Employers Must Now Do More To Contest ACA Penalties From the IRS

October 12, 2021 Robert Sheen ACA Compliance

It’s no surprise that the IRS is increasing its enforcement efforts of the ACA’s Employer Mandate, but the amended Letter 226J language indicates that the agency is taking it to the next level by asking employers to prove their offers of coverage are affordable.

The official penalty letter language now requires employers to substantiate that the coverage offered to a Premium Tax Credit (PTC) recipient is affordable. Specifically, the IRS language says, “Any month that shows XF, XG, or XH is due to a determination that you do not qualify for the safe harbor being claimed (2F, 2G, or 2H). If you still think the safe harbor applies, provide your computation with your written request for reconsideration.”

In other words, employers must prove why an affordability safe harbor applies to a particular ACA full-time employee. The new verbiage indicates that employers must provide tangible evidence using math computations, affordability percentages, and the applicable safe harbor as well to prove affordability.

This is a rather significant development in the way the IRS assesses ACA penalties and aligns with Treasurer Inspector General for Tax Administration’s (TIGTA) recommendation for the agency to do more to enforce the employer section of the healthcare law. 

The IRS is anticipating roughly $1 billion in additional funding for FY 2022 and it appears the agency is off and running with significant improvements to how it identifies ACA non-compliance.

Under the ACA’s Employer Mandate, employers with 50 or more full-time employees and full-time equivalent employees, known as Applicable Large Employers (ALEs) must:

• Offer Minimum Essential Coverage (MEC) to at least 95% of their full-time employees (and their dependents) whereby such coverage meets Minimum Value (MV); and 
• Ensure that the coverage for the full-time employee is affordable based on one of the IRS-approved methods for calculating affordability.

Employers that fail to comply with these two requirements could be subject to IRC Section 4980H penalties via Letter 226J. The tax agency is currently issuing Letters 226J for the 2018 tax year and is expected to begin issuing them for the 2019 tax year any day.

If you receive a Letter 226J from the IRS, timing is of the essence, and the reporting year that the agency identifies also plays a role. First, carefully review the penalty notice, the summary table, the types of penalties being assessed, and the number of employees that received a Premium Tax Credit.

Next, provide the requested information to the IRS by the response date shown in the letter, which will be 30 days from the date the letter was issued. Respond in writing, either agreeing with the proposed Employee Shared Responsibility Payment (ESRP) or disagreeing with part or all of the proposed penalty assessment. 

As the new penalty letter language indicates, the burden of proof has now grown for employers contesting ACA penalties. If you need assistance responding to the letter, calculating ACA affordability, making timely offers of coverage to ACA full-time employees, or anything else related to ACA compliance, contact us to learn about our full-service, comprehensive solution, ACA Complete.

To prevent penalties from happening in the first place, download the Employer’s Guide to Coding ACA Form 1095-C.

For information on ACA penalty amounts, affordability percentages, important filing deadlines, steps for responding to penalty notices, and best practices for minimizing IRS penalty risk, download the ACA 101 Toolkit.