Responding to IRS Letter 226J

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Responding to IRS Letter 226J

By Brian Gilmore | Published February 4, 2021

Question: How should employers respond to the Letter 226J from the IRS?

Short Answer: IRS Letter 226J informs employers of a proposed ACA employer mandate penalty assessment. Employers agreeing with the assessment should timely respond with the required payment, but employers disagreeing with the assessment can engage with the IRS in a process designed to determine whether the assessment is appropriate. Depending on the circumstances, employers may be able to reduce or eliminate the initial penalty assessment.

General Rule: ACA Employer Mandate Penalties

There are two potential ACA employer mandate penalties:

a) IRC §4980H(a)—The “A Penalty”

The larger penalty is the §4980H(a) penalty—frequently referred to as the “A Penalty” or the “Sledge Hammer Penalty.” This penalty applies where the applicable large employer (ALE) fails to offer minimum essential coverage to at least 95% of its full-time employees (and their children to age 26) in any given calendar month.

The 2021 A Penalty is $225/month ($2,700 annualized) multiplied by all full-time employees (reduced by the first 30). It is triggered by at least one full-time employee who was not offered minimum essential coverage enrolling in subsidized coverage on the Exchange. The IRS posts the annual increases to the employer mandate penalties on its ACA employer mandate FAQ website.

b) IRC §4980H(b)—The “B Penalty”

The smaller penalty is the §4980H(b) penalty—frequently referred to as the “B Penalty or the “Tack Hammer Penalty.” This penalty applies where the ALE is not subject to the A Penalty (i.e., the ALE offers coverage to at least 95% of full-time employees). It applies for each full-time employee enrolled in subsidized Exchange coverage who was a) not offered minimum essential coverage, b) offered unaffordable coverage, or c) offered coverage that did not provide minimum value.

Only those full-time employees who enroll in subsidized coverage on the Exchange will trigger the B Penalty. Unlike the A Penalty, the B Penalty is multiplied by all full-time employees.

The 2021 B Penalty is $338.33/month ($4,060 annualized) per full-time employee receiving subsidized coverage on the Exchange. The IRS posts the annual increases to the employer mandate penalties on its ACA employer mandate FAQ website.

ACA Employer Mandate Penalty Assessments: IRS Letter 226J

If the IRS determines that the employer is subject to an ACA employer mandate penalty based on the information filed on its Forms 1094-C and 1095-C, the employer will receive an IRS Letter 226J describing the proposed §4980H penalty assessment.

The letter will include the proposed penalty assessment for each month of the calendar year, including a list of each full-time employee who triggered a penalty by receiving subsidized Exchange coverage for the applicable months. The letter also includes the name and contact information of an IRS representative to contact with any questions.

Employers respond via Form 14764 (ESRP Response) agreeing or disagreeing with the penalty amount assessed by the listed response date. The deadline is generally 30 days from the date of the Letter 226J.

Employers disagreeing will include Form 14765 (PTC Listing) with their response indicating any changes needed to the Form 1095-C for employees who received Exchange subsidies, as well as any supporting statement and/or documentation (e.g., employment or offer of coverage records) the employer would like to provide.

Employers that offered minimum essential coverage that was affordable and provided minimum value to any of the employees listed as triggering a penalty will generally want to respond disagreeing with the assessment.

Additional Notes:

IRS Materials:

Letter 226J

Letter 226J Response Forms

IRS Response to Employer Penalty Assessment Response: IRS Letter 227

The IRS will respond to the employer response via a Letter 227, which comes in five different forms (227-J through 227-N). The Letter 227 will acknowledge the employer’s response and describe the applicable next steps in the process.

Employers disagreeing with the Letter 227 IRS response will have the opportunity to request a conference with the supervisor of the IRS contact assessing the penalty and/or the IRS Independent Office of Appeals. The deadline to request a conference will generally be 30 days from the date of the Letter 227.

IRS Materials:

IRS Notice and Demand for Payment: IRS Notice CP220J

If the IRS ultimately determines at the end of the correspondence and/or appeals conference(s) that the employer owes the employer mandate penalty, the IRS will issue a Notice and Demand for payment via Notice CP220J. Interest will be charged on any outstanding balance until the amount is paid in full.

IRS Materials:

Notice CP220J

IRC §6056 Non-Filer and IRC §4980H Compliance Process

Late/Incorrect ACA Reporting Penalties: Different Penalties Apply

The IRS penalty scheme is different for an employer’s failure to timely or correctly complete its ACA reporting via Forms 1094-C and 1095-C. Those penalties are generally $280 for the late/incorrect Forms 1095-C furnished to employees, and $280 for the late/incorrect Forms 1094-C and 1095-C filed with the IRS. However, multiple potential modifications and exceptions to those penalties may apply.

Regulations

IRS ACA Employer Mandate FAQs Addressing Penalty Amounts:

https://www.irs.gov/affordable-care-act/employers/questions-and-answers-on-employer-shared-responsibility-provisions-under-the-affordable-care-act#Calculation

  1. Does the per-employee amount of the employer shared responsibility payment increase over time? (updated August 19, 2020)

Yes. The employer shared responsibility provisions provide for an inflation adjustment beginning in calendar years after 2014.

In the case of any calendar year after 2014, the applicable per-employee dollar amounts of $2,000 and $3,000 are increased based on the premium adjustment percentage (as defined in section 1302(c)(4) of the Affordable Care Act) for the year, rounded to the next lowest multiple of $10.

The Author

Brian Gilmore

Lead Benefits Counsel, VP, Newfront

Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law.

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