Look out for ACA Penalty Letters from IRS

The Internal Revenue Service (“IRS”) is sending penalty letters to certain large employers as the first step in enforcing the employer shared responsibility provision in the Affordable Care Act (“ACA”). These Letters 226-J are for 2015, the first year for which the penalty will be assessed.

The employer shared responsibility provision states that applicable large employers (“ALEs”) must choose one of two options:

  1. Offer affordable health coverage that provides minimum essential coverage to full-time employees and their dependents, or
  2. Make an employee shared responsibility payment (“ESRP”) to the IRS for any full-time employees who receive a premium tax credit for purchasing health insurance coverage from a Health Insurance Marketplace (the “Exchange”).

ALEs are generally defined as any employer that averages 50 full-time and full-time equivalent employees or more per month in a calendar year. Your ALE status is determined by how many employees you had in the previous calendar year. So, if you averaged 50 full-time and full-time equivalent employees throughout 2014, you are considered an ALE by the IRS for 2015.

Who Will Get a Letter from the IRS?

The employer shared responsibility rules require ALEs to offer health coverage for minimum essential health benefits to full-time employees and their dependents. Any ALE that doesn’t offer such coverage or that offers coverage that is not affordable to full-time employees and their dependents could be subject to the ESRP if just one full-time employee is allowed a premium tax credit for purchasing health insurance coverage from the Exchange.

How Much Is the Penalty?

The annual penalty amount is $2,000 times the number of full-time employees if the employer doesn’t offer at least 95 percent of its full-time employees minimum essential coverage. However, the penalty is $3,000 times the number of employees who receive a premium tax credit for purchasing health insurance coverage from the Exchange if the coverage offered is not affordable or doesn’t offer minimum value. The monthly payment is 1/12 of the annual penalty.

Even though full-time equivalent employees are used to determine if an employer is an ALE, part-time, full-time equivalent and certain full-time employees aren’t counted when calculating the ESRP (for example, a full-time employee in a waiting period). The instructions for Forms 1094-C and 1095-C contain more information about how a full-time employee is defined.

What to Do If You Get a Letter

If you get Letter 226-J from the IRS, the best thing to do is to review the letter and the attachments carefully. Letter 226-J is based on information from the Forms 1094-C and 1095-C you filed. Cross-reference these documents to your facts to make sure the information on these forms and the letter is accurate.

Additionally, you should make sure the penalty is calculated properly. If you disagree with the amount, you can use Form 14764, which should be included with your Letter 226-J, to correct any facts and explain the corrections and why you disagree with the proposed ESRP. Your tax adviser can help you respond.

Action Steps

Whether you receive a letter like this and have questions or you want to review your health insurance coverage and benefits options, a good place to start is with a conversation with Deb Walker, CPA, National Director of Compensation and Benefits and 2017 recipient of the Arthur J. Dixon Memorial Award from the American Institute of CPAs. Whether you need help figuring out your ESRP or you think there may be better benefit options for your employees, Deb’s years of experience can help you find tax-advantaged ways to take care of your employees in line with your business strategy.