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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, that number is expected to reach $228 billion.
Letter 226J penalty notices are being issued by the IRS on a continuous basis. Currently, Letters 226J are being issued for the 2016 tax year. Future reporting years are on the way.
Under the ACA’s Employer Mandate, Applicable Large Employers (ALEs), organizations 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.
If your organization does receive a Letter 226J, here are some things to keep in mind:
Always respond: After reviewing Letter 226J, it is important to send a response. ALEs that receive Letter 226J will typically have 30 days from the date of the letter to respond. You 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 letter.
Have documentation ready: In responding to Letter 226J, it is important to identify if anything should be corrected, and to submit corrected information as part of your response. Make sure you have relevant supporting documentation in hand to support your corrected information in case it’s necessary to provide it to the IRS. Anything you submit will be provided as part of your signed statement. Some third-party organizations will prepare the response package for you as a feature of their ACA compliance solutions.
Make sure the IRS confirms your response to Letter 226J: Following your response to Letter 226J, the IRS will assess whether the amount of the proposed Employee Share Responsibility Payment (ESRP) should be adjusted. Upon conclusion of the review, the IRS will issue Letter 227 and a Notice and Demand for Payment (Notice CP 220J). This Notice offers directions and alternatives to pay the penalty.
Extensions may be granted: Following receipt of a Letter 226J, you may send an extension request to the IRS if you need more than 30 days to respond. The extension request should be for a reasonable period of time.
Consider requesting a pre-assessment conference: If the IRS disagrees with your response, you can request a pre-assessment conference. Following this conference with the IRS, the ALE may also ask the IRS Office of Appeals to review the case.
A third-party can represent your ALE in responding to Letter 226J: Your organization may be represented by an internal resource or a qualified third-party in this penalty review process. The IRS ACA penalty process allows for an ALE to assign a representative to represent it before the IRS in responding to Letter 226J. The representative is not required to have power of attorney (POA), however, IRS staff has indicated it would prefer representatives who have POAs through submission of Form 2848. Attorneys, CPAs, and enrolled agents are the only authorized outside individuals that may represent an employer under an IRS form 2848 POA without limitations. If you choose to have an attorney, CPA or enrolled agent represent your organization, ensure that they are already an expert in the ACA and the complex filing process. That third-party should be familiar with the ACA filing process and IRS forms 1094-C and 1095-C. The representative should be familiar with your benefits process and how errors may have occurred to make the filing non-compliant.
The IRS will find you if you did not comply with the ACA: The IRS uses an Affordable Care Act Compliance Validation (ACV) process to identify ALEs who either failed to comply with the ACA or made errors in the data submitted in the annual Affordable Care Act Information Returns (AIRs) submitted to the IRS as forms 1094-C and 1095-C. The IRS penalty review process is ongoing and includes the 2015 tax year and all subsequent tax years. For tax years following 2015, the IRS will be more demanding of information to explain why your organization failed to comply with the ACA because of the more stringent compliance requirements.
The same advice applies for ACA penalties being issued to employers identified as having failed to file their 1094-C and 1095-C schedules with the IRS and failure to furnish forms 1095-C to their full-time workforce under IRC 6721/6722. The IRS started issuing these penalties in January 2019. The penalties were issued using Letter 5005-A/Form 866-A. You can learn more about responding to those penalty assessments by clicking here.
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