On more than one occasion since passing the Affordable Care Act (“ACA”), the IRS has given some type of early holiday “gift” to alleviate pending compliance concerns for employers. One of the most significant of these occurred in late December 2015, when the IRS extended the mandated filing periods for Forms 1094/1095, which gave employers more time to comply with the ACA’s new reporting obligations. Employers were still coming to grips with reporting health insurance coverages offered during the 2015 taxable year and the litany of new codes used to determine if the employer had adequately complied with Code Section 4980H’s employer shared responsibility requirements. At that same time, the IRS also communicated that employers would not be penalized for filing incorrect or incomplete Forms 1094/1095 if the forms were actually filed by the extended deadlines and filers could show they “made good faith efforts to comply with the information reporting requirements for 2015.”
It comes then as somewhat of a surprise to many that the IRS has not only moved forward with its efforts to review previously filed Forms 1094/1095, but actually has begun enforcement efforts against employers for the 2015 reporting period. However, as the IRS quietly announced would be happening through its updated Employer Shared Responsibility Question and Answer site, the IRS has now begun issuing Letter 226J (sample copy here), which is its official notification of a proposed Employer Shared Responsibility Payment (“ESRP”) assessment for alleged noncompliance with Code Section 4980H. We have now had several clients who have received their Form 226J notice and we are issuing this general response concerning what employers should do if they receive a Letter 226J for 2015 or any period thereafter.
What to Do if You Receive a Letter 226J:
• Breathe. Understand this is only a preliminary calculation of your proposed ESRP liability. Depending on the size of employer, the proposed ESRP can be significant (we have had one employer with an ESRP estimate of over $1.7 million for only 16 people who were listed as having been subject to the IRS assessment) but understand this is not an actual assessment of the amount you actually owe.
• Understand that the IRS gives each employer a full opportunity — using Form 14764 enclosed with the Letter 226J — to dispute the calculation and provide additional information for the IRS to review before issuing any further liability assessment. Given that 2015 was the first filing year for the Forms 1094/1095, it is entirely likely that one or more forms filed were not completed correctly based on IRS guidance issued thereafter.
• Don’t ignore or delay dealing with the Letter 226J you just received. Even though the IRS allows each employer to agree/disagree/or partially agree with the ESRP calculation (the employer can go ahead and make payment of any ESRP amount if it otherwise agrees to the calculated amount), the employer has a set period of time (generally 30 days) to respond or the calculated amount will be assumed correct and further assessment will be made thereafter.
• Review the list of employees included on Form 14765 to determine if they are all actually employees of your organization and gather previously filed Forms 1095-C for each individual to determine if the information provided is accurate, or if other changes need to be made in your IRS response. The IRS provides a process on the Form 14765 for further correction of any errors in original Form 1095-C filings.
• If you dispute the IRS’s ESRP calculation, prepare a Form 14764 with a statement to explain your reasons for disagreeing with the IRS ESRP calculation. Supporting documentation should be included to evidence the reasons for disputing the IRS calculation, such as any written documentation of any prior offer of qualifying coverage.
• Remember that if you filed Forms 1094/1095 for more than one entity (such as multiple subsidiaries or other controlled group members), it is entirely possible the IRS will issue separate Letter 226Js for each entity and you need to ensure that all organizations know and understand the timing and compliance responsibility owed to the IRS for each other entity.
• Understand that you can appoint Jackson Lewis or another representative to assist you in discussing the matter further with the IRS, including engaging in further discussions with the IRS without any admittance of liability on your part.
The vast majority of situations where ESRP liability will be assessed will be those situations where the IRS had incorrect or incomplete information to review. Our role is to ensure that our clients are adequately informed and represented to ensure that the IRS has correct information that evidences compliance with all employer shared responsibility requirements, or if not, to assist in mitigating the impact of any noncompliance in the manner necessary. Meanwhile, continue with efforts to comply with Form 1094/1095 filing requirements for the 2017 taxable year, as it appears the IRS will continue its current objective of holding employers accountable to their ACA shared responsibilities for the foreseeable future. We want to ensure our clients avoid receiving other Letter 226Js to the extent possible for those periods.