Letter 226-J is the IRS's way of informing you that it believes, but has not yet firmly concluded, that you have failed to comply with the ACA's employer mandate. The letter is generated by data you provided on Forms 1094-C and 1095-C, but receiving it does not guarantee that you've done anything substantively wrong.
The ACA contains two employer mandate standards that, if the IRS believes you failed to meet, will trigger a Letter 226-J. Penalties under Internal Revenue Code Section 4980H subsection (a) involve a two-pronged test. They come into play if the employer:
- Did not offer minimum essential coverage to at least 95% of its full-time employees and their dependents (but not necessarily their spouses), and
- At least one of its employees received a tax credit by securing health coverage via a Health Insurance Marketplace (commonly known as an "exchange").
The penalty under subsection (a) is the most severe. It's assessed based on the total number of employees for each month of the violation status. This formula is an annualized inflation-adjusted penalty amount ($2,320 for 2018) for each full-time employee, minus 30. So, if you had 80 employees and were in violation under subsection (a) for an entire year in 2018, the potential penalty would be 80 – 30 = 50 × $2,320 = $116,000.
Sec. 4980H subsection (b) applies if the employer did offer minimum essential coverage to at least 95% of its employees, but at least one full-time employee received a tax credit for coverage bought from a Health Insurance Marketplace because either:
- He or she wasn't offered coverage, or
- Coverage offered failed to meet the ACA's affordability or minimum value test.
The subsection (b) penalty is based on an inflation-adjusted amount ($3,480 in 2018) for each employee who fell into this category. If you had 100 employees, it would be mathematically impossible for more than five employees to trigger a subsection (b) penalty, because you wouldn't have flunked the 95% coverage requirement that would otherwise have made you subject to the harsher subsection (a) penalty.
Employers should read the Letter 226-J carefully to learn why the IRS believes they have gone astray. The letter provides 30 days to respond.
Common errors that trigger the letter include:
- Failing to fill in a safe harbor code on line 16 of Form 1095-C,
- Inadvertently reporting a failure to cover substantially all full-time employees,
- For self-insured plans, failing to include all former employees on Part III of Form 1095-C, and
- Missing the deadline for filing Forms 1094-C and 1095-C.
The source of such errors could be due to either manual mistakes or system errors, or a mistake by the IRS. For example, the employer may have filed a corrected Form 1094-C, but the IRS only accounted for the original filing. Regardless of where the mistakes originated, the employer should move promptly to get the mistakes resolved.
The Letter 226-J itself will provide information on whom to call with questions. The package will also include a response form on which the employer indicates whether it agrees with the agency's findings or not — and if not, why.
If the employer agrees with the IRS's assessment, the form indicates to: "Follow the instructions to sign the response form and return with full payment." If the employer disagrees, it should respond to the letter with a detailed explanation of the basis of that disagreement. The employer will then receive a letter back from the IRS stating its final determination, including the employer's right to appeal the verdict.
Enforcement activity has begun to ramp up now that transitional relief available for 2015 filings is no longer available. Therefore, ALEs that might not have received a Letter 226-J in the past could stand a better chance of receiving one now. If you do receive a Letter 226-J, contact your Sisterson representative for assistance in formulating a proper response.