January 21, 2021

Volume XI, Number 21


January 21, 2021

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Tis the Season for ACA Penalties

After several years of uncertainty surrounding enforcement of the Patient Protection & Affordable Care Act of 2010’s so-called “employer mandate,” the Internal Revenue Service (IRS) has begun assessing penalty notices for the 2015 tax year to “Applicable Large Employers” (ALEs). ALEs are generally employers with 50 or more full-time (or full-time equivalent) employees. These IRS penalty notices are for perceived violations of the employer mandate, and are coded as Letter 226J. 

Qualifying employers should be aware of Letter 226J and its potential implications, and proactively consider several action items:  

  1. If an employer receives a communication from the IRS, it should be carefully scrutinized. Look for the “226J” designation; in a Letter 226J, the IRS will detail the proposed penalty amount and the reason the IRS believes that penalty is appropriate. The letter also explains how the ALE can appeal the proposed penalty, as well as the consequences for failing to send its appeal by the stated deadline (generally only 30 days from the date of the letter). 
  2. ALEs should consider designating an employee who will be the point person and responsible for responding to the IRS should Letter 226J be received. 
  3. For employers with multiple locations/subsidiaries, other considerations may be important. For example, if an employer has multiple subsidiaries, a decision should be made as to whether the response efforts should be centralized, or whether each entity should be independently responsible for responding to the IRS. 
  4. Because enforcement is based on the 2015 IRS Tax Form(s) 1094-C and 1095-C, ALEs should consider gathering all 2015 reporting information or at least understanding where such information can be located. In the event an ALE engaged a third-party vendor for ACA reporting, the employer may want to contact their service providers prior to receiving Letter 226J to make sure that the employer and the service provider are aligned, and the service provider is able to assist with responding to the IRS should a penalty notice be received.
  5. In preparation for such enforcement, the IRS has recently updated its “Questions and Answers on Shared Responsibility Provisions under the Affordable Care Act” website, found here, and released the documents tied to enforcing the ACA employer mandate. 

The key IRS enforcement documents are:

  • IRS Letter 226J – This is the letter that an ALE will receive in the event that the IRS determines an ACA penalty is owed for failing to comply with the ACA employer mandate. Importantly, the deadline for responding to Letter 226J is extremely short. Unless an extension is granted, ALEs will typically have 30 days or less to respond to the IRS.
  • IRS Form 14764 – This is the form that ALEs will use to respond to Letter 226J. It provides the template for an ALE to either: (1) agree to pay the proposed penalty, or (2) contest the proposed penalty. Importantly, it also provides a point of contact through which the ALE can request additional time to respond to Letter 226J.
  • IRS Form 14765 – This form will have an explanation of why the IRS is assessing a penalty and give the ALE the opportunity to respond. The form itself should list each employee who has triggered an ACA employer mandate penalty and for what month(s). After reviewing the IRS assessment, it will then be incumbent upon the ALE to respond timely and correct any inaccuracy on the Form 14765 as part of its response to Letter 226J.
© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume VII, Number 342



About this Author

David Isaacson, Polsinelli Law Firm, Chicago, Employment Law Attorney

As an associate in the firm’s Employee Benefits and Executive Compensation practice, David Isaacson counsels public and private companies of all sizes and across all industries to help address the full range of legal, financial, and administrative issues relating to their compensation and benefit plans in order to attract, motivate, and retain employees. He works with seasoned Polsinelli employee benefits and executive compensation attorneys to provide counseling services that align legal strategies with practical approaches to achieve successful outcomes for each client...

Henry Talavera, Polsinelli PC, Retirement Plan Implementation Lawyer, Employee Benefits Attorney

Henry Talavera’s experience representing clients before the IRS and U.S. Department of Labor, along with his prior experience as a federal government attorney, enables him to handle complex issues for clients.

Henry has a broad-based, comprehensive practice that involves all areas of employee benefits law related to benefit programs and arrangements for employees, directors, and independent contractors. His extensive experience includes guidance relating to public, private, and tax-exempt employers on the design, implementation, and...

William J. Sanders, Polsinelli PC, Limited Liability Company Matters Lawyer, Tax matters Attorney
Shareholder, Practice Chair

Through over 30 years of practicing law, Bill Sanders has developed broad tax experience in corporate, partnership, limited liability company, complex business transactions, and workout and bankruptcy issues.

As chairman of the firm’s tax practice group and a licensed CPA in Missouri, Bill’s clients range from Fortune 100 companies to family-owned and tax-exempt organizations.

He regularly represents clients nationwide before the Internal Revenue Service at all levels including audits, the Appeals Division and...