IRS Letter 226-J: Penalties for ACA Noncompliance

IRS Letter 226-J

IRS Letter 226-J is sent to inform applicable large employers (ALEs) that they are liable for an Employer Shared Responsibility Payment (ESRP). These penalties are thousands of dollars per employee, and they can add up quickly. If you receive this letter, you must respond if you want to minimize the consequences of the situation. You should also make sure that you’re in compliance with the Affordable Care Act mandates moving forward.

Have you received IRS Letter 226-J? Don’t know what to do next? To learn more, keep reading, or to get help now, contact us at Wiggam Law today.

What is IRS Letter 226-J?

The IRS sends Letter 226-J to inform businesses that they are liable for an Employer Shared Responsibility Payment. Businesses that are classified as Applicable Large Employers must provide their employees with affordable healthcare, and failure to do so results in these penalties.

Note that this section of the Affordable Care Act is only relevant to applicable large employers (ALEs). These are businesses that have more than 50 full-time employees, including full-time equivalent employees. If you receive Letter 226-J and you are not an ALE, you should respond to the letter immediately and let the IRS know that this part of the ACA doesn’t apply to your business.

Is Letter 226-J an Audit?

IRS Letter 226-J is not an audit. It is one of the first notices a business receives, letting them know they are not in compliance with the Affordable Care Act. The letter will detail why the IRS believes that your business qualifies as an ALE. It will also include details for the proposed Employer Shared Responsibility Payment.

Why You Received Letter 226-J

You have received Letter 226-J because the IRS found that your business may be liable for an Employer Shared Responsibility Payment. Generally, this happens if the IRS knows that you are a large employer and if one or more of your employees applied for a Premium Tax Credit.

The IRS may use payroll and federal unemployment tax forms to estimate your number of full and full-time equivalent employees. The agency will also use information reported on Forms 1094-C and 1095-C to determine if you owe a penalty.

Forms 1094-C and 1095-C

All ALEs must file these forms annually and provide each of their employees with a copy of Form 1095-C. Form 1095-C shows that your business offered minimum healthcare coverage to your employees during the year. You should give one of these forms to each eligible employee and send a copy to the IRS. Form 1094-C summarizes the information on the individual 1095-C Forms.

Note that certain small employers that offer healthcare to their employees may need to file 1094-B and 1095-B. These employers aren’t subject to the shared responsibility penalty, but they do have to meet reporting requirements.

If you don’t file these forms, you will receive a notice about non-filing. Then, if the IRS decides to propose penalties on your account, you will get 226-J and other relevant notices at that time.

ESRP Penalties

Letter 226-J will outline the penalties that the IRS proposes against your business. ESRPs fall into two categories and are calculated slightly differently as follows:

1) If you don’t offer health insurance to at least 95% of your employees and at least one employee claims the Premium Tax Credit, you must pay a penalty of $2,000 per employee. The penalty doesn’t apply to your first 30 employees; it’s indexed to inflation, and it applies monthly rather than yearly. For example, as of 2024, the penalty is $2970 per year or $247.50 per employee per month.

2)If you offer health insurance to at least 95% of your employees, but they qualify to claim the Premium Tax Credit, you will incur a $3,000 penalty for each employee who claims the PTC. Again, this penalty is also indexed to inflation, and as of 2024, it is $4,460 per employee. When applied monthly, that works out to $371.67 per employee per month.

How to Respond to Letter 226-J

The first thing you should do is read the letter carefully. The letter will explain why the IRS believes you may owe an ESRP. It also says how much the ESRP would be. Whether you agree or disagree, you must respond within 30 days.

Start your response by filling out Form 14764, ESRP Response. If you disagree with the information on the form, include a formal explanation for why you disagree with the letter. You may also need to complete Form 14765, Employee Premium Tax Credit Listing. Both of these forms should come with your letter.

Deadlines and Timelines

If you do not respond within 30 days, the IRS will move forward with assessing the penalties against your business. Not paying this amount could result in a tax lien or levy against your personal and/or business assets.

Challenging the ESRP Assessment

If you do not agree with the letter, it is very important to respond as soon as possible with the enclosed response Form 14764. You should also include a signed, written explanation detailing why you disagree with the letter.

Include any documentation that supports your reasoning that you do not owe an Employer Shared Responsibility Payment. For example, if you have less than 50 full-time and full-time equivalent employees, you should explain that with your letter.

Potential Outcomes After Responding

If you agree with the letter, just wait or sign the consent forms to agree to the penalty. The IRS will formally assess the penalty and send you another letter with payment instructions. Once you pay the penalty, the matter is resolved. If you choose to refute the letter, you should expect to go back and forth with the IRS for a while.

Avoiding Future Letters

The best way to stay compliant with the Affordable Care Act is to stay up-to-date on any revisions made to the requirements. It is also important to understand whether or not your business qualifies as an ALE to the IRS. Regularly reviewing any provisions regarding ALEs can be helpful. Also, note the deadlines for filing Forms 1094/1095 and make sure to stay compliant.

IRS Letter 226-J FAQs:

What triggers the IRS to send Letter 226-J to an employer?

The IRS sends Letter 226-J because the information on Forms 1094-C/1095-C indicated that your business has not complied with the Affordable Care Act and now may be liable for an ESRP.

How does the information reported on Forms 1094-C and 1095-C relate to Letter 226-J?

The IRS uses the information provided on Forms 1094-C/1095-C to ensure that employers are meeting the requirements of the ACA and providing adequate health insurance to their employees. If these forms and individual tax returns from your employees indicate non-compliance, the IRS may send you Letter 226-J.

What are the steps an employer should take immediately upon receiving Letter 226-J?

When you receive the letter, review it carefully to see if you agree or disagree. If you have filed Forms 1094/1095, make sure they are correct, and file these forms if they haven’t been filed. Then, respond to the IRS by the deadline noted on the letter. If you have incurred a penalty, make a plan to get in compliance for the next year. If you disagree with the letter, collect supporting documents to make your case.

Can an employer request an extension to respond to Letter 226-J?

To request more time, contact the IRS directly. Alternatively, you can hire a tax attorney and have them contact the agency for you.

What should an employer do if they disagree with the ESRP amount proposed in Letter 226-J?

If an employer disagrees, they must respond within 30 days via form 14765 and 14764. It is also advised that they seek professional advice from a tax expert.

Get Help With IRS Letter 226-J

IRS Letter 226-J can be very difficult to understand. However, it is important to understand that it is not an audit or bill. The letter informs you that the IRS believes that your business owes an ESRP, but this is not always the case.

Remember, the IRS can make mistakes. If you feel like this letter was issued in error, start drafting your response or reach out to a tax attorney for help as soon as possible. In all cases, the most important thing is to respond in a timely manner to avoid penalties.

To get help with Letter 226-J, Forms 1094/1095, and other aspects of ACA compliance and business tax problems, contact us at Wiggam Law today. We can help you get back into good standing with the IRS and put your business tax problems behind you.