Are you a business owner that the IRS considers an applicable large employer? If so, you’re required to provide your full-time employees with an opportunity to enroll in a health insurance plan with at least the minimum essential coverage. If you don’t meet the IRS’s requirements, however, you may receive IRS Letter 226J and be on the hook for what’s called an employer shared responsibility payment.
That’s a lot to take in, and the verbiage the IRS uses can be complicated.
Here’s what you need to know and how to avoid potential problems with the tax agency.
IRS Letter 226J terms explained
Before we get into the actual letter, let’s go over the different terms we’ve already thrown out there to help you understand the situation better.
Applicable large employer
You’re considered an applicable large employer if you have an average of at least 50 full-time employees—or full-time equivalents—during the year. For the purposes of the Affordable Care Act, an employee is considered full time if they work at least 30 hours per week.
A full-time equivalent, on the other hand, is any collection of two or more employees whose combined hours add up to 30 hours per week or more.
So if you have no full-time employees but do have 100 part-time employees who all work 15 hours per week, you have 50 full-time equivalents.
Minimum essential coverage
If you qualify as an applicable large employer, you “must offer your employees and dependents health insurance coverage with minimum essential coverage,” says Jeff Schneider, an enrolled agent and certified tax resolution specialist at SFS Tax & Accounting Services.
That minimum essential coverage is included with just about any health insurance plan an employer can offer.
The only types of coverage that don’t qualify include:
- Plans that only provide discounts on health care services.
- Plans that cover only dental or vision care.
- Workers’ compensation plans.
- Plans that cover only a specific condition.
Employer shared responsibility payment
If an applicable large employer doesn’t offer the required coverage, says Schneider, “they can owe the employer shared responsibility payment.”
This is essentially a penalty for not complying with the mandate of the Affordable Care Act. “The penalty in 2018 is $193.33 per month per employee,” Schneider adds.
What to do if you get IRS Letter 226J
If you’re an applicable large employer, you typically won’t receive IRS Letter 226J unless you don’t comply with your responsibility to provide the minimum essential coverage to full-time employees.
The letter will usually give you 30 days to respond. “[You] must reply by this date, whether [you] agree or disagree with the proposed employer shared responsibility payment,” says Schneider.
- If you don’t, “the IRS will issue a demand letter and [you] could be subject to liens and levies,” he adds.
- If you agree with the IRS’s assessment and the penalty amount, respond accordingly and make the payment within the 30-day limit.
- Here are three steps to take as soon as you get the letter in the mail, if you object,
1. Request more time
Before you do anything, call the IRS and request an extension for your response. Even if you agree with the agency’s assessment, it’s best to make sure you have all of the information before you file your response.
2. Contact your benefits administrator
Reach out to your benefits administrator or the company you use for Affordable Care Act reporting to gather the information and documentation you need to respond to the IRS.
If you disagree with the tax agency’s assessment, this is a crucial step to ensure that you have the right information to share with them.
3. Submit your response
Once you have all of your supporting evidence for your objection, fill out and sign Form 14764. Then, send the form and other documents to the IRS by the due date.
You can either do this yourself or have your tax accountant help you.
After you submit your response to the IRS, the agency will do one of three things:
- Agree with your response and either reduce the penalty amount or withdraw it altogether.
- Disagree with your response and issue a notice demanding payment.
- Request more information from you with Letter 227.
If you still disagree with the IRS’s assessment after its response, consider hiring a tax attorney to help you with the dispute process.
The Affordable Care Act’s employer mandate isn’t easy for all employers to comply with. If you receive IRS Letter 226J and owe a penalty, the worst thing you can do is ignore it.
Make it a priority to respond within the 30 days or request additional time through an extension. And if you disagree with the assessment, get all the documentation you need to prove it.
Otherwise, you’ll be on the hook for the full amount the IRS requests.