With the New Year well underway, the IRS has begun assessing new ACA penalties, setting the tone for compliance in 2024.
Earlier this month we received notice from a new client that the tax agency has started issuing Letter 226J penalties for the 2021 tax year.
In this post, we’ll cover everything you need to know in the event your organization receives one.
Why Does the IRS Issue Letter 226J Penalties?
The IRS issues Letter 226J notices to organizations it believes failed to comply with the ACA’s Employer Mandate for a particular tax year, and had at least one full-time employee receive a Premium Tax Credit (PTC) from a state or federal healthcare marketplace.
The Letter 226J will indicate which of the organization’s employees received a PTC, along with the months they received one.
If an employee receives a PTC, the IRS will reference the employer’s 1095-C filings and check to see if the employee who received the PTC was offered Minimum Essential Coverage (MEC) that met Minimum Value (MV) and was affordable.
The penalty amount shown in the Letter 226J will be calculated based on the full-time counts reported in the annual ACA filings for the relevant tax year.
What are the 2021 Letter 226J Penalty Amounts?
Letter 226J penalty amounts can range in size, but we’ve seen fine amounts in the millions of dollars. Depending on whether the violation contains a 4980H(a) or 4980H(b) penalty will also determine the size of the fine.
The IRC 4980H(a) penalty is issued if an organization fails to offer MEC. It’s applied for every month that the employer fails to offer coverage to at least 95% of a company’s full-time employees and their dependents.
Meeting the 95% threshold requirement is pass/fail too. So, if you offer coverage to only 94%, the penalty will apply for every month you extend coverage to only 94%. What’s more is that the penalty will be applied against your entire full-time workforce. For the 2021 tax year, the monthly 4980H(a) penalty amount for a single employee is $225.00, or $2,700 annualized.
The 4980H(b) penalty for the 2021 tax year is $338.33 per employee, or $4,060 annualized. While the 4980H(b) penalty is higher than the 4980H(a), it’s assessed on a per-employee basis, i.e., for every instance an employee receives a PTC from a state or federal health exchange.
Because of this, Letter 226Js with 4908H(b) penalties tend to be smaller.
How can Employers Contest a 2021 Letter 226J?
If you receive a Letter 226J penalty notice for the 2021 tax year, or any year, be sure to prepare a response quickly.
There are several steps involved, but at a high level, you will need to provide requested information, such as benefits details, enrollment, declinations, affordability calculations and even payroll details to the IRS by the response date shown in the letter, which will be 30 days from the date the letter was issued.
The letter will contain the name and contact information of a specific IRS employee that you should contact if you have questions about the letter.
Respond in writing, either agreeing with the proposed Employee Shared Responsibility Payment or disagreeing with part or all of the proposed penalty assessment. The notice will provide instructions on how to respond.
If you need assistance preparing a response to the IRS, contact Trusaic. We’ve helped prevent over $1 billion in ACA penalty assessments for our clients.
Get help with ACA compliance
Let the IRS’ recent activity regarding penalty notices be a reminder to be diligent with the 2023 ACA filings due over the next couple of months. Failing to get it right could cost your business.
Trusaic can implement a sound ACA compliance process for you so that there is never a lapse in coverage offered, or errors in your filings. Our ACA Complete solution is tailored for enterprise organizations in a way that allows their teams to completely offload the tedious process.
To assess your organization’s compliance efforts with the Employer Mandate, take a few minutes to get your ACA Vitals score. The brief, self-evaluation tool can help you identify insights into the current state of your ACA compliance processes.
