How Should Employers Respond to IRS Employer Penalty Letters?
Over the last year, the IRS has been sending ACA employer penalty notices, IRS Letter 226-J, to Applicable Large Employers (ALEs). The IRS has relied on information in Forms 1094-C and 1095-C filed by ALEs and in Form 1040 filed by employees. If this information indicates that an employer did not provide ACA-coverage to its full-time employees, the IRS will send Letter 226-J to the ALE advising that it may be liable for the Employer Shared Responsibility Payment (ESRP).
IMPORTANT – NO AUTOMATIC EXTENSION FOR RESPONSES: The ALE then has 30 days to respond to Letter 226-J. The IRS has no provided for an automatic extension of this deadline. In limited situations, the IRS may issue an extension on the response. We strongly recommend that employers contact their attorney as soon as they receive the letter if they believe they need an extension.
Based on IRS guidance, we recommend the following steps to ALEs that receive Letter 226-J:
- As soon as possible, read your letter and attachments carefully. These documents explain the ESRP process and how you should respond to the letter.
- Determine if you agree or disagree with the proposed ESRP computation and why. If you have any questions about whether your plan was compliant with the ACA rules, reach out to your Northwestern Benefit Consultant as soon as you review the letter.
- Provide your response to the letter by completing Form 14764, which is attached to Letter 226-J. Your response should indicate whether you agree or disagree with the letter and why.
- If you agree with the proposed ESRP liability, follow the instructions to sign the response form and return with full payment in the envelope provided.
- If you disagree with the proposed ESRP liability, you must provide a full explanation of your disagreement and/or indicate changes needed on Form 14765. NOTE: If you have found that your ACA reporting was inaccurate or is inconsistent with the information in Letter 226-J, provided corrected information on this form.
- Return all documents as instructed in the letter by the response date.
Finally, remember that Letter 226-J addresses whether you, the employer, have complied with your responsibilities to offer ACA-compliant coverage to your full-time employees. The purpose of the letter is NOT to establish whether an employee should have received a subsidy or Premium Tax Credit (PTC) to purchase insurance on the Exchange. Letter 226-J is not asking you about whether your employees should have gotten the PTC, so you do not need to address that issue in your response.
IMPORTANT TIPS FROM THE IRS:
- Review the information reported on Forms 1094-C and 1095-C for the applicable year to confirm that the information filed with the IRS was accurate because the IRS uses that information to compute the ESRP.
- Keep a copy of the letter and any documents you submit.
- Contact the IRS using the information provided in the letter if you have any questions or need additional time to respond.
- Send the IRS a Form 2848 (Power of Attorney and Declaration of Representative) to allow your attorney or tax advisor to contact the IRS on your behalf.
Additional information and FAQs can be found on the IRS website: