IRS Letter 226J: The Million-Dollar Letter (And How To Respond)
The IRS has recently started sending employers “Letter 226J,” which is a proposed assessment of Employer Shared Responsibility Payments (ESRPs) under the Affordable Care Act. The IRS sends Letter 226J if it determines that one or more full-time employees of an “applicable large employer” (that is, an employer with 50 or more full-time equivalent employees) enrolled in health coverage on a government exchange and received a premium tax credit. The letter will include a listing of the employee(s) who received the premium tax credits and how those employees were classified on the employer’s Affordable Care Act reporting Forms 1094-C and 1095-C.
Many employers will be shocked to receive Letter 226J, either because they thought they complied with the Affordable Care Act’s employer mandate, or because they thought their liability would be much lower. However, although the proposed amount can be shocking (for the 2015 tax year, up to $2,000 times your total number of employees, minus 30), remember that Letter 226J is not an actual assessment of liability, just a proposed assessment of liability. This letter is the employer’s official notification that a full-time employee received a premium tax credit and that the IRS believes the employer may owe a payment. However, employers may respond to the letter disagreeing with all or part of the proposed amount, and in many cases, there will be a good reason to disagree with this proposed assessment.
This is because the proposed amount is based solely on the number of employees who received a premium tax credit for coverage purchased on an exchange. Remember, employees are eligible for the premium tax credit on an exchange only if they don’t receive an offer of minimum essential coverage from their employer that is affordable and provides minimum value. But the IRS doesn’t investigate whether an employer actually offered coverage to its employees before sending Letter 226J, so even if an employer made an offer of coverage, and correctly completed Form 1094-C or 1095-C disclosing that offer of coverage, it may still receive Letter 226J with a proposed penalty if an employee incorrectly stated that they were eligible for the premium tax credit.
Therefore, it’s important to respond appropriately to Letter 226J. The response date is listed on the first page of the letter, which is 30 days from the date of the letter (not from the date you receive it). If you don’t respond within the 30 day timeframe, the IRS will assess the proposed amount and will issue a notice and demand for payment. And once the IRS demands payment, interest begins to accrue and will continue to accrue until the entire balance is paid.