So, what is a 226-J Letter? The IRS has begun to send out 226-J Letters to ALEs (Applicable Large Employers), entities with 50 or more full-time employees, to warn them they may be responsible for the IRS’s Employer Shared Responsibility Penalty (ESRP) under the ACA regulations. The ESRP is a component of the Affordable Care Act which requires ALEs to offer affordable health insurance coverage to all their full-time and full-time equivalent employees (or be subject to a penalty). The IRS can determine if an ALE is responsible for payment based on the information that was filed on their 1095-C & 1094-C Forms. The information on the forms communicates to the IRS when the employees, and in some cases their dependents, were offered insurance and if it was affordable. It was common in the initial year of ACA reporting (2015) that information on these forms were inaccurate due to the complex nature of reporting and organizations not having the depth of knowledge and proper data to have them completed correctly. The IRS began issuing the 226-J penalty notice letters to employers in the fall of 2017 for the tax year 2015. They will continue to audit subsequent tax years and issue penalty notices on a going-forward basis. The IRS is allowing companies 30 days to respond to the 226-J Letter by using Form 14764 to explain if they agree or disagree with the proposed penalty amount in the letter. Also, included with letter 226-J is Form 14765, which lists the ALE’s employees that received a tax credit for one or more months in the reporting year where the employee was employed full-time and the ALE did not have a safe harbor code to indicate relief from offering coverage. Therefore, the ALE would be subject to a penalty.
If you respond to the IRS on Form 14764 informing them the penalty amount indicated is incorrect, you need to provide a detailed explanation along with making the changes on the 14765 Form indicating what the corrections should be and include the documentation with your response. Upon receiving your response, the IRS will send an acknowledgement of your retort with one of a series of 227 Letters:
- Letter 227-Jinforms the ALE the IRS received the signed agreement, Form 14764, and that the ALE agreed to the ESRP and they will be assessed the agreed-upon penalty amount. The ALE will be required to submit payment and if payment is not received within 10 days, the IRS with send a bill for the balance due. After issuance of this letter, the case will be closed. No response is required.
- Letter 227-Kinforms the ALE the IRS received the information contesting the penalty and the ESRP has been reduced to zero. After issuance of this letter, the case will be closed. No response is required.
- Letter 227-Linforms the ALE the IRS received the information contesting the penalty amount and shows the ESRP has been revised. The letter includes an updated Form 14765 with a list of employees who received a premium tax credit along with a revised calculation table. The ALE can agree to this revised amount or request an appeal.
- Letter 227-Minforms the ALE the IRS received the information contesting the penalty amount, however upon review of the information the ESRP did not change. The ALE can agree or request an appeal.
- Letter 227-Ninforms the ALE of the decision reached for any appeals and will include the ESRP based on the appeals review. After issuance of this letter, the case will be closed. No response is required.
It may be beneficial to consult with an experienced ACA reporting professional, such as SPS/GZ, when responding to these penalty notices. To avoid penalties with future 1095-C and 1094-C Form filings, it is advisable to hire a professional and experienced ACA reporting company to assist you with proper reporting requirements and alert you if there are issues on forms that would cause penalties before filing these forms with the IRS.