Keeping up with IRS Letter 226-J

Keeping up with IRS Letter 226-J

A year ago the IRS began issuing Letter 226-J notifying employers — those that may not have complied with section 4980H(a) and (b) of the ACA employer mandate during the 2015 tax year — of the penalties they may face for non-compliance.

Now, the IRS has started issuing Letter 226-J notices for failure to comply in tax year 2016.

The IRS is also issuing Letter 5669, a letter that indicates the IRS believes the organization has failed to file information returns for the 2015 or 2016 reporting season and could face applicable penalties. The Letter 5669 requests basic employer information including confirmation of the tax identification company name for used by the Applicable Large Employer (ALE) when filing ACA information returns as well as requesting the company’s Employer Identification Number (EIN) and the filing date.

Read our blog, Respond to Letter 226-J in Three Easy Steps, for more information on the different versions of the 226-J letters that may be received and the resulting actions an employer may need to take.

Improving the assessment process
The IRS is improving its process for identifying employers that may be out of compliance with regard to their obligations under IRC 4980H of the Employer Shared Responsibility Mandate.

This effort to improve the process is directly tied to the Treasury Inspector General for Tax Administration (TIGTA) Report. The report, completed last March, aimed to help the IRS better identify employers who failed to comply with the employer provisions.

The report found that the data used by the IRS were not always complete or correct. The chart below identifies the differences in number of potentially liable employers for tax year 2015 identified by TIGTA in comparison to the number of employers identified by the IRS and the potential payment. According to the report, from a population of 318,296 employers, the IRS did not identify 840 employers potentially subject to more than $113 million in Employer Shared Responsibility Payments.

Comparison of the IRS’s and TIGTA’s identification of potentially liable ALE for tax year 2015

Source: Affordable Care Act: Processes to Identify Employers Subject to the Employer Shared Responsibility Payment Need Improvement (Rep. No. Reference Number: 2018-43-022). (2018, March 21). 


The IRS spent more than $2.8 million on improvements and — beginning with tax year 2016 — will begin focusing on employers based on a “highest value of work” basis. This means the larger the potential penalty, the more likely the IRS will issue an assessment.

Minimizing company risk
In many cases the threat of receiving an assessment letter can be significantly reduced simply by effective monthly management of data and searching for data anomalies.

In particular, HR teams should be sure to validate:

  • Their stated number of full-time employees on a month over month basis
  • Form 1095-C code determination combinations and potential “fail” codes/code combinations including series 1 codes (line 14) 1F and 1H and a blank series 2 Safe Harbor code (line 16)

How Health e(fx) can help
First and foremost, Health e(fx) technology helps minimize the likelihood of receiving a 226-J letter in the first place. In fact, 98% of our clients say they are confident our technology helps them minimize their penalty risk.

In the case that an employer does receive a proposed penalty assessment, Health e(fx) clients can use our system to easily access the information required to defend and support its claims against the proposed ACA shared responsibility penalties and respond on a timely basis.

For clients enrolled in Health e(fx) Managed Services, we will work with you to process and respond to the IRS requests.  For those who do not use Health e(fx) Managed Services, Health e(fx) offers an array of report options as well as past Form(s) 1094-C and/or Form(s) 1095-C within the Health e(fx) system to support the completion of Form 14765 and 14764 response and statement.

If you don’t feel confident in your ACA management and eligibility strategy, Health e(fx) can help. Contact us today to learn more about how we help companies comply with the ACA guidelines and support a quick response to 226-J letter, now and in the years ahead.

November 26, 2018