Employers recently began receiving letters regarding estimated penalties under the Affordable Care Act (Pub. L. No. 111-148). The IRS started sending out Letter 226-J to those employers that are suspected of owing employer shared responsibility payments for not providing health coverage to employees in 2015 that met certain standards under the ACA.
Bloomberg Law talked to Joanna Kerpen, a partner at Winston & Strawn LLP in Washington and author of the HIPAA Privacy and Security Compliance for Group Health Plan Sponsors chapter of the Bloomberg Law Benefits Guide (subscription required), to learn more about the letters and action steps for employers who receive a Letter 226-J from the Internal Revenue Service.
This interview was edited for clarity and brevity.
Bloomberg Law: What is IRS Letter 226-J?
Joanna Kerpen: IRS Letter 226-J is a letter sent by the IRS to an employer informing the employer that the IRS believes the employer may owe an employer shared responsibility payment. The letter also includes a preliminary calculation of the suspected payment. Employers should note that this is not a notice and demand for payment, and can be disputed.
The Letter 226-J will also include a Form 14765, Employee Premium Tax Credit Listing (“PTC Listing”), which lists those employees (i) for whom the employer filed a Form 1095-C, (ii) who were allowed a premium tax credit on his or her individual tax return for one or more months during the time period listed on the Letter 226-J, and (iii) for whom the employer did not report an affordability safe harbor or other employer shared responsibility payment relief on the employee’s Form 1095-C for one or more of the months the employee was allowed a premium tax credit.
Bloomberg Law: What is an employer shared responsibility payment?
Kerpen: An employer shared responsibility payment is a payment owed for noncompliance with the employer shared responsibility requirements under the Affordable Care Act (“ACA”). An employer may owe an employer shared responsibility payment if the employer has fifty (50) or more full-time employees and/or full-time equivalents (FTEs), and did not offer health coverage constituting “minimum essential coverage” under the ACA to at least 95 percent of FTEs (and their dependents) or the employer offered the required coverage, but the coverage was not “affordable” or did not provide “minimum value” as required by the ACA. These potential payments are set forth in Internal Revenue Code Sections 4980H(a) and 4980H(b).
Bloomberg Law: How does the IRS compute employer shared responsibility payments?
Kerpen: The payment for failure to offer minimum essential coverage to at least 95 percent of FTEs (the “Code Section 4980H(a) payment”) is triggered if at least one FTE receives a premium tax credit. For 2017, the Code Section 4980H(a) payment (as an annual amount) is equal to $2,260 per each FTE (minus the first 30 employees). Note that while this is presented as an annual amount, penalties are calculated on a monthly basis. The Letter 226-J will calculate the payment using the relevant dollar amount for the years at issue in the Letter (for 2015, the payment is calculated using $2,080, and for 2016, the payment is calculated using $2,160).
The payment for failure to offer coverage that is affordable and provides minimum value (the “Code Section 4980H(b) payment”) is triggered if at least one FTE receives a premium tax credit. For 2017, the Code Section 4980H(b) payment (as an annual amount) is equal to $3,390 for each FTE who receives the premium tax credit. Note that while this is presented as an annual amount, penalties are calculated on a monthly basis. The Letter 226-J will calculate the payment using the relevant dollar amount for the years at issue in the Letter (for 2015, the payment is calculated using $3,120, and for 2016, the payment is calculated using $3,240).
Bloomberg Law: Why might an employer receive an IRS Letter 226-J?
Kerpen: Employers might receive an IRS Letter 226-J if the IRS has reason to believe that an employer shared responsibility payment is owed. For example, if an employee applied for coverage on a health insurance exchange and received a subsidy for the coverage, this could trigger a Letter 226-J being sent to the employer.
Bloomberg Law: What should employers do if they receive an IRS Letter 226-J?
Kerpen: Employers that receive IRS Letter 226-J should be sure to send a response within the stated deadline, which is 30 days after the date of the letter. The response should be made using IRS Form 14764, which is included with the Letter 226-J. If the employer disagrees with the information on the Letter 226-J, the employer should indicate on the Form 14764 that it disagrees with part or all of the proposed assessment of the employer shared responsibility payment.
Bloomberg Law: What happens if employers don’t respond in time?
Kerpen: It is extremely important that employers meet the response deadline. If the employer fails to respond by the required deadline, the IRS will issue a notice and demand for payment, Notice CP220J, for the assessed employer shared responsibility payment. Due to the short deadline, employers should be prepared to respond if they receive a Letter 226-J.
Bloomberg Law: Can employers appeal the IRS employer shared responsibility payment calculations contained in IRS Letter 226-J?
Kerpen: Yes. The employer can and should dispute any proposed calculation it believes is erroneous. An employer who wants to dispute the proposed employer shared responsibility payment calculation should do so using the IRS Form 14764. The employer should include any corrections it believes are needed to the Form 14765, PTC Listing, with its response (along with supporting documentation). In addition, the employer should include a signed statement explaining why it disagrees with part or all of the proposed employer shared responsibility payment (with supporting documentation), along with a description of any changes the employer wants to make to its filed Forms 1094-C or 1095-C.
If the employer disputes the calculation using the Form 14764, the IRS will respond with the relevant version of IRS Letter 227. The different versions of IRS Letter 227 acknowledge the employer’s response to the Letter 226-J and describe any additional actions the employer must take. If the employer still disagrees with any proposed employer shared responsibility payment after receiving the Letter 227, the employer can request a pre-assessment conference with the IRS Office of Appeals.
Bloomberg Law: What steps if any should employers take if they are concerned about owing an employer shared responsibility payment but haven't received an IRS Letter 226-J or Notice CP220J ?
Kerpen: The employer should keep complete records of all offers of minimum essential coverage in order to be ready to respond to any proposed employer shared responsibility payment calculation in the event they do receive an IRS Letter 226-J. Employers should also carefully monitor their mail to be on the lookout for the Letter 226-J. It will likely be routed to the same address provided on the filed Forms 1094-C and 1095-C.
See related story, Dear Employer, You Could Owe the IRS Millions of Dollars.
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