Arriving in Mailboxes: ACA Penalty Letters

The IRS has begun notifying Applicable Large Employers (ALE) of potential penalties under the Affordable Care Act for tax year 2015. These penalties are more commonly referred to as "Employer Shared Responsibility Payments" or ESRPs.

Starting in 2015, ALEs were required to offer their full-time employees minimum essential health insurance coverage. An ALE is generally any employer that had an average of 50 full-time equivalent employees (FTE) the previous calendar year. For 2015 the IRS provided temporary relief so that the penalty would not be assessed to employers with less than 100 FTEs.

If an ALE did not offer health insurance to enough of their full-time employees, or the coverage offered was not affordable or did not meet the minimum criteria, the ALE may owe for penalties. The IRS is using information provided by the Health Insurance Marketplace and Form 1094-C and 1095-C prepared by the ALE to determine if an ALE should be subject to a penalty. If the IRS determines that an ALE may owe a penalty, they will be sending Letter 226J to the ALE. Letter 226J is not an assessment of the penalty, but it does notify the ALE of a potential liability.

The letter includes:

1. A brief explanation of the employer mandate requirements
2. A table summarizing the proposed penalties by month
3. An explanation of the amounts in the table
4. Form 14764, a response form
5. Form 14765, listing employees that received a premium tax credit from the Marketplace
6. A list of actions to take if you agree or disagree with the proposed penalty
7. A list of actions the IRS will take if you do not respond to the letter
8. The name and contact information of a specific IRS employee whom you can contact

Employers have 30 days from the date of the letter to respond to the IRS. Even if the IRS determines that an employer may owe a penalty, there are many reasons the penalty may not be applicable. It is important to review the letter carefully and respond timely to the IRS. If you receive Letter 226J, contact your tax professional so they can help you determine whether you do owe the penalty and if the penalty amount is correct.

Sample letter from the IRS: https://www.irs.gov/pub/notices/ltr226j.pdf

Monica Brickel, CPA
Senior Tax Manager
mbrickel@klcpas.com | 574.289.4011