When you find a copy of IRS Letter 226J in the mail, it can be a frustrating feeling. Letter 226J is a penalty assessment notice that essentially notifies you that you failed to comply with the employer mandate of the Affordable Care Act (ACA).
Your first thought might be: “What? No way.” You may disagree with how the IRS interpreted the situation, or the amount they say is due. Let’s look at what the 226J means for your company and what you should do after receiving it.
Why Did We Receive IRS Letter 226J?
The IRS sends a 226J based on information you provided earlier on forms 1094/5-C, as well as the individual income tax returns of your full-time employees. If they determine that the employee was allowed a tax credit for which your company didn’t qualify, that’s a red flag.
To look at it another way: If, for at least one month in the year, any full-time employee was enrolled in a qualified health plan for which a premium tax credit was allowed, the company must qualify for an affordability “safe harbor” or other relief. The three affordability safe harbors are: the Form W-2 wages safe harbor, the rate of pay safe harbor, and the federal poverty line safe harbor.
So you received Letter 226J because the IRS either disagrees that you had safe harbor, or needs more information about the situation. They want to make sure the tax credit was allowable and see if a penalty – also known as Employer Shared Responsibility Payment (ESRP) – applies.
Is 226J a Bill We Have to Pay?
No, 226J is not a bill. It’s a summary of the ESRP from the IRS. It’s their proposal to you and you have an opportunity to respond to it.
Whether you disagree or accept the ESRP, your first step should be to read the letter thoroughly, including any attachments, and note the deadline to respond, which is usually within 30 days. Next, contact your ACA solutions provider so you can look through the information together.
Are there any errors? Do you agree to the payment or disagree with a portion or all of what the IRS says? Prepare to respond in writing.
If you agree with it, complete and sign Form 14764 – ESRP Response, which should have been included with the 226J notice. Return it to the IRS by the response date with your payment.
There are two ways to disagree with the IRS’ assessment of your situation:
FACTUAL INACCURACY. If the information is factually wrong, follow the instructions in the letter to provide correct information to the IRS. They will follow up with you by mail.
APPEALS PROCESS. If you disagree that you owe the ESRP altogether, or disagree with the amount of the penalty, read through your rights – they’re spelled out in the 226J notice. You have a right to appeal, but you’ll need to follow the IRS process for doing so.
Whichever path you take, the IRS will acknowledge your response to Letter 226J with a Letter 227.
What if We Don’t Respond to 226J?
Not responding to Letter 226J is the absolute wrong thing to do. Sometimes, because of “noise in the news” about the ACA and the future of health care, employers ignore important IRS notices and assume politicians will sort it all out eventually.
But in the meantime, the IRS will issue penalties for noncompliance. For some companies, it could be in the millions of dollars.
If you never respond to the 226J, the IRS will move forward by viewing it no longer as a proposal, but a foregone conclusion. You’ll now owe the ESRP amount stated in the letter and the IRS will send you a Notice and Demand for Payment. Due to your company’s inaction, you may be subject to an audit.
Many U.S. employers are now in a tough situation. For 18 months or more, they thought they were safe from receiving 226Js because they simply hadn’t received one yet. Or they ignored earlier notices, assuming the ACA would be overhauled.