How to Respond to an IRS Letter 226J Statement of ACA Penalty

Posted by Anastasia Parsons on July 9, 2018

irs tax forms

6 Guiding Steps to Consider

The break-neck pace at which Congress approved the tax reform included in the Tax Cuts and Jobs Act (TCJA) on December 22, 2017 left many wondering what was actually decided upon regarding the Affordable Care Act (ACA). Putting some speculation to rest, the Internal Revenue Service (IRS) rather quickly confirmed that the Individual Mandate would be repealed beginning in 2019, and issued Letter 226J to Applicable Large Employers (ALE) summarizing penalties and required payments for infractions with the Employer Shared Responsibility Mandate (ESR).

The intent of an IRS Letter 226J is to inform ALEs they MAY owe an ESR payment for penalty. Reportable year 2015 is the one in question for the Letters issued on the heels of last year’s tax reform, and proposed penalty amounts can range from a few thousand dollars to upwards of seven figures. Specific triggers for the Letter include:

  • Form 1094-C, Part III (a) – response equals “No” or was left blank
  • Form 1095-C, Part II for any subsidized employee – missing line 16 “excuse code” or employee was miscoded as a full-time employee.

Deltek partner Baker Tilly Vantagen, LLC, delves into a brief history of the ACA and the effects of TCJA tax reform in the on demand webinar Planning in the Age of Affordable Care Act (ACA) Changes. The expert presenter provides six guiding steps for ALEs faced with an IRS Letter 226J, as well as a few other practical tips for mounting a defense against the assessed penalty.



Planning in the Age of Affordable Care Act (ACA) Changes

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Guiding Step 1 - Alert the person in your organization who would receive Letter 226J

For employers who have received an IRS Letter 226J, it’s important to know there is no presumption of innocence regarding a penalty. An official response is required to address any perceived error in the calculation of the penalty or the penalty itself.

Guiding Step 2 – Treat an IRS Letter 226J with urgency and respond quickly

The response date the IRS includes in Letter 226J is the date the IRS expects to have an official response in hand. To respond, IRS Form 14764 needs to be completed for the employer, and IRS Form 14765 is required for any person receiving a premium assistance tax credit and/or an employee that may receive a penalty. For any firm that has missed their response date, they must call the number in the letter to request an extension as soon as possible.

Guiding Step 3 - Issue a response via registered mail or private delivery service

Having confirmation and proof that a response is with the IRS is one additional piece of documentation to prevent additional penalties.

Guiding Step 4 – Prepare for future Letters by playing the problem through to the present

In addition to a complete review of the ESR Penalty Summary Table within the Letter to fully understand how the proposed penalty was calculated, it is important for an ALE to conduct an internal assessment of reporting for ACA compliance to determine where errors occurred due to a missed step or documentation problem. Revisit what records are maintained that prove benefits eligibility and enrollment/waivers, and return to a process of over-reporting of details if necessary.

Guiding Step 5 – Submit ALL documentation that supports your response

If an ALE wants to challenge their ESR penalty, either the calculation or the entire assessment, again, there is no assumption of innocence. Businesses need to provide documentation with their response, and in this instance, it’s best to err on the side of caution and provide EVERYTHING that supports the challenge… down to the smallest scrap of information.

Guiding Step 6 – When possible, argue both “A” and “B” penalty assessment at the same time

The “A” penalty is applied if one or more full-time employees received healthcare through the Exchange and a premium tax credit because the employer made no offer of coverage. The “B” penalty is applied if one or more full-time employees receive healthcare through the Exchange and a federal premium subsidy because the employer made an offer of coverage that was not affordable or did not meet minimum value requirements. Challenging each of these penalties requires an abundance of documentation. Because the response documents for both penalties “A” and “B” are predominately the same, gathering the information at the same time will help preserve a bit of sanity for those in an organization addressing these assessments.

Following an ALE response to their ESR penalty, the IRS will issue two possible letters. Letter 227J is the IRS’s counter to the protested assessment. A business’s legal team will need to be brought up to speed if this letter is received. Letter CP220J also requires a legal team’s involvement because it informs an ALE that the IRS is holding firm on its penalty and additional challenges would need to take place in court.

Learn More

Planning in the Age of Affordable Care Act (ACA) Changes reviews additional stumbling blocks businesses have encountered with 1094 and 1095 reporting and ACA compliance. Also discussed, possible outcomes from the repeal of the Individual Mandate and the “Cadillac tax” (40% excise tax) being suspended until 2022.