Applicable Large Employers (ALEs) are required to offer affordable health coverage to their full-time employees or pay a tax penalty. It is important for employers to pay close attention to any correspondence from the Internal Revenue Service (IRS) regarding potential penalties and to respond promptly and accurately.
The first outreach from the IRS is typically through Letter 226-J. This letter alerts employers that they may owe an Employer Shared Responsibility Penalty (ESRP) for one or more employees.
Letter 226-J serves as a formal notification to employers that they may be subject to an ESRP. To calculate the penalty amount outlined in the letter, the IRS reviews information provided by employers on Forms 1094/1095-C, as well as individual income tax returns filed by employees.
Upon receiving Letter 226-J, employers should take immediate action. The IRS provides specific steps for employers to follow:
- Carefully read the letter and any attachments. These documents provide detailed explanations of the ESRP process and how the information received impacts the penalty calculation.
- The letter outlines the necessary actions to take if the employer agrees or disagrees with the proposed ESRP computation.
- Complete the response form included with the letter, indicating agreement or disagreement with the proposed penalty.
- In cases of disagreement with the proposed ESRP liability, provide a detailed explanation of the disagreement and/or indicate any necessary changes on the Premium Tax Credit (PTC) Listing. All documents must be returned as instructed by the response date.
- If agreement is reached regarding the proposed ESRP liability, follow the provided instructions to sign the response form and return it with full payment.
To ensure accuracy in the penalty assessment, the IRS recommends reviewing the information reported on Forms 1094-C and 1095-C. If any reported information is found to be incorrect, employers should inform the IRS and ask for corrections to be considered.
If the employer needs time to prepare a response, contact the IRS and ask for an extension. The IRS may grant additional time to respond if requested within the response date timeframe.
Following the instructions provided in Letter 226-J and providing corrected information to the IRS will aid in the determination process. It is essential for employers to respond promptly and accurately to IRS correspondence regarding potential penalties to avoid further penalties. Failure to respond or address the issues raised in Letter 226-J may result in additional charges or enforcement actions by the IRS.
A link to the IRS page addressing Letter 226-J may be accessed by clicking here.
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