaiser, CIGNA and many others), and integrate with any payroll system for enrollment deduction management (e.g., Workday, ADP, Paylocity, PayCor, UKG, and many others).
