For many businesses and employers, especially large applicable employers (ALE) that are required to complete ACA reporting with the IRS, there are few worse things than finding an IRS notice in your mailbox.
This can mean your IRS compliance is in jeopardy and you could be facing penalties. For all businesses, this is a stressful situation, but when it comes to ACA-related penalties, these can get expensive quickly.
This is a guide to help employers understand what the IRS Letter 226J is, why they have likely received it, and what their next steps should be.
What is Letter 226J?
This is the initial IRS notice that employers will receive from the IRS notifying them that they may be liable for an Employer-Shared Responsibility Payment. The Letter 226J is generally sent to employers that failed to comply with the requirement of providing affordable coverage to all of their eligible employees.
Why might an employer receive Letter 226J?
The employer most likely received this because one of their employees was able to receive a premium tax credit towards health insurance coverage that they purchased through the marketplace.
So, why does this matter? If you were required under the Affordable Care Act to provide all eligible employees with an affordable option for health insurance coverage, and this individual received a premium tax credit, this tells the IRS that you either didn’t offer this employee coverage, or you offered them coverage that wasn’t affordable.
Therefore, based on their income, they were able to find a more affordable option through the marketplace, with the help of a premium tax credit from the federal government.
The IRS also uses the information that employers report on Forms 1095-C to calculate whether or not the coverage meets the affordability standards set in place by the IRS. The IRS provides employers with Safe Harbors. This means that employers have more than one way to calculate the affordability of the plan, and as long as the plan is considered affordable using one of these methods, they will not be penalized.
If you are receiving this letter, you are liable to pay an Employer-Shared Responsibility Payment because the coverage for this individual or individuals was not deemed affordable by ACA standards.
What should you do if your business receives a Letter 226J?
Most importantly – do not ignore the Letter 226J. This is an initial notice from the IRS, ignoring it will only ensure harsher consequences, this will likely finalize the penalties your business is facing.
You essentially have two options, if the penalty is justified, you can agree with it. If you feel the penalty is not justified, you can disagree with the notice. Depending on which way you go, there are a couple of different ways that you can respond.
First, be sure to thoroughly review the letter, there will be instructions that you need to follow laid out in the notice. There will also be an attachment form included, this is Form 14764.
On Form 14764, you can indicate whether or not you agree or disagree with the ESRP. If you do agree, you can follow the instructions in the notice on attaching your payment and returning this to the IRS. If you do not agree with this notice, you can attach a complete explanation to the letter providing your reasoning.
How long does the IRS give you to respond to Letter 226J?
The IRS allows you thirty days from the date that you received the letter to respond accordingly.
While it is important to respond to the IRS in a timely manner, it is important that you take this opportunity to review all the ACA Forms 1095-C that you submitted to the IRS for that year’s ACA reporting. The IRS will calculate the ESRP based on the information you provided on these forms, so it is critical that the information you provided is accurate.
Should I keep documentation from Letter 226J
Absolutely! Whether you initially agree or disagree with the ESRP, it is important that you keep a copy of this letter and any documentation that you sent to the IRS for your records. You will likely need this information in the future.
If you have any questions that are preventing you from responding to the Letter 226J, it is recommended that you reach out to the IRS for resolution. It is also crucial that you contact the IRS if you may need additional time to complete the response.
Stay Ahead of IRS Penalties with ACAwise
After dealing with the complexities of the ACA reporting process and the potential penalties that come with it, our clients are happy to unburden themselves for the process. ACAwise is an ACA reporting provider that has years of experience with the reporting process, requirements, and complexities involved in reporting to the IRS.
We alleviate the stress and burden of this difficult reporting process for our clients by offering a complete solution to meet their filing needs. ACAwise handles the generation of Forms 1095-C with the IRS and required states, complete with code generation if needed.
ACAwise also provides an easy solution for distributing employee copies of ACA Forms either electronically or through postal mail. Our team of experts is available throughout the process to answer any questions and address any concerns you may have.
Are you interested in learning more about ACAwise? Reach out to our team today for a free quote!