According to Employer Shared Responsibility rules, an applicable large employer needs to offer minimum affordable essential coverage. This rule requires employers to provide minimum value to all full-time employees or they will have to pay potential tax as a penalty. The Employer Shared Responsibility rules updated in 2017 and introduced a Letter 226-J. The IRS issues this letter to employers for proposing and assessing the Employer Shared Responsibility Penalty Payment. These rules are only are relevant for companies that qualify as applicable large employers (ALE). An employer will become ALE if they have 50 or more full-time employees.
What is Letter 226-J?
Letter 226-J is a letter you would potentially receive from the IRS if you are an Applicable Large Employer (ALE). The letter lets these companies know that they could be liable for ESRPs, or Employer Shared Responsibility Payments.
Why might you owe Employer Shared Responsibility Payments? ALEs are required to provide affordable minimum essential healthcare coverage to full-time employees, not doing so means you can get penalized through an ESRP. The IRS uses form 1094-C and 1095-C as well as employee individual income tax returns to see if they were allowed premium tax credits. Learn more about the ACA Employer Mandate and how to stay compliant here.
What do employers need to do after receiving Letter 226-J?
Within your Letter 226-J and additional attachments, the IRS includes what the Employer Shared Responsibility Payments process looks like, as well as your next steps depending on if you think the included computation is accurate or inaccurate. Before you take any other steps, you will have to fill out Form 14764, which is the ESRP response form. Within this form you will specify if you don’t agree with the IRS’ computation.
If you do disagree with your proposed ESRP calculation, you must fill out another form, Form 14765, detailing what you think is incorrect. If you do think that the ESRP calculation is correct, you sign and send back Form 14764 along with a payment addressing the ESRP.
Make sure to keep a copy of all of these documents for your records. Ensure that all information is correct before filling out the forms and submitting them back to the IRS, and confirm that information on your 1094-C and 1095-C forms are accurate to ensure the ESRP is correct.
Letter 226J contains:
- Your proposed ESRP
- A table containing a summary of the ESRP payment by the month
- Indication of whether an employer is liable for employer Shared Responsibility Payment under section 4980H (a) or 4980H (b).
- Form 14764 (Response Form).
- Form 14765 (Employee Premium Tax Credit Listing)
- Steps to take for ALE if he agrees or disagrees with the proposed payment.
- The actions that the IRS will perform if you don’t submit a timely response.
How will an employer know that the IRS has received their response?
The IRS will send an acknowledgment letter after receiving your response. This response is called Letter 227 and will come as either a 227-J, 227-K, 227-L, 227-M, 227-N, or 227-O depending on next steps. Each version includes the actions that ALE needs to take (if any). Learn more on the IRS site here.
What happens if ALE doesn't respond to a Letter 226-J?
If you don’t respond to your Letter 226-J, the IRS will send you a CP220J Notice. It will inform you of your expected amount due, the deadline by which you need to pay that amount, and what your payment options are. Remember that ESRPs are subject to lien/levy procedures, that you will be charged interest on your ESRP until the full amount is paid, and that you can always apply for a Payment Plan.
Where can employers find more information about paying Employer Shared Responsibility Payments?
Letter 226-J will contain a detailed notice to instruct you about the payment process. Remember that no employer is required to make a payment or add any tax to pay before receiving a Notice 220-J. Remember that the IRS has resources if you are unable to pay the full amount, and also have detailed pages on any form (including a Letter 226-J).
How can I avoid future ESRP penalties?
Managing your Affordable Care Act compliance is crucial to avoiding penalties from the IRS. Track your ACA eligibility and offers to employees carefully to keep an eye on your monthly compliance.
Ensuring ACA compliance can be time-consuming and frustrating, especially if you are a complex employer with multiple branches. Consider using a tool like ACA Reporter which can help track your ACA compliance for you and help prevent future penalties. Contact us today to learn about how we can save you time and streamline your Affordable Care Act tracking and reporting.
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