Receiving mail from the IRS isn’t always bad, but in the case of the ACA, it usually is. The reason for that is that the tax agency’s preferred method for issuing ACA penalty notices is in the form of physical mail.
If your organization receives one, you must respond to it quickly and accurately — which can be difficult without the right process and information on-hand.Â
Below, we outline the five steps you should take in the event you’re hit with an ACA penalty from the IRS.Â
Step 1: Review the Notice
The very first thing you should do upon receiving an ACA penalty from the IRS is understand why the agency is penalizing you. Carefully read the notice to find out the reason for the penalty and the owed amount.Â
This is a critical first step. Because the type of penalty you’ve received will determine what correspondence and supporting documentation you will need to contest it.
For example, if you receive a Letter 226J penalty notice, it means the IRS believes your organization failed to comply with the ACA’s Employer Mandate.Â
Under the ACA’s Employer Mandate, applicable large employers must offer Minimum Essential Coverage that is affordable and meets Minimum Value to their employees and their dependents.Â
If you are going to contest the Letter 226J penalty notice, you will first need to understand the type of violation. Letter 226J penalty notices can contain either a 4980H(a) or 4980H(b) penalty. A 4980H(a) penalty is assessed when an organization fails to offer Minimum Essential Coverage to at least 95% of its workforce.Â
In this pass/fail scenario, the 4980H(a) penalty is applied across the organization’s entire reported full-time workforce, minus the 30 exceptions.Â
If the IRS assesses a 4980H(b) Letter 226J, it means that the organization failed to offer minimum value affordable coverage to select full-time employees. This penalty is often smaller because it’s applied on a per-violation basis, as opposed to across the entire workforce.
Letter 226J violations are just one type of ACA penalty. If the agency issues a Letter 5699, Letter 5005-A, or a Letter 972CG, the penalty amounts and the violations that triggered them will differ and as such will require a different response process.
This is why it’s paramount that as you begin preparing your response that you examine the penalty carefully. Also, review it to confirm that it’s meant for your business and if there are any mistakes or if it’s outdated.Â
Step 2: Gather Documentation
Employers may not organize their records in the same manner as the IRS, but let this be a sign of encouragement to start doing so if you aren’t. The reason for that is that it will make responding to an IRS penalty a lot easier.
If you receive a Letter 226J, you have limited options for disputing it. And the effectiveness of your response largely hinges on your supporting documents. Look for and collect all the relevant documents such as the 1094-C/1095-C filings, enrollment/declinations, and summary of benefits coverage.
Retrieving this information can be difficult, especially when the penalty is issued for a violation made years ago. This is when having a comprehensive ACA solution can be extremely helpful.Â
Trusaic’s ACA Complete solution, for example, handles record-keeping every month. The solution also establishes affordability and documents all enrollments, declinations, and relevant healthcare details for your workforce each year. By having these records readily available, you can respond promptly to any IRS inquiries without scrambling to gather information.
Step 3: Request Relief
Sometimes, you might not have everything you need to deal with an ACA penalty from the IRS. If you’re in this situation and you lack the resources, legal help, or evidence to handle it properly, you can request an extension.
You will need to explain why you need extra time when you request it, however. Tell them about any difficulties your organization is facing, like not having enough resources or undergoing any major business changes, like a merger or acquisition.Â
The IRS typically only grants a one-month extension for organizations dealing with ACA penalties, so make sure to ask for it as soon as possible.
In extenuating circumstances, organizations can also request relief from the stated penalty as well. This can be done over the phone, but you will need to explain why you need the penalty waived. Again, supporting documentation will play a key role in receiving any relief from the IRS.
Step 4: Submit Your Response Package
After completing the initial three steps, it’s time to craft your response to the ACA penalty notice. If your organization agrees with the penalty and its details, simply follow the instructions to make the payment as outlined in the notice.
However, if you believe there’s a mistake in the penalty assessment, you’ll need to present evidence to support your case. This evidence is crucial in defending your business and potentially reducing or eliminating the proposed ACA penalty.
Include the supporting documentation outlined in step two to explain why you think the penalty was wrongly issued if that’s the case, and ensure you do this before the deadline mentioned on the notice. Providing detailed explanations and evidence is essential.Â
This includes displaying measurement periods for the employees listed in the penalty notice, as well as calculations for providing ACA affordability.
The IRS recently began asking for detailed calculations regarding full-time and full-time equivalent counts when disputing penalty assessments, so it’s advisable to provide more information than less. Be prepared to show your work as well, including any methodology you use for tracking employee hours and assigning classifications.
Step 5: Follow-up
As we’ve mentioned before, having proper documentation is crucial when disputing ACA penalties with the IRS. Once you’ve started communicating with the tax agency, it’s important to keep a record of all your interactions. The IRS recommends keeping tax-related documents for a minimum of three years.
Keep track of your case, follow up with the IRS as needed, and work toward resolving the issue through proactive communication.
Depending on the level of detail provided in your ACA penalty response notice, the agency may accept it without any additional inquiry. Oftentimes, though, especially when it involves Letter 226J penalties, the IRS may request more information via various Letter 227s.Â
Get Help with ACA Compliance
The process for reviewing IRS penalties is constantly changing and evolving. If you haven’t received a penalty notice from the IRS regarding ACA non-compliance, you may receive one in the future.Â
This is especially true now that the agency made clear that there is no statute of limitations when it comes to ACA penalties, and assessments for previous year infractions can be issued at any time in the future.
If you do get one, make sure to follow the steps we’ve outlined earlier and reach out to Trusaic for assistance in responding to the notice. We’ve been successful in preventing over $1 billion in ACA penalty assessments for our clients, and can most certainly support you.
