Letter 226-J: the proposed employer shared responsibility payment under IRC 4980H

What the letter means

The letter opens: “We have made a preliminary calculation of the Employer Shared Responsibility Payment (ESRP) that you owe.” The IRS Letter 226-J page answers the first question clients ask: “Is this letter a bill? No, the letter is the initial proposal of the ESRP.” The letter includes an explanation of IRC 4980H, an ESRP Summary Table itemizing the proposed payment by month (and whether each month falls under section 4980H(a) or 4980H(b)), Form 14764 (ESRP Response) and Form 14765 (Employee PTC Listing).

The letter also serves as the certification required by section 1411 of the Affordable Care Act that, for at least one month, at least one full-time employee enrolled in a marketplace plan for which a premium tax credit was allowed.

Why the employer got it

IRM 8.7.21 summarizes the two liabilities. Under IRC 4980H(a), an ALE is liable if it “does not offer minimum essential coverage (MEC) to at least 95% (70% for 2015) of full-time employees (and their dependents) and at least one of its full-time employees is allowed a premium tax credit (PTC).” Under 4980H(b), an ALE that does offer coverage to at least 95% is liable if at least one full-time employee is allowed the PTC “because the coverage was unaffordable or did not provide minimum value, or the full-time employee was not offered coverage.”

The IRS builds the proposal from two data sets. The IRS page: it “used form 1094/5-C filed by the ALE and the individual income tax returns of your full-time employees to identify if they were allowed a premium tax credit.” The response therefore usually centers on what the employer reported on lines 14 and 16 of Form 1095-C and on Form 1094-C: a missing safe harbor code, a wrong offer code, or a full-time count error. IRC 4980H(c)(5) indexes the dollar amounts for calendar years after 2014; the letter's explanation and summary table show the amounts used for the year.

Deadlines and what happens if they pass

The IRS questions and answers say the response “will be due by the response date shown on Letter 226J, which generally will be 30 days from the date of Letter 226J.” If no response arrives, IRM 25.21.4.14.1 says the examiner attempts phone contact; failing that, the IRS sends Letter 5040-J with a copy of the Letter 226-J. “The Letter 5040-J allows the ALE fifteen days to respond. If the ALE does not respond, the case will be prepared for assessment.” The letter states the consequence: “If you don’t respond by the Response date on the first page of this letter, we will send you a Notice and Demand for the ESRP that we proposed and assessed. The ESRP will be subject to IRS lien and levy enforcement actions.”

How to respond

1. Authorization. The IRS Letter 227 page says a Form 2848 “must state the year and that it is for the Section 4980H Shared Responsibility Payment.” IRM 25.21.4.14 adds that the ALE can also authorize someone in the Authorization section of Form 14764.
2. Pull the filed Forms 1094-C and 1095-C for the year and compare them to the Employee PTC Listing. Each listed employee was allowed a PTC for at least one month with no safe harbor or relief code reported for that month.
3. Correct on Form 14765, not by refiling. The letter instructs: “Do not file a corrected Form 1094-C with the IRS to report any changes” and do not file corrected Forms 1095-C either. Enter the corrected line 14 and line 16 codes on the second row of each monthly box, line 14 code first (for example, 1H/2A).
4. Write the signed statement. If disagreeing (see the response sequence for calendaring), check the disagreement box on Form 14764 and include “a signed statement explaining why you disagree with part or all of the proposed ESRP.” IRM 25.21.4.14.3.1 says the statement should explain changes to Forms 1094-C or 1095-C, corrections on Form 14765, or how the ALE qualified for relief. Payroll, offer and enrollment records support it.
5. Address affordability with computations. IRM 25.21.4.14.3 says that if the ALE provides its computation under the Form W-2, federal poverty line or rate of pay safe harbor, the examiner will recompute affordability.
6. Mark every page with the tax year and EIN in the top right corner, as the letter asks, and send it so it is received by the response date.
7. If agreeing, sign Form 14764 and pay, or expect a CP220J bill for any unpaid amount.

What the IRS does next

The IRS answers each response with a Letter 227. The ESRP Q&A calls these “a series of five different letters that, in general, acknowledge the ALE’s response to Letter 226J and describe further actions the ALE may need to take.” An agreed response gets Letter 227-J and assessment. A revised computation comes on Letter 227-L; an unchanged one on Letter 227-M. IRM 8.7.21.2 says that if the ALE disagrees, it “can request a pre-assessment Appeals conference in response to one of the following letters”: 227-L or 227-M. After Appeals, the IRS sends Letter 227-N. When liability is final, the IRS assesses and issues the CP220J, and unpaid amounts follow the collection process; the CP220J page notes that ESRP payments, if assessed, “are subject to lien/levy and will be collected in the same manner as other assessments.” See the Independent Office of Appeals and writing a protest.

Related notices

Questions practitioners ask