What HR Needs To Know About Letter 226-J

Planning with proactive audits

Since last November, applicable large employers (ALEs) all over the country have been receiving letters from the Internal Revenue Service (IRS) for employer shared responsibility payments (ESRPs) from 2015 Affordable Care Act (ACA) filings. This ACA penalty letter is called Letter 226-J, and it can result in expensive fines for employers who are found liable.

In most instances, ALEs are looking to their HR teams to handle these letters—as if they didn’t already have enough to do! This is still a relatively new process, but there are several things HR teams should know if they are faced with an ACA penalty letter. 

Letter 226-J explains that an ALE is subject to an ESRP and how the information the IRS receives affects its calculation. These penalties can be assessed because an employer did not offer minimum essential coverage (MEC) to the required percentage of ACA full-time employees or because the coverage that was offered did not meet minimum standards, including affordability. Either way, these penalties can be quite substantial if triggered. 

Within Letter 226-J, the IRS provides Form 14765, which includes a summary and specific calculation of the penalty amount, along with a listing of all employees that have effectively triggered a potential penalty. The letter also provides instructions to the employer on how to respond and the response deadline, which is only 30 days after receipt of the letter. If an ALE is sent Letter 226-J, here’s what their HR team needs to do to effectively respond.

HR needs to start by auditing the ACA filing and specifically the premium tax credit (PTC) listing in the letter. From there, it must be determined whether the employer agrees or disagrees with the IRS’s assessment. Some things HR should evaluate in this process include:
 

If it’s determined that the IRS’s assessment is accurate then there’s not much left to do but check the corresponding box on Form 14764 and make financial preparations to pay the assessed penalty. It’s important to note that the HR team should consult with individuals within the organization who oversee finances and taxes as the penalty may have implications in those areas.

If the employer disagrees with the IRS’s assessment, they should complete Form 14764 and 14765 (if applicable). The IRS requests that the employer provide supporting documentation with their response. HR teams may take the following steps when crafting the response for the employer:
 

Once a response is completed, the employer should submit it to the IRS. In many instances the penalty can be reduced or even eliminated, if the employer provides proper documentation to make their case.

To help prepare for Letter 226-J, employers can proactively audit their previous ACA filings, rather than wait to receive Letter 226-J. By doing this they can establish a plan to ensure they’re able to respond in the short amount of time the IRS provides. Proactive auditing also benefits the company because they can take their self-evaluation and plan for potential penalties and tax implications, and adjust compliance procedures to avoid future penalties. 

The IRS is now assessing these penalties for the 2015 filing year, but letters are expected for the 2016 filing year as well. By ensuring the accuracy of data and keeping up-to-date ACA compliance practices and auditable records, employers are more likely to keep the business in compliance and create a trail of information for the IRS in case a letter finds its way to their mailbox.

The reality is that this is a new and evolving compliance process. Most HR teams that have been involved in the ACA compliance process could have foreseen the IRS would one day come to enforce these regulations, but it wasn’t made entirely clear how or when that would be done until recently. Now that the IRS has shown they’re serious about ACA penalties, HR teams should take the time to understand the process so they’re prepared to accurately and efficiently respond to Letter 226-J.