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The IRS has begun to issue Letter 226J penalty assessments to employers that failed to comply with the ACA’s Employer Mandate for the 2018 tax year.
If your organization receives a Letter 226J penalty assessment for the 2018 tax year, or for any year, the letter only provides you with 30 days to respond. If you need more time, the IRS is unlikely to grant more than one 30-day extension request. Employers, that means responding quickly and thoroughly is paramount.
Under the ACA’s Employer Mandate, Applicable Large Employers (ALEs), which are 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 Internal Revenue Code (IRC) Section 4980H penalties.
Letter 226J penalty notices contain one of two different types of ACA penalties–4980H(a) or 4980H(b). It’s important to note that an employer will never receive a Letter 226J penalty notice for both 4980H(a) and (b) for the same reporting year.
- The “A” penalty, also known as the “hammer penalty’ is triggered when an ALE fails to offer Minimum Essential Coverage (MEC) to at least 95% of its full-time workforce and their dependents and had at least one full-time employee receive a Premium Tax Credit (PTC) from a state or federal health exchange.
Here’s an example of the “A” penalty calculation for the 2018 tax year: $2,320/12 per month multiplied by the total number of full-time employees, minus 30 employee exemptions.
- The 4980H(b) penalty is triggered if the healthcare coverage does not meet minimum value and/or is not affordable. The “B” penalty is triggered by each full-time employee who receives a PTC from a state or federal health exchange. Unlike the “A” penalty, the “B” is calculated on a per-employee basis.
Here’s an example of the “B” penalty calculation for the 2018 tax year: $3,750/12 multiplied by the number of full-time employees that received a PTC for each month.
Employers unsure of their ACA compliance process may be at greater risk of receiving Letter 226J penalty notices for the 2018 tax year. Best practices suggest reviewing your 2018 ACA filings to determine if you are at risk. If you identify errors in your ACA filings, you will have an opportunity to correct your filings before the IRS will issue a Letter 226J penalty notice or another type of penalty.
Employers should also observe the IRS’ recent ACA enforcement activity as a reminder to be extra careful when completing annual ACA filings. The ACA reporting deadlines for the 2020 tax year are upon us. Ensure your business is engaging in good ACA compliance practices, including accurately populating Lines 14 and 16 on Form 1095-C with the correct codes and meeting the deadlines to prevent ACA late penalties.
If you’re unsure of the ACA reporting deadlines for the 2020 tax year, to be filed and furnished in 2021, review our post, 2021 Dates for ACA Reporting.
Contact us if you need assistance meeting the ACA reporting deadlines for the 2020 tax year. We can help you reduce your potential IRS penalty exposure, establish monthly monitoring to ensure no employee slips through the cracks, and organize your supporting documentation in the event of an IRS inquiry with our ACA Complete.
If you’re not confident in your previous years’ ACA filings, contact us to have a no-cost ACA Penalty Risk Assessment performed. There is still time to make corrections before you receive an ACA penalty from the IRS.
If your organization has received IRS Letter 226J, download our white paper on Letter 226J to learn best practices for responding to the penalty notice.