Receiving a Letter 226-J from the Internal Revenue Service (IRS) can be daunting for many employers. As an Applicable Large Employer (ALE), this correspondence may indicate potential liability for Employer Shared Responsibility Payments (ESRP) under the Affordable Care Act (ACA). Properly interpreting the letter's contents and responding promptly are critical steps in addressing this compliance matter.

What Is Letter 226-J?

The IRS issues Letter 226-J to notify ALEs of potential ESRP assessments when they may have failed to meet ACA requirements. The healthcare law mandates that employers with 50 or more full-time equivalent employees offer affordable, minimum-value health coverage to eligible workers. When employees instead receive Premium Tax Credits (PTCs) through health insurance marketplaces, the IRS may assess penalties.

The letter typically includes three key components:

  • Proposed ESRP amount: Detailed calculations showing how the IRS determined the potential liability
  • Response options: Instructions for agreeing or disagreeing with the assessment
  • Next steps: Guidance on required forms and submission procedures

Background and Legal Context

Letter 226-J stems from ACA provisions enacted in 2010. The law established shared responsibility requirements for large employers to expand healthcare coverage while providing subsidies for qualifying individuals. The IRS identifies potential violations by cross-referencing employer-submitted Forms 1094-C and 1095-C with individual tax returns claiming PTCs.

Interpreting Your Letter

Upon receipt, carefully review all documents including the enclosed ESRP Summary Table. The IRS calculates potential payments based on:

  • The number of full-time employees who received PTCs
  • The duration of any coverage gaps
  • Whether offered plans met affordability and minimum value standards

The letter will specify which employees triggered the assessment and the corresponding penalty periods. Comparing this information with internal records is essential for formulating a response.

Required Actions

Time-sensitive responses are crucial. Employers typically have 30 days from the letter date to:

  • Agree with the assessment: Complete and return Form 14764 (ESRP Response) with payment
  • Dispute the findings: Submit Form 14765 (PTC Listing) with supporting documentation explaining discrepancies

Compliance Review Recommendations

Before responding, conduct an internal audit of:

  • Historical Forms 1094-C/1095-C filings
  • Employee eligibility determinations
  • Plan affordability calculations (using all safe harbor methods)
  • Documentation of coverage offers

This review may reveal reporting errors or substantiate disagreement with the IRS findings. Maintaining accurate records helps prevent future assessments.

Common Missteps to Avoid

Employers frequently encounter these pitfalls:

  • Missing response deadlines: Failure to reply may result in automatic assessment of the full proposed amount
  • Incomplete documentation: Partial responses can delay resolution or weaken dispute positions
  • Misunderstanding coverage requirements: Simply offering insurance doesn't guarantee ACA compliance

Strategic Considerations

Proactive measures can mitigate future ESRP risks:

  • Implement regular ACA compliance audits
  • Update systems for accurate monthly measurement of employee status
  • Train HR staff on affordability safe harbor calculations
  • Maintain detailed records of coverage offers and employee responses

While Letter 226-J presents significant compliance challenges, methodical review and response can help employers resolve issues efficiently. Maintaining accurate records and understanding ACA requirements remain the best defense against potential ESRP assessments.