Recipients of these letters may disagree with all or part of the proposed assessment amount. In many cases, there is good reason to disagree, since the IRS is evaluating compliance based on ACA reporting Forms 1094-C and 1095-C from 2015 — the first year for these filings, when confusion was common. Therefore, providing the IRS with updated information or correcting filing errors is likely to reduce or even eliminate the assessment.
It appears that 2015 proposed assessment letters will continue during 2018, and that employers will be notified of 2016 proposed assessments either later in 2018 or in 2019 (absent legislative relief or a legal challenge to the employer mandate).
WHY WAS LETTER 226-J SENT?
ALEs started reporting compliance information from 2015 to the IRS on Forms 1094-C and 1095-C in early 2016. An ALE may receive an IRS assessment letter for the following reasons:
- The employer did not offer a health plan to substantially all full-time employees and dependents, and at least one full-time employee received a premium tax credit on the public exchange. Under the employer mandate, ALEs were required to offer coverage to at least 70% of full-time employees and dependents (under transition relief) in 2015 and to 95% of them in 2016 and beyond.
- The health plan did not meet minimum value requirements or was not affordable, and one or more full-time employees received a premium tax credit on the public exchange.
Letter 226-J states the proposed penalty (with accompanying calculations) and a list of employees who received a premium tax credit by month. The letter also indicates whether the proposed assessment is for an “a” or “b” penalty (so far, most are “a” penalties). The “a” penalty relates to whether the employer offered health coverage to substantially all (70% in 2015, 95% after that) full-time employees (and dependents), while the “b” penalty relates to whether the coverage offered met the minimum value requirements and was affordable. Recent 226-J letters have proposed penalties in the following situations:
- Transition relief was not selected on Form 1094-C. To obtain the transition relief — minimum essential coverage (MEC) offered to 70% of full-time employees (and dependents) — employers had to check Box C, “Section 4980H transition relief,” and enter a transition relief indicator code on Form 1094-C. Otherwise, they were required to offer MEC to 95% of full-time employees (and dependents) in 2015.
- MEC offer not reflected on Form 1094-C. Failing to check the “YES” box for any month (or for “All 12 Months”) on Form 1094-C indicated that the filer did not offer coverage to at least 70% of its full-time employees (and dependents) for that month. If a full-time employee obtained a premium tax credit for any month for which the “YES” box was not checked, the ALE may be liable for an “a” penalty for that month.
- Failing to offer affordable coverage that meets the MEC offer standard and leaving line 16 of Form 1095-C blank. Leaving line 16 blank on Form 1095-C indicates that the ALE did not offer affordable coverage that met minimum value requirements. If that full-time employee obtained a premium tax credit on the public exchange and the ALE failed to offer coverage to at least 70% of its full-time employees (and dependents), the ALE may be subject to a penalty. While the IRS does not require ALEs to enter a code on Line 16, as a best practice ALEs should enter an affordability code — 2F (W-2), 2G (federal poverty line) or 2H (rate of pay) — for any full-time employee who waived the employer’s offer of coverage.
HOW TO RESPOND
First, any company that consists of more than one ALE will want to direct the Letter 226-J to the correct ALE so it can respond promptly. The most likely cause of incorrect assessments is errors in Forms 1094-C and 1095-C, as these are the forms the IRS uses to determine compliance with the employer mandate. The following are some suggestions for responding to these letters and avoiding assessments, now and in the future:
- Respond within 30 days or request an extension. Unless the IRS receives a response within 30 days, the agency will assume that its facts and penalty amount are correct. Employers can request an extension by calling the phone number at the top of the Employer Shared Responsibility Payment (ESRP) Response form (Form 14764). The IRS typically grants these requests to give the filer more time to understand the issues identified in the letter.
- Analyze Letter 226-J for accuracy and prepare response. The employer should review all documents filed with the IRS and provided to employees to ensure that the information on the 2015 Forms 1094-C and 1095-C is correct and properly reflected in the IRS letter. The review should include the following:
- Ensure that all employees listed as receiving a premium tax credit were common law employees.
- Establish whether any employees listed as having received a premium tax credit were enrolled in the ALE’s health plan.
- Establish whether health coverage was offered to employees who were not enrolled in the health plan and who received a premium tax credit.
- Verify that all employees listed as receiving a premium tax credit were full time.
- Correct any Form 1095-C coding errors for employees listed as receiving a premium tax credit.
- Correct any Form 1094-C errors.
- Decide whether to challenge the assessment. Employers that decide to challenge a proposed assessment should complete the ESRP Response form. This filing should include a signed statement explaining the reason(s) for the disagreement and any supporting documentation, such as calculation of the adjusted employer mandate assessment and the correction of any errors on Form 1094-C or 1095-C. Changes might also be required to Form 14765 (Employee Premium Tax Credit Listing), which summarizes the Form 1095-C coding submitted for all employees who received a tax credit. Later in the process, the employer may also request a pre-assessment conference with the IRS Office of Appeals.
- Review 2016 and 2017 IRS filings to ensure that errors from 2015 were not repeated. Since future assessments are based on the associated year’s Forms 1094-C and 1095-C, employers should carefully review those filings and correct any errors by filing amended forms (amended forms may be filed before but not after receiving Letter 226-J from the IRS).
ALEs that discover an error after receiving Letter 226-J should not re-file the forms and should respond to the letter in one of two ways: pay the proposed penalty or disagree with all or part of the proposed assessment following IRS procedures.
ALEs that respond to the IRS will receive Letter 227, which acknowledges receipt of the ESRP Response form and describes any next steps for the ALE. An ALE that disagrees with the IRS’s proposed or revised assessment may request a pre-assessment conference with the IRS Office of Appeals by the response date on Letter 227 (generally 30 days from the date of the letter).
Failing to respond to Letter 226-J within 30 days will trigger a Notice and Demand for Payment (Notice CP 220J). After that, the penalty amount will be subject to IRS lien and levy enforcement actions, and interest will start to accrue.
ALEs (or their ACA reporting vendors) need to be careful in filing Forms 1094-C and 1095-C in the future. Assuming the employer mandate requirements are met, completing the forms correctly the first time should ensure that ALEs do not receive Letter 226-J. ALEs that receive a proposed assessment letter should consult with qualified legal counsel to evaluate the assessment and respond appropriately. Additional information is available at the IRS’s Letter 226-J Website.
ALEs that discover filing errors in their 2016 or 2017 filings of Forms 1094-C and 1095-C should obtain copies of the erroneous forms and re-file corrected forms as soon as possible (re-filing is generally permissible before a Letter 226-J is received). Self-correction is the best way to stay ahead of these issues before the IRS gets involved.