It’s 2019, but the IRS just started sending out Letter 226-J penalty notices for tax year 2016. If you received one for the 2015 tax year, which may have happened as recently as last year, you probably know exactly what this is. But for the uninitiated, here’s an explainer: Letter 226-J penalty notices have to do with the provision in the Affordable Care Act that requires employers of a certain size (50 or more full-time or FTE-equivalent employees) to offer minimum essential healthcare coverage to the majority of their full-time workers and dependents.
Employers face tougher requirements
In 2015, that majority threshold was 70 percent of full-time workers; in 2016 and subsequent years, employers must offer this coverage to at least 95 percent of their full-time workers or be subject to IRS penalties. Also gone is the transitional relief, which phased out after tax year 2015 and helped offset penalties, whether partially or completely. And not just any coverage will do. It must meet minimum value requirements and be affordable for the employee.
In more recent tax years, the affordability requirement is more likely to lead to noncompliance, says Lisa McMurtry, director of benefits for XMI.
“Many employers don’t realize that they have to make the plan affordable for their lowest-paid workers,” she says. To be compliant in the current tax year, the employee share of the plan must not exceed 9.86 percent of the employee’s household income, which works out to about $99.75 per month.
Compliant? Penalty notices still possible
“One thing that’s been clear from looking at a few of these penalty letters is that a lot of employers didn’t know how to answer the questions on the forms correctly,” McMurtry says. “That’s understandable, because it’s a new rule and a new process, and kinks are still being ironed out.”
For example, transitional relief was available for tax year 2015, but it wasn’t automatic. “Many employers didn’t realize that and simply failed to check a box,” she says. “But the good news is, it has been fairly easy to provide corrected reporting information.”
The IRS also may have flagged your business if an employee applied for a subsidy on the marketplace and indicated that their employer didn’t offer them coverage. If that happens, even if you did offer coverage, you may need to revisit your enrollment process.
“Employers want to do passive enrollment because they want to make it as easy as they can on employees, but by doing that they’re also increasing their exposure to IRS scrutiny,” McMurtry says. “We always recommend requiring employees to make a yearly election. It takes more work, but it protects employers in the long run.”
Don’t delay if you receive an ACA penalty letter
If you do get a notice, McMurtry recommends addressing it immediately. “Ignoring it is definitely not an option,” she says.
For starters, Letter 226-J is an initial proposal, but you have just 30 days to respond (on Form 14764), either agreeing to the proposed assessment or challenging it. If you don’t respond at all, the IRS will go ahead and assess the penalty, even if you believe it is wrong.
On the other hand, if you agree with the assessment without checking the validity of the assessment, you’ll have fewer options for disputing it later. That’s why it’s important to take the time (even though you have just 30 days) to thoroughly review the proposed assessment, and cross check it with supporting documentation from that tax year, including reporting forms and exchange premium tax credit notices, to make sure the proposed penalty is correct.
This is where a relationship with an experienced benefits vendor like XMI can come in handy. We know exactly what to do when an ACA penalty letter shows up in your mailbox, and we can work to resolve any issues quickly. We’re also in the business of helping companies avoid ACA penalties, working with employers in all industries to design benefits packages that maximize compliance with these rules.
For more information on how XMI can help your business navigate ACA compliance, email firstname.lastname@example.org or give us a call at 615-248-9255.