Overview
The IRS enforces the employer mandate through a series of letters sent to Applicable Large Employers (ALEs). The process is based on two sources of information:
- The ALE’s Forms 1094-C and 1095-C
- Its full-time employees’ individual tax returns, which show whether they were allowed a Premium Tax Credit (PTC)
The process usually begins when the IRS sees that a full-time employee was allowed a PTC, and the ALE’s reporting doesn’t show an offer of affordable, minimum value coverage for that employee.
Step 1: Letter 226-J – Proposed Penalty
Letter 226-J is the IRS’s first notice that an ALE may owe an employer mandate penalty. It’s a proposal, not a bill. It includes:
- A summary table showing the proposed penalty under §4980H(a) or (b)
- Form 14765 (Employee PTC Listing): the full-time employees who were allowed a PTC, by month
- Form 14764 (ESRP Response): the form the employer uses to agree or disagree
The letter gives a response date. Under a 2024 law, employers have at least 90 days to respond. An employer that disagrees explains why and notes any corrections on Form 14765.
Step 2: Letter 227 – IRS Response
After reviewing the employer’s response, the IRS sends a Letter 227. Which version arrives depends on the outcome:
- 227-J: The employer agreed. The penalty will be assessed, and the case is closed.
- 227-K: The penalty was reduced to zero. The case is closed.
- 227-L: The penalty was revised. The employer can agree or request a meeting with an IRS manager or Appeals.
- 227-M: The penalty didn’t change. The employer can agree or request a meeting with an IRS manager or Appeals.
- 227-N: Reflects the Appeals decision. The case is closed.
Like Letter 226-J, a Letter 227 is not a bill.
Step 3: Notice CP220J – The Bill
If a penalty is assessed, the IRS sends Notice CP220J, the actual bill. It shows the amount due, the due date, and payment options, including payment plans. Interest is charged on any unpaid balance.
Reporting Issues That Can Lead to a Letter 226-J
Because the process relies on Forms 1094-C and 1095-C, reporting problems can lead to a proposed penalty even when coverage was offered. Common examples include:
- Incorrect or missing offer codes (Line 14) or safe harbor codes (Line 16) on Form 1095-C
- Information that doesn’t match between Forms 1094-C and 1095-C
- Forms that were filed late or not filed, including for employers in a controlled group
See Employer Reporting Overview for more.
What the IRS Suggests
According to the IRS’s guide, Understanding your Letter 226-J, an employer that receives a Letter 226-J may want to:
- Read the letter and attachments carefully, and note the response date
- Review the Forms 1094-C and 1095-C it filed for that year, since the IRS used them to calculate the penalty
- Keep copies of the letter and anything it sends back
- Submit Form 2848 (Power of Attorney) if it wants a representative, such as a CPA or attorney, to deal with the IRS on its behalf
The Broker’s Role
Understanding this process can help brokers recognize a Letter 226-J and know what it means. But responding to these letters is a tax matter. Responses should be prepared and submitted by the employer with its own tax counsel, CPA, or other qualified tax professional, not by the broker.
Important: This information is provided for general educational purposes. It is not legal or tax advice. How these rules apply depends on each employer’s specific circumstances, so employers should review their situation with their own legal counsel, ERISA attorney, CPA or tax advisor.