Enforcement of the Employer Shared Responsibility Provision of the Affordable Care Act

The Internal Revenue Service (IRS) has begun enforcing the employer shared responsibility provision (aka “employer mandate” or “pay or play” provision) of the Affordable Care Act (ACA) for the 2015 tax year by sending Letter 226J to tens of thousands of applicable large employers (ALEs).  Here are ten things to keep in mind if you are an ALE:

Keep a careful watch on the mail. The letters are being sent to the contact person listed on your group’s 2015 Form 1094C/1095C filing with the IRS, done back in 2016.  It is possible that individual is no longer the correct contact person, so make sure that official correspondence from the IRS isn’t sitting in the mailroom or on someone’s desk unopened.

Read the letter and all enclosed documents carefully. Any Letter 226J from the IRS will explain the employer mandate and cover how the IRS used information gained from Forms 1094C/1095C provided to the IRS and individual employee tax return data to see which employees received a premium tax credit subsidy and to calculate a company’s proposed penalty amount. The letter will be accompanied by Form 14765, which will contain information about the employees that triggered the penalty and how the company reported their coverage information to the IRS for the tax year 2015.  The letter will also explain the steps each employer must take if they agree or disagree with the proposed penalty computation.

Know that receipt of a letter doesn’t necessarily mean a company will ultimately pay the penalty. Even businesses that were fully compliant with the employer mandate may receive enforcement communications from the IRS, and the agency expects that many initial assessment notices will contain errors. Letter 226J is just a proposed assessment notice and does not mean the employer automatically will have to pay the penalty; there will be a chance for every employer to disagree with the initial notice and then also to appeal if a company still disagrees with the IRS’s response.

Get records and documentation together. The most useful thing to do is to gather all documentation from the 2015 1094C/1095C reporting that was filed with the IRS and distributed to employees in the spring of 2016.  Documentation includes all copies of forms submitted to the IRS and distributed to employees, as well as relevant payroll records and signed waivers of coverage if applicable.  Additionally, if the business was eligible for transition relief, then all documentation of eligibility should be gathered.

Contact your broker right away. If you receive a Letter 226J, you should contact your broker from 2015 immediately. They can help review the notice and gather appropriate information and resources that you may need to properly respond to the IRS.

Utilize other resources and the IRS website. Groups should reach out to their Form 1094/1095 reporting vendor for support and documentation assistance.  Employers should also reach out to their independent tax professionals or legal counsel for help.  Finally, the IRS website has useful resources online for employers preparing responses to Form 226J.

Watch the deadlines. Employers will have 30 days from the date on their Letter 226J to respond to the IRS.  If a company does not reply in time, then they will lose the chance to appeal and the IRS will follow up with a written demand for payment, Notice CP 220J.

Be mindful of transition relief, coverage waivers and potential errors in your original coding. The first year of ACA compliance was tricky with different types of transition relief and vague instructions from the IRS on Form 1094/1095C coding, so it is entirely possible that a company’s 1094C/1095C filings contained inadvertent mistakes. Problems in any of these areas could trigger a Letter 226J, but an employer can address these issues in their response to the IRS.

Provide an organized, timely and comprehensive response. It is essential to provide a thorough and professional response back to the IRS.  A strong response will include a complete, signed, and dated enclosed Form 14764, which is the official response form.  It will also include a letter explaining the employer’s concerns with the proposed assessment, a copy of coding corrections made on the enclosed Form 14765, relevant documentation like payroll records and employee coverage waivers to support the company’s case and explanations about the documentation provided.  Employers should take care to submit the response exactly as requested and in a timely fashion, and keep copies of everything sent to the IRS to have it on hand for potential follow up communications.

Be prepared for more communication with the IRS. All employers that reply to the IRS objecting to their proposed assessment in a timely fashion will receive a written response back from the IRS describing further actions they may need to take. If the employer still disagrees with the IRS, then the company may request a pre-assessment conference with the IRS Office of Appeals.