The IRS enforces the ACA’s Employer Shared Responsibility requirements through a series of formal letters and notices issued to Applicable Large Employers (ALEs). These letters are based on information reported on Forms 1094-C and 1095-C, as well as data from the Health Insurance Marketplace (state Exchange).
The process typically begins when the IRS determines that one or more full-time employees received a premium tax credit through the Exchange, and the ALE’s reporting suggests that required coverage was not offered or was unaffordable.
Initial Assessment – Letter 226-J
IRS Letter 226-J serves as the IRS’s initial notification to an ALE that it may be liable for an employer shared responsibility payment (ESRP). It includes:
- A summary table showing the proposed penalty amount under IRC §4980H(a) and/or (b).
- A month-by-month summary of full-time employees who received premium tax credits.
- Form 14765 (Employee Premium Tax Credit Listing), which details the employees triggering the penalty.
- Form 14764 (ESRP Response), which the employer must complete to accept or dispute the proposed penalty.
Employers generally have 30 days from the date of the letter to respond, though extensions may be requested.
Response and Review – Letter 227 Series
Once the IRS receives the employer’s response, it issues a Letter 227 to acknowledge and outline next steps. There are several versions of Letter 227:
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227-J – Confirms the employer agreed with the proposed penalty. The ESRP will be assessed as shown, and the case is closed. No response needed.
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227-K – Confirms the penalty has been reduced to zero based on the employer’s response. Case closed. No response needed.
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227-L – Shows the penalty amount has been revised. Includes an updated employee list and calculation table. The employer can agree or request a meeting with the IRS manager or Appeals.
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227-M – Confirms the penalty did not change after review. Includes updated supporting documents. The employer can agree or request a meeting with the IRS manager or Appeals.
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227-N – Reflects the final Appeals determination and resulting ESRP. Case closed. No response needed.
Employers should review these letters carefully to confirm whether the IRS accepted their explanation or adjusted the proposed penalty.
Final Assessment – CP220J
If the proposed assessment is not successfully disputed, the IRS issues Notice CP220J, which serves as the final bill for the assessed employer shared responsibility payment. Payment instructions and deadlines are included in this notice.
Common Triggers for IRS Letters
- Misaligned or inconsistent data between Forms 1094-C and 1095-C.
- Incorrect or missing offer codes on Form 1095-C (Line 14) or safe harbor codes (Line 16).
- Failing to designate an authoritative transmittal correctly.
- Late or non-filing of ACA IRS reporting forms, including for Aggregate/Controlled Groups.
- Employees incorrectly receiving premium tax credits due to reporting errors.
Responding Effectively
Employers should:
- Act promptly upon receipt of Letter 226-J to meet response deadlines.
- Review Forms 1094-C and 1095-C for accuracy and correct any reporting errors.
- Provide clear, organized explanations and supporting documentation when disputing penalties.
- Involve their tax counsel or other qualified professionals early in the process.
Role of Brokers
Brokers should understand the enforcement process to help employers identify potential reporting issues and respond appropriately. However, these letters involve tax matters. Employers should work with their tax counsel to prepare and submit responses to the IRS. Brokers should not draft or submit responses on behalf of employers.