ACA Penalty Letters: What They Mean and How to Respond

December 5, 2017

A stern letter from the IRS isn’t at the top of anyone’s holiday wish list, but your organization may receive exactly that in the coming weeks.

 The IRS has long warned of consequences for companies that fail to comply with Affordable Care Act (ACA) requirements, and it’s now meting out those consequences. If your company was noncompliant during the calendar year of 2015, expect to soon receive a notification called Letter 226J—if you haven’t already.

 Why Did We Get This Letter?

The ACA requires Applicable Large Employers (those with 50 or more full-time employees) to offer basic and affordable health insurance to its employees. If your company qualifies as an ALE but did not give employees minimum health coverage, and those employees then receive premium tax credits toward their health insurance, your company will be required to share the cost of that tax credit.

 The purpose of Letter 226J is to notify you that you owe your share in the form of an Employer Shared Responsibility Payment (ESRP). Even if you only failed to provide coverage for one employee during a single month, you may be required to make an ESRP.

 What Should We Do Now?

It’s important to act quickly once you receive a penalty letter. The IRS generally expects you to respond within 30 days, although you may be able to receive an extension if you need one.

Your response will depend on whether or not you agree with the letter’s findings. The IRS takes its information from your company’s filed Form 1094/5-C and from your employees’ tax returns. Looking back through your files may prove that you have complied with the ACA and that the IRS made an error. If you do dispute the letter, you have the option of submitting a statement explaining your position.

If the information in your letter is correct, your company has to pay its penalty. The letter will include that figure and include a chart showing how it was calculated. Failure to pay the ESRP promptly may result in liens and other consequences, so it’s not something you can afford to put off.

This penalty letter—like all things ACA related—is complicated and includes a lot of fine print, and mistakes may be costly. If you’re not sure about how to respond or how to become ACA compliant moving forward, reach out to Commonwealth today.

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