Recently, the IRS has started to send out the 226j letter. This letter is a proposal to assess ESRPs, which are Employer Shared Responsibility Payments, as part of the ACA, which is the Affordable Care Act. Essentially, the IRS will send out this letter if it has determined that at least one of the employees in a company with more than 50 full-time employees have received premium tax credit. If so, it will list which ones.
Understanding the 226j Letter
Often, when an employer received the 226j letter, they will feel quite shocked because they were under the impression that they were fully compliant with the ACA employer mandate. Others will be shocked because they presumed to have a much lower liability. It is important to remember, therefore, that the letter does not actually assess liability but rather that it proposes liability should be assessed. In other words, it is an official notification that states the IRS believes payments are old. An employer is within their right to disagree with the proposed amount and they are usually correct in this disagreement as well.
The reason for this is that the amount proposed is based only on how many employees received premium tax credit that was exchange purchased. The IRS does not look into whether or not employers also offer this type of coverage to their employees, which means a lot of businesses will receive this letter with a proposed penalty when there is no need for that. However, it is still a letter from the IRS and must therefore be responded to appropriately. The first page of the letter highlights the date by which a response must be received, which is 30 days from the day it was written, which is not necessarily the day it was received. If payments are not made by then, interest payments will also be required and those will continue to accrue until full payment of the balance. Hence, appealing the letter itself is vital.
Companies that do received this letter are encouraged to speak to third-party businesses that understand employee benefits so determine whether the business is indeed liable for the payment of the amount. Additionally, these third-party companies can help object to the IRS letter in the most effective manner. Ultimately, they will help to minimize the liability that a company has towards the IRS.
While the IRS is seen by many employers as the big bad boogeyman that cannot be messed with, they have themselves explained the process of the new 226j letter and how it is likely that a business is not liable for the payments at all. Hence, it is important that businesses are not tempted to simple dig their heads in the sand but that they contact the IRS straight away to seek clarification and to determine whether they are liable at all. In many cases, they will find that they aren’t liable and the letter can simply be destroyed, but not until the IRS has been informed of this.