IRS Letters 226J Are Coming: ACA Non-compliance Penalties for Tax Year 2016

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According to an ACA Times article, published by First Capitol Consulting, Inc., the IRS is ready to send out Letter 226J for the 2016 tax year beginning in November. Who receives these letters?—Applicable Large Employers (ALE) that the IRS believes were non-compliant with the ACA during that year.

 

What is an ALE?

An ALE is an employer with 50 or more full-time (FT) or full-time equivalent (FTE) employees (See IRS “Determining if an Employer is an Applicable Large Employer“). Such an employer is required to file details of its offer of Minimal Essential Coverage (MCE) that is both affordable and meets Minimum Value to at least 95% of its FT/FTE employees and their dependents to the IRS using Forms 1094-C and 1095-C.

What is Letter 226J?

It is the initial letter notifying an ALE that it might be liable for an Employer Shared Responsibility Payment (ESRP). The IRS uses the employer’s Forms 1094/5-C and income tax returns of its full-time employees to identify any who were granted a premium tax credit. This information is used to compute the ESRP. The letter is not a bill. It is contains a proposed ESRP amount and a Summary Table that shows how the monthly ESRP was determined. It also includes a listing (by month) of full-time employees who received a premium tax credit.

What to do if you receive a Letter 226J

An ALE that receives this letter has a number of options. Remember, the letters contain preliminary ESRP assessments; it’s not the final word. After careful review, the employer should complete the response form indicating agreement or disagreement (Form 14764). If the ALE disagrees with the information, it must provide detailed explanation and indicate changes needed on Form 14765. All documents must be returned by the indicated response deadline. The return window is not long, and an employer can request an extension by contacting the IRS. Read the IRS document “Understanding your Letter 226-J” for more complete information, “Answers to Common Questions,” and links to related forms and documents.

2016 penalties

2016 penalties will likely be higher than those assessed in 2015. The major reason for this is the higher percentage of full-time employees required to receive offers of Minimal Essential Coverage for themselves and their dependents. In 2015 at least 70% of employees were required to receive such coverage offers. That percentage rose to 95% in 2016.

According to the March 2018 report from the Treasury Inspector General for Tax Administration, the IRS spent $2.8 million on systems that would improve the process of identifying ALEs that are not in compliance. “ACA penalties to continue,” an article by Joanna H. Kim-Brunetti in accountingTODAY, states that enforcement will become more robust. Also, the IRS will be auditing non-compliant companies on a “highest value of work” basis (those companies that will likely have higher penalties).

Being proactive

By carefully checking their 1094-C and 1095-C forms for errors, employers can help avoid receiving a Letter 226J. These forms are complicated, and there are plenty of places where a small oversight – like neglecting to check “Yes” for all months that coverage was offered to at least 95% of eligible employees – can raise a red flag for the IRS.

Delphia Consulting offers the product My Workforce Analyzer (MWA) to help with accurate reporting and easy viewing and editing of each 1095-C form to make any necessary corrections. When using MWA, the employer can e-file with Aatrix both the 1094-C form and the 1095-C form.  If a client receives a Letter 226J or any other IRS notification, both Aatrix and Delphia Consulting are able to assist with understanding and addressing the IRS letter.

For more information about MWA or how Delphia can be of assistance, check out MWA’s product page, contact Sales through our website or call 1.888.421.2004.

Additional resources

From IRS.gov

Information Reporting by Applicable Large Employers

Questions and Answers on Employer Shared Responsibility Provisions under the Affordable Care Act

Understanding your Letter 226-J

Articles:

Be Ready for More ACA Penalties” by Allen Smith, J.D.  SHRM Resources and Tools August 30, 2018

IRS Letter 226J for 2016: In The Mail” by Robert Sheen    The ACA Times

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Mary van Balen
Mary van Balen
Technical Writer at Delphia Consulting
Mary van Balen is based out of Columbus, Ohio and is a writer for Delphia Consulting. Mary contributes to the Delphia blog on Human Resources issues and Delphia Consulting and Sage product related updates.