Although the current administration has directed the federal agencies to use their regulatory authority to simplify and delay certain provisions of the Patient Protection and Affordable Care Act (PPACA), many employers may be surprised to learn that the IRS has begun to enforce Section 4980H, also known as the Employer Shared Responsibility mandate. After all, PPACA is still the law of the land despite numerous repeal and replace efforts. As an early holiday present, some employers are now receiving IRS Letter 226-J, notifying them of proposed Employer Shared Responsibility penalties.
What is letter 226-J?
Letter 226-J is sent by the IRS to Applicable Large Employers (ALEs) to notify them that they may be liable for an Employer Shared Responsibility Payment (ESRP). This proposed penalty assessment is based on information gathered from Forms 1094-C and 1095-C filed by the employer as well as individual income tax returns filed by the employees for the 2015 tax year.
Receiving a Letter 226-J may surprise some ALEs, including those ALEs that made the necessary changes to comply with Section 4980H. Since employer reporting was a new process for ALEs, it is likely that mistakes were made that may trigger Letter 226-J.
Should you receive a 226-J letter, there are several action items an employer must consider:
Make sure to review the accuracy of the information contained in the Letter 226-J. Generally, the letter will provide the penalty amount, the response date, how the penalty was calculated, and a list of the employees that triggered the penalties through the receipt of premium tax credits in 2015. The letter also instructs ALEs how to respond to the IRS in the event they agree or disagree with the penalty assessed.
- Act Quickly
Time is ticking! Employers only have 30 days from the date of the letter to reply - giving very little time to respond. The IRS has indicated additional time may be provided upon request.
- Get Access to Information
Since the demand is based on the 2015 calendar year, make sure you can access the information you need to defend against the proposed penalty. This may include contacting your payroll provider and any third-party vendor that assisted with calculating hours of service, administering measurement methods, and generating Forms 1094-C and 1095-C.
- Contact your Legal Counsel
Notify the appropriate internal teams, as well as your legal counsel or tax advisor. You will want to have a team assembled if you have to have further dialogue with the IRS around the ESRP.
- Notify your Benefits Consultant
If you are working with an employee benefits consulting firm, you likely received guidance around PPACA from your consultant. Their records and assistance should provide you with quicker access to your history.
If you receive a letter, DON’T PANIC. Take a step back and remember you have an opportunity to contest the penalty if the amount proposed is incorrect.
How to Dispute a Penalty
Forms 14764 (ESRP Response) and 14765 (Employee Premium Tax Credit Listing) are the documents an ALE will use to respond to the IRS to pay or dispute the penalty. Letter 226-J clearly outlines the steps to complete these forms. These forms provide an explanation as to why the IRS is seeking a penalty and will give the employer the opportunity to respond.
Form 14764 – This form asks employers to indicate agreement or disagreement with the proposed penalty. If an employer disagrees, the employer is advised to submit a signed statement explaining the reasons behind their disagreement. Employers may include documentation supporting the statement. However, the IRS has yet advised the type of supporting documentation may be required to resolve a proposed penalty.
Form 14765 - Review form 14765 carefully. It will give a list of employees that generated the penalty and the codes found in Lines 14 and 16 of each employee’s Form 1095-C. If any of the codes listed are incorrect, the form provides space for the employer to indicate corrections.
If Letter 226-J was generated as the result of incorrect or incomplete information that was reported on Forms 1094-C or 1095-C, the employer should not file corrected forms; however, any necessary corrections to Forms 1094-C or 1095-C should be identified in the employer’s signed statement or on Form 14765.
For more information on the ESRP assessment process, review Gallagher’s Employer Shared Responsibility Penalty Assessment Toolkit. Should you receive a Letter 226-J, consider the action steps above and contact HCW if further guidance is needed. And if you are an applicable large employer, consider attending our live event on January, 17, 2018 as we will walk you through sample scenarios of what to do if a letter is received.