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Home ACA Compliance Receive an ACA Penalty from the IRS? Here’s What to Do

Receive an ACA Penalty from the IRS? Here’s What to Do

4 minute read
by Joanna Kim-Brunetti

It’s no secret that IRS enforcement is ramping up. With an additional $80 billion in funding and 87,000 new agents, employers should accept the fact that ACA penalties could be coming their way if they’ve neglected the requirements of the Employer Mandate.

Under the ACA’s Employer Mandate, Applicable Large Employers or employers with 50 or more full-time employees 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 the Minimum Value 
  • Ensure that the coverage for the full-time employee is affordable based on one of the IRS-approved methods for calculating affordability

Organizations that fail to meet these requirements and have at least one employee obtain a Premium Tax Credit from a state or federal health exchange, could be hit with ACA penalty letter 226J from the IRS

If you’ve received one of these notices, or another related ACA penalty notice from the IRS, you know the stakes are high for responding promptly. But what exactly should you do? Below we go into detail on how to respond.

Step 1: Review the notice

It sounds obvious, but the truth is, the IRS has been experiencing an unprecedented backlog of unprocessed tax correspondence. Earlier this year it had over 5 million taxpayer documents it needed to review. If you receive an ACA penalty assessment from the IRS, review the notice carefully, and review it more than once. 

Make sure to review the contents of the notice – was it intended for your business, does it contain errors, is it outdated? These are questions you should ask yourself when reviewing the penalty notice. 

Step 2: Compare notes

Organizations may not keep track of their records the same way the IRS does. For this reason, it’s paramount that you review your employee data, 1094-C/1095-C filings, offers of coverage, summary of benefits, and other related healthcare details. 

In the event you receive a Letter 226J, or a different ACA penalty, you have few options for disputing it, and the most significant factor for how you go about doing that depends on your supporting documentation. This is when having a dedicated full-service ACA solution can really benefit you. 

Solutions like ACA complete, for example, maintain these records for you on a monthly basis, in addition to establishing affordability, and documenting all enrollments, declinations, and details pertinent to your healthcare. Not having to scramble to recall this information will lend itself to making a timely response to an IRS inquiry.

Step 3: Request an extension

It’s not always possible, and the IRS has shortened the number of times an organization can do this, but if you lack the resources, in-house counsel, and supporting documentation to respond appropriately to the ACA penalty assessment, request an extension as soon as possible. 

In your submission, be sure to explain why you need the extra time to respond to the original notice. Include any pertinent information, such as challenges you may be experiencing, process changes, or new systems. The IRS only grants one 30-day extension to organizations required to respond to ACA penalty assessments.

Step 4: Promptly respond to the notice

After taking the previous three steps, it’s time to develop your response to the ACA penalty assessment. If your organization is not going to contest the penalty assessment, simply make the payment listed in the notice and follow the instructions documented for submitting the monetary request.

If however, you disagree with any or all of what the tax agency is proposing in the assessment, you will need to prove it. Again, supporting documentation will play a critical role in defending your business and reducing or eliminating the proposed ACA penalty assessment. 

Include substantiating evidence for why the penalty was issued incorrectly, if you believe it was, and do so before the date stated at the top of the form.

Step 5: Keep track of your efforts 

As we’ve previously mentioned, documentation is key in contesting ACA penalties from the IRS. And once you’ve established correspondence with the tax agency, you will need to continue documenting your communications. The IRS encourages keeping tax information for at least three years.

As a final piece of advice – the IRS has a sophisticated approach for identifying ACA non-compliance. The method, known as the Affordable Care Act Compliance Validation process, identifies ALEs who either failed to comply with the ACA or made errors in the data submitted in the annual Affordable Care Act Information Returns filed to the IRS in Forms 1094-C and 1095-C. 

The IRS penalty review process is ongoing and always evolving. If you haven’t received a penalty notice from the tax agency for ACA non-compliance, know that one may be coming. If you receive one, follow the aforementioned steps and contact Trusaic for assistance in responding to the notice. So far, we’ve helped prevent over $1 billion in ACA penalty assessments, and we can certainly help you.

To avoid ACA non-compliance altogether, consider outsourcing ACA. Our full-service, comprehensive ACA Complete solution provides with you a dedicated specialist who can assist with monthly tracking, offers of coverage, affordability calculations, documentation, annual filing, and an IRS audit defense.

To learn more about what’s required of your business under the ACA’s Employer Mandate, download the 2022 ACA Essential Guide for Employers below.

Download: ACA Essential Guide

For information on ACA penalty amounts, affordability percentages, important filing deadlines, steps for responding to penalty notices, and best practices for minimizing IRS penalty risk, download the ACA 101 Toolkit.

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