The IRS has taken actions indicating that employer mandate penalties under the ACA are about to be enforced. The recently updated Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act includes the section, “Making an Employer Shared Responsibility Payment,” which expands specifically upon the soon-to-be-issued Letter 226J and what that will include.
These most recent IRS Q&As explain that employer mandate penalties (formally known as employer shared responsibility payments or ESRPs) will be proposed and assessed via Letter 226J. The determination of whether an Applicable Large Employer (ALE) may be liable for an ESRP and the amount of any proposed penalty will be based on the information the ALE reported to the IRS on Forms 1094-C and 1095-C and information from the IRS regarding which full-time employees of the ALE received a premium tax credit. The IRS will begin issuing Letters 226J for the 2015 calendar year in late 2017. Per the IRS website, Letter 226J will include:
A brief explanation of section 4980H;
An ESRP summary table itemizing the proposed payment by month and indicating for each month if the liability is under Internal Revenue Code (IRC) Section 4980H(a) or 4980H(b) or neither;
An explanation of the ESRP summary table;
An ESRP response form, Form 14764, “ESRP Response”;
An employee PTC list, Form 14765, “Employee Premium Tax Credit (PTC) List” which lists, by month, the ALE’s assessable full-time employees (individuals who for at least one month in the year were full-time employees allowed a premium tax credit and for whom the ALE did not qualify for an affordability safe harbor or other relief (see instructions for Forms 1094-C and 1095-C, Line 16), and any indicator codes the ALE reported on lines 14 and 16 of each assessable full-time employee’s Form 1095-C;
A description of the actions the ALE should take if it agrees or disagrees with the proposed ESRP in Letter 226J; and
A description of the actions the IRS will take if the ALE does not respond timely to Letter 226J.
ALEs generally will have 30 days within which to respond to Letter 226J before any ESRP is formally assessed and any demand for such payment is made by the IRS. The Letter 226J allows an ALE to submit a statement and supporting documentation that describes why the ALE disagrees with a proposed ESRP. This statement and supporting documentation may include any changes that the ALE would like to make to the information reported on Form(s) 1094-C or Form(s) 1095-C.
After an ALE responds to the Letter 226J, the IRS will send the ALE a description of any further actions the ALE may need to take with respect to any proposed penalty. The ALE will then be given an opportunity to request a “pre-assessment conference” with the IRS Office of Appeals if the ALE still disagrees with the proposed ESRP.
Next Steps for ALEs
Employers should have the Form(s) 1094-C and 1095-C that were filed with the IRS for 2015 easily accessible in anticipation of receiving a Letter 226J, as well as any applicable information regarding the employer’s approach with respect to compliance with IRC Section 4980H(a) and (b). The IRS specifically noted in the model Letter 226J that an ALE should not file a corrected Form(s) 1094-C or Form(s) 1095-C, but should follow the steps noted in Letter 226J to correct any incorrect information within the IRS-indicated response timeframe.
Additionally, the 30-day response window leaves little room for error. Employers should notify their administrative staff that any letters from the IRS should be forwarded immediately to a designated contact in the benefits department.