Letter 226-J: Employer Shared Responsibility

Understanding Letter 226-J: Employer Shared Responsibility

As a business owner, receiving an IRS notice is never pleasant. Among these, the Letter 226-J can be particularly daunting. This letter is a notification concerning the Employer Shared Responsibility Payment (ESRP) under the Affordable Care Act (ACA). Understanding the implications, processes, and potential penalties associated with this letter is crucial for any employer. In this article, we will explore Letter 226-J in detail, from its requirements and IRS procedures to common mistakes and FAQs.

The Foundation of Letter 226-J

What is the Employer Shared Responsibility Payment?

The Employer Shared Responsibility Payment (ESRP) is a penalty imposed on applicable large employers (ALEs) who do not offer affordable health coverage to their full-time employees and dependents, as required by the ACA. Under Sections 4980H(a) and 4980H(b) of the Internal Revenue Code, ALEs must either provide minimum essential coverage or potentially face penalties.

What Triggers Letter 226-J?

Letter 226-J is issued when the IRS determines that, for at least one month during the year, one or more full-time employees were allowed the premium tax credit and the ALE did not meet the ACA's Employer Shared Responsibility provisions. This usually occurs if:

• The employer did not offer coverage to at least 95% of full-time employees and their dependents.
• The coverage offered was not affordable or did not provide minimum value.

Decoding the Letter 226-J Process

Receiving and Responding to Letter 226-J

Upon receiving the Letter 226-J, employers should carefully review the information, which typically includes:

• A summary of the ESRP assessment.
• An explanation of the proposed penalty.
• Instructions for responding.

Employers have 30 days from the date the letter was issued to respond. Failure to respond can lead to further IRS action and increased penalties.

Forms and Procedures

Employers can respond to Letter 226-J using Form 14764, ESRP Response. They may also need to engage with other IRS forms, such as:

• Form 433-A: Collection Information Statement for Wage Earners and Self-Employed Individuals.
• Form 433-F: Collection Information Statement.
• Form 656: Offer in Compromise.

These forms help demonstrate the employer's financial situation, if contesting the penalty on financial hardship grounds.

Illustrative Examples

Understanding the Penalty Calculation

Consider an ALE with 100 full-time employees. If they fail to offer coverage to at least 95 employees, under Section 4980H(a), they face a penalty of $2,570 per full-time employee, excluding the first 30 employees. Here’s the calculation:

• Penalty = (100 - 30) x $2,570 = $180,000

If coverage is offered but deemed unaffordable or not of minimum value, the penalty under Section 4980H(b) is $3,860 per employee who receives a premium tax credit. If 10 employees do, the penalty is:

• Penalty = 10 x $3,860 = $38,600

Common Mistakes to Avoid

Employers often make errors that can lead to or exacerbate penalties. Here are some common pitfalls:

• Misclassifying employees, leading to incorrect ALE status.
• Failing to track hours accurately, affecting full-time employee counts.
• Overlooking the affordability test, as defined in IRS Publication 969.
• Ignoring Letter 226-J or responding after the 30-day deadline.

Frequently Asked Questions

What is the definition of an applicable large employer (ALE)?

An ALE is an employer with 50 or more full-time employees, including full-time equivalent employees, during the prior calendar year.

How is minimum essential coverage defined?

Minimum essential coverage, as outlined in IRS Publication 974, includes employer-sponsored plans that meet the ACA's standards.

What should I do if I disagree with the IRS determination in Letter 226-J?

Respond with Form 14764, detailing your disagreement and providing supporting documents. Consider consulting a tax professional.

Can penalties be waived?

In certain cases of hardship, penalties may be waived. Use Form 433-A or 433-F to provide financial details to the IRS.

What happens if I ignore Letter 226-J?

Ignoring the letter can lead to enforced collection actions, including liens or levies.

How can I ensure compliance with the ACA employer mandate?

Regularly review employee classifications, coverage offerings, and consult IRS guidance and tax professionals.

Conclusion

Letter 226-J represents a significant compliance issue for employers under the ACA. Understanding your responsibilities and responding appropriately to IRS notices is crucial. If you're facing this challenge, ensure you're fully informed and act within the deadlines. For further guidance and to manage your compliance efforts effectively, consider exploring our comprehensive tools and resources.

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