Letter 226-J Explained: ACA Penalties and What Employers Need to Know
Letter 226-J is the initial proposal letter issued by the IRS to notify certain Applicable Large Employers potentially liable for an Employer Shared Responsibility Payment (ESRP). ALEs may receive Letter 226-J if employees were allowed a premium tax credit. This is determined by entries on Form 1095-C and 1094-C, filed by ALEs alongside their employees’ individual income tax returns.
In one of our previous article, we explained the IRS Letter 1865-C. In this article, we will provide a detailed explanation of Letter 226-J.
Understanding Letter 226-J:
Letter 226-J is an important communication from the IRS for Applicable Large Employers (ALEs). It serves as an initial notice that you might be responsible for an Employer Shared Responsibility Payment (ESRP). Here’s a detailed breakdown of what this means:
Purpose of Letter 226-J:
- Notification: Letter 226-J informs you that the IRS has identified a potential issue with your compliance regarding the Affordable Care Act (ACA) requirements. Specifically, it suggests that you may owe an ESRP because of problems related to the health coverage you provided to your employees.
Basis for Determination:
- Forms 1094-C and 1095-C: The IRS uses information from the Forms 1094-C and 1095-C you filed to make this determination. These forms are part of the ACA reporting requirements and provide details about the health insurance coverage you offer to your employees and their enrollment status.
- Employee Tax Returns: The IRS also considers your employees’ individual income tax returns. This includes examining whether employees claimed any premium tax credits for coverage purchased through the Health Insurance Marketplace, which could indicate potential gaps or issues in the coverage you provided.
ESRP Calculation:
Proposed Payment: The letter will detail the proposed ESRP amount based on the data from your Forms 1094-C and 1095-C and the information from your employees’ tax returns. This amount represents a penalty for not meeting ACA requirements, such as failing to offer your employees affordable and minimum essential coverage.
Understanding Letter 226-J is crucial for addressing potential issues and ensuring compliance with ACA requirements, which can help avoid or mitigate any penalties.
What are Employer Shared Responsibility Provisions (ESRP)?
As an Applicable Large Employer (ALE), you’re required to either offer your full-time employees (and their dependents) minimum essential coverage that is both “affordable” and meets the “minimum value” criteria, or you might need to make an Employer Shared Responsibility Payment (ESRP) to the IRS. This ESRP, often called “the employer mandate” or “the pay or play provisions,” applies to employers who meet the ALE threshold for the number of employees.
These provisions won’t apply to you if you fall below this threshold. As an ALE, you’re also responsible for reporting the minimum essential coverage you offer your employees. You must provide the necessary reports to your employees and the IRS.
Why Do You Receive Letter 226-J?
The IRS uses the data you file on Forms 1094-C and 1095-C to assess your compliance with the provisions of the Affordable Care Act’s employer shared responsibility. Form 1094-C serves as a transmittal form that summarizes the information you provide on Form 1095-C, which details the health coverage you offered to each of your full-time employees.
Based on the details from these forms, the IRS evaluates whether you, as an Applicable Large Employer (ALE), have met the requirement to offer affordable, minimum essential coverage to your full-time employees and their dependents.
If the IRS determines that you failed to meet these obligations for any month during the year, and at least one full-time employee received a Premium Tax Credit (PTC) for purchasing coverage through the Health Insurance Marketplace, you may be subject to an Employer Shared Responsibility Payment (ESRP). The ESRP is essentially a penalty the IRS imposes on ALEs that do not comply with the ACA’s employer mandate.
How to Respond to IRS Letter 226-J?
It’s important to carefully review the letter, as it explains how the IRS arrived at its conclusions based on your Forms 1094-C and 1095-C.
- First, read the details in Letter 226-J and the attachments carefully. This explains details about the ESRP process and explains the next step ALEs should take if you agree or disagree with the proposed ESRP computation.
- Complete the ESRP response form- Form 14764, indicating your agreement or disagreement with the letter 226-J.
- If you agree with the proposed ESRP liability, follow the instructions to sign the response Form and return it with full payment in the envelope provided.
- If you disagree with the proposed ESRP liability, you must fully explain your disagreement and indicate the necessary changes on Form 14765 (PTC Listing). Return all documents as instructed in the letter by the response date.
Steps to Take After Receiving IRS Letter 226-J
- Review Your Forms: Check the information reported on Forms 1094-C and 1095-C for the relevant year. Ensure the details filed with the IRS are accurate, as the IRS uses this information to calculate the Employer Shared Responsibility Payment (ESRP).
- Keep Records: Retain a copy of the letter and any documents you submit to the IRS for your records.
- Contact the IRS: If you have questions or need more time to respond, use the contact information provided in the letter to contact the IRS.
- Authorize a Representative: If you need someone to communicate with the IRS on your behalf, you can file Form 2848 (Power of Attorney and Declaration of Representative). Ensure the form references the current year and indicates that it is for the Section 4980H Shared Responsibility Payment.
What is the Timeframe the IRS Provides to Respond to Letter 226-J?
The IRS gives you 30 days from receiving Letter 226-J to respond. While it’s crucial to reply within this timeframe, it’s equally important to use this opportunity to thoroughly review the ACA Forms 1095-C you submitted for that year. The IRS bases its calculation of the Employer Shared Responsibility Payment (ESRP) on the details you provided in these forms, so ensuring the accuracy of your submissions is essential.
Ensure Compliance and Avoid IRS Penalties with TaxBandits
Businesses may find it challenging to ensure compliance with the reporting requirements of the Affordable Care Act (ACA) and avoid IRS penalties. That’s where TaxBandits comes in.
With years of expertise in ACA reporting, TaxBandits provides a comprehensive solution that caters to all aspects of the reporting process. From the generation and filing of Forms 1095-C and 1095-B with both the IRS and state agencies to the creation of necessary aca 1095 codes, TaxBandits simplifies the process for you.
Additionally, TaxBandits streamlines the distribution of ACA forms to employees through an online access secure portal or postal mailing. Our dedicated team is committed to assisting you through the e-filing process. E-file Form 1095-C and file 1095-B with TaxBandits.
Stay updated on important information by staying connected with us in the coming weeks as we continue our ACA notice series.
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