ACA – IRS Letter 226J
This post is for Applicable Large Employers (ALEs) required to comply with the Affordable Care Act. We hope you find it useful.
Passport Software provides consultation services for IRS Letter 226J penalty notices, and we have helped many clients avoid or greatly reduce penalties. Call 800-969-7900 to learn more.
Here’s what to do if you receive letter 226J:
Employer shared responsibility payment (ESRP) penalties are substantial, even potentially devastating if the 95% rule is violated.
1. Each full-time employee who was not offered qualifying coverage and receives a premium tax credit can result in a penalty of $3,000, adjusted each year for inflation ($3,480 for 2018). This penalty is prorated monthly.
2. If the employer did not offer coverage to 95% of its full-time employees, the penalty is $2,000 (adjusted to $2,320 for 2018) per employee, multiplied by the number of full-time employees (minus 30). If a business with 130 full-time employees did not comply in 2017, the penalty would be $232,000.
3. Late filing can result in a penalty of $260 per form, even if the company is otherwise fully compliant.
What is the solution?
Don’t break the law. It may sound like an obvious recommendation, but it’s almost always cheaper to make the offers.
It can be tempting to look at the costs associated with subsidizing employee coverage and calculate that it’s better to pay the penalty, but for three reasons this is rarely the case:
1. Bronze level plans meet minimum standards and the three Safe Harbors (methods of estimating income) allow an employer to minimize its contribution.
2. The business may also lose tax breaks.
3. Finally, and most frequently overlooked, is that many employees will waive the offer of coverage. This means the employer’s theoretical contribution for many employees will never materialize. With the elimination of the Individual Mandate (tax penalty for not having coverage) employees have even less incentive to enroll.
What do I do if I receive a penalty notice (the 226J letter)?
Passport offers consultation services. We will look at your 226J notice and the 1094-C/1095-Cs for the penalized year.
We cannot guarantee a penalty reduction, but given the unique and difficult requirements of ACA reporting, we have yet to review a single case where we didn’t find a reporting mistake.
Once corrected, some or all of the penalty has been forgiven.
How do I prevent penalties?
1. Know your obligations. Passport has ACA experts available to answer your questions.
2. Offer affordable coverage to your full-time employees.
3. Use Passport Software’s ACA Software to identify your full-time employees, code the ACA forms correctly, and file accurately and on-time.
Understand the requirements of the ACA, the consequences for non-compliance, and your options in the event of a letter 226J penalty notice.
For more information about Affordable Care Act compliance and ESRP penalties, start at this IRS page.
Or Contact Us at 800-969-7900 – We are here to help.