The IRS is now issuing Letter 226J penalty notices to employers identified as having failed to comply with the ACA’s Employer Mandate for the 2019 tax year. Just in time for the holiday season.
If you receive a Letter 226J penalty notice from the IRS, timing is of the essence. You will only have 30 days to respond to the notice. If you need additional time, the IRS can grant you one additional 30-day extension but is unlikely to grant any more afterward.
As a reminder, the IRS issues Letter 226J penalty notices to employers that fail to comply with the ACA’s Employer Mandate.
Under the ACA’s Employer Mandate, employers with 50 or more full-time employees and full-time equivalent employees are Applicable Large Employers (ALEs) and 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.
ALEs that do not meet the aforementioned requirements could be subject to IRS penalties under IRC Section 4980H via penalty Letter 226J.
The Letter 226J penalty notice contains either a 4980H(a) or 4980H(b) penalty, but never both for the same reporting year.
The 4980H(a) penalty is assessed when an ALE fails to offer MEC to at least 95% of its full-time workforce and their dependents. For the 2019 tax year, the annualized 4980H(a) penalty is $2,500 per employee. This 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) is assessed on a per-employee basis, rather than across the entire workforce. This penalty is assessed when ALES offers healthcare coverage that doesn’t meet MV and/or is unaffordable. For the 2019 tax year, the annualized 4980H(b) penalty is $3,750 per employee.
Curious about how the IRS identifies ACA non-compliance? There are a number of ways, but the primary trigger involves an employee requesting a Premium Tax Credit (PTC) from a state or federal health exchange. When an employee receives a PTC it will trigger the issuance of Letter 226J to the ALE that employs the individual.
Regardless of whether the employee rightfully receives the PTC, the burden of proof falls on employers. The same goes for repealing the penalty assessments, correcting your ACA filings if necessary, and supplying supporting documentation for why the penalty should be reduced or eliminated.
If you need assistance responding to the Letter 226J penalty notice or another ACA penalty, 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, don’t rejoice just yet — the IRS is ramping up enforcement efforts. It is possible that you may first receive a Letter 5699, the precursor Letter 226J penalty notice. We invite you to get your ACA Vitals to see where your ACA compliance processes currently stand and learn how likely it is that you receive a penalty.
With the 2021 filing season approaching quickly, now would also be a good time to refresh your understanding of the different 1095-C codes. Download the Employer’s Guide to Coding ACA Form 1095-C to learn about the importance of coding your forms correctly.
We’re committed to helping companies reduce risk, avoid penalties, and achieve 100% ACA compliance. For questions about the ACA contact us here.