Update: The IRS has used Letter 226-J to notify employers who may have not complied with section 4980(b), the ACA employer mandate, during the 2015 tax year. A recent Treasury Inspector General for Tax Administration report says more penalties will be issued for 2016.
For the 2015 tax year, most employers have been able to get the proposed penalties waived by providing corrected reporting information to the IRS. Others have had the proposed penalties significantly reduced by properly claiming transition relief, correcting full-time employee counts, and updating individual employee offer of coverage information on the Form 14765.
Letter 226-J outlines several things for the employer receiving it. The letter defines the proposed penalty assessment and tells the employer whether the assessment is based on an “A” or “B” Penalty.
An “A” Penalty is assessed on whether the employer offered the minimum essential coverage (MEC) to at least 70 percent in 2015 (and 95 percent in 2016 and beyond) of its full‐time employees. (Note: For employers with non-calendar plan years, transition relief is provided for employees (whenever hired) who would be eligible for coverage as of the first day of the 2015 health plan. If these employees are offered affordable, minimum value coverage no later than the first day of the 2015 health plan year, the large employer will not be liable for a penalty prior to the 2015 health plan year.) The “A” Penalty is $2,000 annually for each full‐time employee, excluding the first 80 employees in 2015 (30 starting in 2016). It is calculated monthly but based and remitted on an annual assessment.
The “B” Penalty applies if the employer’s health plan fails to meet the minimum value (MV) requirement and/or affordability requirement. This penalty is triggered when one or more employees, receives a federal subsidy on the Exchange. The “B” penalty annualized amount for 2018 is $3,480, assessed monthly at $290 per employee and for 2015, $3,120 annualized, assessed monthly at $260 per employee. The penalty is assessed for any month in which qualified coverage was not offered to a full-time employee and that employee secured subsidized marketplace coverage.
Provided with Letter 226-J are details on how to respond to and/or dispute the assessment.
What to do if you Receive Letter 226-J
Whether an employer agrees or disagrees with the penalty assessment, they should contact their ACA reporting solution provider, or whomever assisted in generating their forms for assistance.
If you disagree with the assessment, first you will need to review your Form 1094-C and compare the Forms 1095-C for each identified employee to Form 14765, the Employee Premium Tax Credit Listing (you do not need to re-submit corrected Forms 1094-C or 1095-C).
Next, you should complete, date and sign Form 14764, “ESRP Response” and send it back to the IRS with any supporting documents by the due date written on the letter, with a statement concerning why you are disputing the assessment. If you agree with the assessment, you may simply enclose a check for the amount requested and the process ends.
Step 2: Respond to Letter 227
Once Form 14764 is sent, the IRS will acknowledge the employer’s response to Letter 226-J with Letter 227 which describes what action the employer must take if any.
Here are the different versions of the 227 letter, listed in order of amount of action an employer may need to take:
- Letter 227-J acknowledges receipt of the signed agreement Form 14764, ESRP Response, and that the ESRP will be assessed. After issuance of this letter, the case will be closed. No response is required.
- Letter 227-K acknowledges receipt of the information provided and shows the ESRP has been reduced to zero. After issuance of this letter, the case will be closed. No response is required.
- Letter 227-L acknowledges receipt of the information provided and shows the ESRP has been revised. The letter includes an updated Form 14765 (PTC Listing) and revised calculation table. The employer can agree with the assessment and enclose a check for the revised amount. Or, if the employer disagrees with the assessment, the employer can request a meeting with the manager and/or the IRS Office of Appeals. To request a pre-assessment conference with the IRS Office of Appeals, follow the instructions provided in Letter 227, and Publication 5, “Your Repeal Rights and How to Prepare a Protest if You Don’t Agree”, which can be found on the IRS website. You must request the conference in writing by the due date.
- Letter 227-M acknowledges receipt of information provided and shows that the ESRP did not change. The ALE can agree and enclose a check for the amount requested or request a meeting with the manager and/or the IRS Office of Appeals.
- Two other versions of Letter 227-M exist. One version is used when the IRS partially disagrees with the recalculated ESRP submitted by the employer. This version is used to propose a revised ESRP that may or may not be lower than the original assessment. The other version is used if the IRS seeks further clarification of the information and documentation provided by the employer.
Step 3: IRS Notice CP 220-J, Pay or Challenge
After responding to Letter 227, or after your conference with the IRS Office of Appeals, you will receive Notice CP 220-J asking you to pay the reassessed penalty. If the numbers are correct and you have yet to pay your penalties, simply pay the amount requested electronically, or via check. If you continue to disagree with the assessment, consult legal counsel on how to proceed next.
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 manage the information required to defend 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 resolve the IRS correspondence. For those who do not use Health e(fx) Managed Services, you can pull past Form 1094-C and/or Form 1095-C within the Health e(fx) system to compare the data to Form 14765 and 14764.
To reduce future penalty risk, the Health e(fx) system allows clients to generate reports that help assess whether or not their plans meet the affordability requirement in order to reduce their chances for Penalty B risk. If you have further questions or would like to learn more about how Health e(fx) can help you minimize penalty risk, contact your Account Manager.