IRS Limiting Length of Extensions for Responding to ACA Penalty Notices
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Employers that receive IRS Letter 226J penalty notice for failing to comply with the Affordable Care Act will be limited to one 30-day extension for each IRS notice received in the penalty process.
An apparent misinterpretation of the extension allowance policy had IRS staff granting longer extensions, up to 90 days, to provide employers additional time to respond to Letter 226J beyond the standard 30 days. IRS staff will no longer continue this practice.
That means employers need to act with even more urgency as the window for responding to the penalty assessment will be shorter due to this new enforcement policy.
ACA penalty notices are sent by the IRS to employers the federal tax agency has identified as not complying with the ACA. Employers required to comply with the ACA are classified as Applicable Large Employers (ALEs), employers with 50 or more full-time employees and full-time equivalent employees, are required to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is Affordable for the employee or be subject to IRS 4980H penalties as required by the ACA’s Employer Mandate.
Employers that receive Letter 226J will have 30 days from the date of the letter to respond. They may either agree or disagree with all or part of the proposed penalty assessment. Failing to respond will be similar to agreeing to the proposed penalty included in the notice.
Often, when an ALE has received a Letter 226J penalty assessment from the IRS, time is of the essence. For example, if an ALE receives a Letter 226J penalty assessment with only five days left from the posted date to the required response date, 25 days of the standard response time has passed and now the response is required within those remaining five days unless an extension is granted by the IRS. In this case, the ALE should request a 30-day extension immediately. No other extensions will be granted for the Letter 226J penalty notice. If an ALE receives an IRS Letter 227M after the response to Letter 226J has been reviewed by the IRS, the ALE may request another 30-day extension for additional time to respond to the Letter 227M notice.
As you can see, more than ever, ALEs receiving a Letter 226J need to be prepared to move quickly to request a 30-day extension from the IRS and then organize a team to respond to the penalty notice. Consider enlisting the assistance of a third-party expert with a track record of reducing or eliminating the proposed ACA penalty assessment. With some penalty assessments in the millions of dollars, the cost of adding a third-party expert to help your internal team could be well worth the investment.
The IRS has issued more than $4.5 billion in penalties to employers that failed to comply with the Affordable Care Act’s Employer Mandate for the 2015 tax year alone. By the year 2026, the amount of ACA penalties issued by the IRS is expected to reach $228 billion. If you haven’t received a penalty notice from the IRS, one may still be in the offing. The IRS has been sending Letter 226J penalty notices for the 2016 tax year, and is expected to start issuing penalty notices for the 2017 tax year in the months ahead.
To better understand your potential ACA penalty risk, consider undertaking an ACA Penalty Risk Assessment to determine your organization’s risk of receiving ACA penalties. Many third-party experts will provide this assessment at no charge. However, the peace of mind it may provide is priceless.
To learn more about ACA compliance for the 2019 tax year, click here.
For ACA reporting deadlines in 2020 for the 2019 tax year, organizations should review this link for important dates and requirements.
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