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IRS Starts to Send ACA Penalty Letters

Employers have just 30 days to respond to penalty assessments

A business woman is looking at a document with a magnifying glass.

updated Dec. 12, 2017

The IRS has begun notifying employers of their potential liability for failing to provide health coverage compliant with the Affordable Care Act's (ACA's) shared responsibility provisions. It recently released forms that employers can use to dispute the assessment.

On Nov. 2, the IRS issued Q&As 55-58, informing employers that by year's end the agency will begin notifying "applicable large employers" (ALEs) of their potential liability for an employer shared responsibility payment, if any, in connection with the 2015 calendar year. The determination will be based on information that employers reported to the IRS on Forms 1094-C and 1095-C and the individual tax return filed by the ALE's employees. In general, an ALE would be subject to a penalty fee if, for at least one month in the year, one or more of its full-time workers received a premium tax credit through the ACA's Health Insurance Marketplace because the ALE failed to provide ACA-compliant health coverage.

The IRS posted a sample Letter 226J, Preliminary Calculation of the Employer Shared Responsibility Payment, and an explanation of Letter 226J, which describes how ALEs should respond to this letter.

"Any ALE that receives a Letter 226J will be provided with 30 days to respond before a demand for payment is made by the IRS," said Ryan Moulder, a Los Angeles-based partner at Health Care Attorneys PC and general counsel at Accord Systems LLC, an ACA compliance software firm.

IRS Letter 226J will include:

  • IRS Form 14765, Employee Premium Tax Credit Listing, with a list the ALE's assessable full-time employees for the year in question.
  • IRS Form 14764, Employer Shared Responsibility Payment Response. Employers receiving Letter 226J should complete, sign, and date the enclosed Form 14764 and return it to the IRS to report any changes they want to make to their Form 1094-C.

"Only 10 employees will be listed on each page of the Form 14765 so an ALE member with hundreds of assessable full-time employees should expect a thick package included with the Letter 226J," Moulder said.

Penalty Refresher

The ACA added employer shared responsibility provisions under Section 4980H of the tax code. ALEs—employers with at least 50 full-time equivalent employees—must offer "minimum essential coverage" that is "affordable" and that provides "minimum value" to their full-time employees or potentially make an employer shared responsibility payment to the IRS.

However, "2015 was a phase-in year and an applicable large employer [was defined as having] 100 or more full-time employees," rather than 50 or more, said Craig Hasday, president of Frenkel Benefits, an employee benefit brokerage and benefit administration firm in New York City. For 2015, ALEs also were "required to offer minimum essential coverage which also met the minimum value standard to at least 70 percent of full-time employees and their eligible dependents," whereas beginning in 2016 the statutory threshold—at least 95 percent of full-time employees—took effect.

For plan year 2015, ALEs could face a $2,000 penalty for every full-time employee in the event there was no valid offer of coverage and a $3,000 penalty if the offer was not affordable. These penalties are indexed for inflation and rose slightly for each subsequent plan year (2017 and 2018 penalty amounts are described here).

Enforcement Guidance

The new guidance explains that:

  • The IRS will notify an employer of potential liability for an employer shared responsibility payment via Letter 226J. The letter will list, by month, the employees who received a premium tax credit and provide the proposed penalty. It will also provide the employer shared responsibility response form (Form 14764) and the name and information for a specific IRS employee to contact with any questions.
  • ALEs will have just 30 days from when the Letter 226J was dated to respond before the IRS demands payment. The ALE's response can either agree with the proposed assessment or disagree in whole or in part.
  • The IRS will acknowledge the ALE's response with Letter 227, which describes further actions the employer may need to take.
  • If the employer disagrees with the proposed or revised assessment in Letter 227, the employer can request a pre-assessment conference with the IRS Office of Appeals. Conferences will generally take place 30 days from the date of Letter 227.

[SHRM members-only toolkit: Complying with and Leveraging the Affordable Care Act]

Rapid Response Required

If an ALE does not make a timely response to the Letter 226J, "the IRS will demand payment in the proposed amount through notice CP 220J. Assessments are due only after the IRS has provided notice and demand for payment," noted Julia Zuckerman, J.D., a director at Conduent HR Services in Washington, D.C., and Richard Stover, an actuary and principal with the firm, in a recent blog post.

Employers "should also ensure that processes are in place to make these payments, as necessary. Even employers who are not expecting any assessments will need to prepare to respond to the IRS within the limited timeframe to appeal any incorrect assessments," they advised.

"Regardless of the reason an ALE member receives a Letter 226J, a timely, accurate response is necessary," Moulder emphasized. "It would be prudent for any ALE responding to the Letter 226J from the IRS to consult with an attorney who is familiar with the Forms 1094-C and 1095-C as well as other pertinent Affordable Care Act provisions."

"Subtract mailing time and internal routing time and you may have just two or three weeks to deliver to IRS your well-considered, written, well-documented, objection to a substantial employer mandate tax assessment," said R. Pepper Crutcher Jr., a partner in Balch & Bingham's Jackson, Miss., law office. "If you lack ready access to well-organized data about your 2015 group health plan enrollment, employee affordability, eligibility and IRS reporting of your coverage offers—including 2015 Forms 1094-C and 1095-C—you may find this a daunting task. If that data is hosted by a vendor, you should contact that vendor and verify access promptly."

"In an organization of any size, it might take a week or more for Letter 226J to reach the right department or person," said Alden Bianchi, a benefits attorney with Mintz Levin in Boston. "While the Q&A nowhere mentions extensions of time, one would hope that the IRS will be more flexible on this score."

Due to confusion surrounding the regulations and the complexity of the required forms, "the appeal process is going to be a mess," said Hasday. "No doubt, there are going to be a lot of angry and confused employers. Lawyers, accountants and insurance brokers are going to get very busy sorting all this out."

"Moving forward, employers should place a heavy emphasis on the accuracy of the Forms 1094-C and 1095-C to avoid potential IRS issues in future years," added Moulder.

Related SHRM Articles:

Prepare for Early 2018 ACA Information Reporting on Health Coverage, SHRM Online Benefits, October 2017

Play or Pay: Rising Penalties' Role in Complying with the ACA, SHRM Online Employment Law, October 2017

Not Every Aspect of Form 1095-C Can Be Outsourced, SHRM Online Employment Law, October 2017

Related SHRM Resources:

Health Care Reform Resources for Employers


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