10 TIPS FOR RESPONDING TO (AND AVOIDING) AN IRS LETTER 226-J: Have you received a Letter 226-J from the IRS indicating that you owe a penalty under the Affordable Care Act? This article offers ten tips for how to respond as well as how to avoid receiving future notices.

Author:Goodman, Lindsay M.

One of the key provisions of the Affordable Care Act (ACA) is the employer mandate, a requirement that certain employers provide minimum essential coverage that is "affordable" and provides "minimum value" to their full-time employees (FTEs) and their dependents.

The employers, referred to as applicable large employers (ALEs), that do not meet those requirements are required to make an employer shared responsibility payment (ESRP), which is triggered if at least one of their FTEs receives a premium tax credit for purchasing individual coverage on the Health Insurance Marketplace.

In late 2017, the Internal Revenue Service (IRS) began notifying ALEs that they may be liable for an ESRP for the 2015 calendar year, which was the first year that the employer shared responsibility rules were in effect. Employers that receive the notice, called a Letter 226-J, could face significant penalties.

Generally speaking, employers employing 50 FTEs, including full-time equivalent employees, are considered ALEs. The determination of whether an ALE may be liable for an ESRP and the amount of the proposed ESRP in Letter 226-J are based on information from IRS Forms 1094-C and 1095-C filed by the ALE and the individual income tax returns filed by the ALE's employees. It is expected that Letters 226-J will continue to be issued for later calendar years as 1094-C and 1095-C forms from those years are reviewed and processed by IRS.

The following are ten tips for responding to (and avoiding) an IRS 226-J notice.

  1. Don't Panic!

    When employers first open their letters, they often freak out about the amount of the proposed ESRP. However, as explained below, the proposed ESRP is often due to an error in coding or the wrong box being checked. Therefore, it is important to keep calm and thoroughly assess the situation before jumping to the conclusion that the ESRP is accurate.

  2. Look at the Response Due Date, Put It on the Calendar and Respond ASAP

    If the deadline to respond is short, employers should immediately contact IRS at the number indicated in the letter to request an extension of time to respond.

  3. Determine Which Penalty Applies--"A" Penalty or "B" Penalty

    This is essential in order to determine what information an employer may need to gather and what supporting documentation is needed to provide an adequate response. The table explains each penalty.

  4. Review Letter 226-J and Determine What May Have Gone Wrong

    After an employer determines the type of penalty...

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