Begin­ning in 2015, to com­ply with the Patient Pro­tec­tion and Afford­able Care Act (ACA), “large” employ­ers must offer their full-time employ­ees health cov­er­age, or pay one of two employ­er shared respon­si­bil­i­ty / play-or-pay penal­ties. The Inter­nal Rev­enue Ser­vice (IRS) deter­mines the penal­ty each cal­en­dar year after employ­ees have filed their fed­er­al tax returns.

In Novem­ber 2017, the IRS indi­cat­ed on its “Ques­tions and Answers on Employ­er Shared Respon­si­bil­i­ty Pro­vi­sions Under the Afford­able Care Act” web­page that, in late 2017, it plans to issue Let­ter 226J to inform large employ­ers of their poten­tial lia­bil­i­ty for an employ­er shared respon­si­bil­i­ty pay­ment for the 2015 cal­en­dar year.

The IRS’ deter­mi­na­tion of an employer’s lia­bil­i­ty and poten­tial pay­ment is based on infor­ma­tion report­ed to the IRS on Forms 1094‑C and 1095‑C and infor­ma­tion about the employer’s full-time employ­ees that were received the pre­mi­um tax credit.

The IRS will issue Let­ter 226J if it deter­mines that, for at least one month in the year, one or more of a large employer’s full-time employ­ees was enrolled in a qual­i­fied health plan for which a pre­mi­um tax cred­it was allowed (and the employ­er did not qual­i­fy for an afford­abil­i­ty safe har­bor or oth­er relief for the employee).

Let­ter 226J will include:

  • A brief expla­na­tion of Sec­tion 4980H, the employ­er shared respon­si­bil­i­ty regulations
  • An employ­er shared respon­si­bil­i­ty pay­ment sum­ma­ry table that includes a month­ly item­iza­tion of the pro­posed pay­ment and whether the lia­bil­i­ty falls under Sec­tion 4980H(a) (the “A” or “No Offer” Penal­ty) or Sec­tion 4980H(b) (the “B” or “Inad­e­quate Cov­er­age” Penal­ty) or nei­ther section
  • A pay­ment sum­ma­ry table explanation
  • An employ­er shared respon­si­bil­i­ty response form (Form 14764 “ESRP Response”)
  • An employ­ee pre­mi­um tax cred­it list (Form 14765 “Employ­ee Pre­mi­um Tax Cred­it (PTC) List”) which lists, by month, the employer’s assess­able full-time employ­ees and the indi­ca­tor codes, if any, the employ­er report­ed on lines 14 and 16 of each assess­able full-time employee’s Form 1095‑C
  • Actions the employ­er should take if it agrees or dis­agrees with Let­ter 226J’s pro­posed employ­er shared respon­si­bil­i­ty payment
  • Actions the IRS will take if the employ­er does not time­ly respond to Let­ter 226J
  • The date by which the employ­er should respond to Let­ter 226J, which will gen­er­al­ly be 30 days from the date of the letter
  • The name and con­tact infor­ma­tion of the IRS employ­ee to con­tact with ques­tions about the letter

If an employ­er responds to Let­ter 226J, then the IRS will acknowl­edge the response with Let­ter 227 to describe fur­ther actions that the employ­er can take.

After receiv­ing Let­ter 227, if the employ­er dis­agrees with the pro­posed or revised shared employ­er respon­si­bil­i­ty pay­ment, the employ­er may request a pre-assess­ment con­fer­ence with the IRS Office of Appeals. The employ­er must request the con­fer­ence by the response date list­ed with­in Let­ter 227, which will be gen­er­al­ly 30 days from the date of the letter.

If the employ­er does not respond to either Let­ter 226J or Let­ter 227, then the IRS will assess the pro­posed employ­er shared respon­si­bil­i­ty pay­ment amount and issue a notice and demand for pay­ment on Notice CP 220J.

Notice CP 220J will include a sum­ma­ry of the employ­er shared respon­si­bil­i­ty pay­ment, pay­ments made, cred­its applied, and the bal­ance due, if any. If a bal­ance is due, Notice CP 220J will instruct an employ­er how to make pay­ment. For pay­ment options, such as an install­ment agree­ment, employ­ers should refer to Pub­li­ca­tion 594 “The IRS Col­lec­tion Process.”

Employ­ers are not required to make pay­ment before receiv­ing a notice and demand for payment.

The ACA pro­hibits employ­ers from mak­ing an adverse employ­ment action against an employ­ee because the employ­ee received a tax cred­it or sub­sidy. To avoid alle­ga­tions of retal­i­a­tion, as a best prac­tice, employ­ers who receive a Let­ter 226J should sep­a­rate their employ­er shared respon­si­bil­i­ty penal­ty assess­ment cor­re­spon­dence from their human resources depart­ment and employ­ees who have author­i­ty to make employ­ment actions.

By Danielle Capilla

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