The IRS appears to be making good on its commitment to clear its backlog by the end of this year as the agency is now issuing Letter 226J penalty letters for the 2020 tax year.
Whether the progress is due to its 87,000 new tax agents, or the $80 billion in additional funding, the fact remains that the agency is making serious headway on its overdue tax correspondence. As such, organizations need to be on the lookout for these new penalty notices.
Unfamiliar with the notorious ACA penalty notice? The IRS issues a Letter 226J to employers suspected of ACA non-compliance for a particular tax year. The letter will contain either a 4980H(a) penalty or a 4980H(b) penalty, but never both.
In order for an employer to receive a 2020 Letter 226J penalty notices, they must have an employee receive a Premium Tax Credit from a state or federal health exchange. The IRS will then review related 1095-C information and the PTC recipient details to see if the employee was eligible for the subsidy. The IRS will assesses a penalty based on the employer’s supposed liability to offer sufficient coverage as required under the ACA’s Employer Mandate. Even if the employee incorrectly received the PTC, the onus is on the employer for proving such and subsequently if a penalty was wrongfully assessed.
Under the ACA’s Employer Mandate, employers with 50 or more full-time and full-time equivalent employees must:
- Offer Minimum Essential Coverage to at least 95% of their full-time employees and their dependents, whereby such coverage meets Minimum Value
- Ensure that the coverage for the full-time employee is affordable based on one of the IRS-approved methods for calculating affordability
Penalty amounts for the 2020 tax year are higher than previous years too. The 4980H(a) penalty for the 2020 tax year is $214.17 per employee, for an annualized amount of $2,570. This penalty in particular can cause significant financial strain on organizations because of how it is assessed. The 4980H(a) penalty can add up quickly as it’s a pass/fail situation. It only takes one employee to trigger it and then it applies across the vast majority of your ACA full-time workforce.
The 4980H(b) penalty for the 2020 tax year is $321.66 per employee, for an annualized amount of $3,860. While the 4980H(b) penalty is higher, it is assessed on a per-employee basis, i.e., for every instance an employee receives a PTC from a state or federal health exchange. If an employee receives a PTC, the IRS will reference the employer in question’s 1095-C filings and confirm whether the employee who received the PTC was offered coverage that met Minimum Value and was affordable. If the employee didn’t receive the required coverage, the employer will receive a 4980H(b) penalty for every month the employee lacked coverage.
Each employee who received a PTC and didn’t receive an offer of coverage that was affordable and met Minimum Value will result in a penalty.
If you have received a Letter 226J or another ACA notice, and need help responding, contact Trusaic to learn about our penalty reduction services. So far, we’ve helped our clients prevent over $1 billion in ACA penalties.
If you’ve been fortunate enough to avoid an ACA penalty, now is not the time to celebrate. The IRS is ramping up enforcement efforts and Letter 226J penalties are on the rise. It is possible that you may first receive a Letter 5699, the precursor to Letter 226J penalty notice.
To gauge your ACA compliance efforts, consider getting your ACA Vitals score. This self-assessment tool can help you understand where your ACA compliance processes currently stand.
For more information on Letter 226J, including best practices for responding to the penalty notice, download our white paper.