IRS 226J Letters: What They Are and What Employers Need to Know
This post was authored by Shauna Waldin, Director of Compliance & Wellness at Rose and Kiernan, Inc.
The IRS has been following through on their 2017 year-end promise that employers would begin receiving initial notices relaying penalties associated with the Affordable Care Act’s (ACA) employer shared responsibility provision. These IRS 226J Letters, as they’re titled, are steadily being released by the IRS and reflect proposed penalties associated with the 2015 tax year. For 2015, the Employer Shared Responsibility Payment (ESRP) amounts are $2,080 and $3,120, depending on the violation.
The letters themselves, while lengthy, do provide employers with the exact reason for the penalty including the names and timeframes of employees who received a premium tax credit for purchasing coverage in the Marketplace. Included in the very first line of the letter is the “preliminary calculation of the Employer Shared Responsibility Payment (ESRP) that [the company] owes” Having walked numerous clients through this process, we have seen penalties ranging from $80,000 to almost $2 million!
There is some good news that follows; first, the IRS provides detailed instruction as to how you should respond to the letter, depending on whether you agree or disagree with the assessment. Second, and perhaps most importantly, many of the penalties that we have seen have been simple errors associated with first-year filings. To date, each of our clients who have received such letters have seen significant, if not total reduction in the proposed ESRP penalty.
It is important to note that employers should not ignore this letter and have just 30 days to respond. Though a preliminary calculation is noted in the letter, there is no formal request for payment in the initial communication. Once the employer responds, the IRS will respond again with a variation of Letter 227, depending on the required next steps:
- The IRS acknowledges receipt of an employer’s confirmation that the preliminary fee is correct
- The IRS acknowledges and agrees with an employer’s evidence that no penalty is owed
- The IRS acknowledges an employer’s evidence that a reduced penalty should be imposed, and provides a revised Form/calculation
- The IRS acknowledges an employer’s submission but declares the preliminary penalty is owed
Letter 227 is also not a request for payment, rather, confirmation of the IRS decision and next-steps (if any) but still must be responded to. Once the amount of any penalty has been assessed, a bill will be sent.
The Commonsense Reporting Act of 2017 was introduced in both the U.S. Senate and House of Representatives, in an attempt to simplify the ACA employer reporting process. While we will continue to monitor this bill and hope for relief, we remain available in the meantime for any assistance regarding these letters.