Letter 226-J

Letter 226-J is the IRS's proposal that your business owes an employer shared responsibility payment under section 4980H of the Affordable Care Act. The amounts can run to six or seven figures, and they are computed from the Forms 1094-C and 1095-C your business filed. Most successful responses are about correcting those forms, not about arguing the law.

How the proposal is built

The IRS cross-references two things: the 1095-C codes your business reported for each full-time employee, and the list of employees who received a premium tax credit through a marketplace. If the codes indicate that coverage was not offered, or was not affordable or of minimum value, and at least one full-time employee received a credit, the system proposes a payment.

The letter includes Form 14765, the Employee Premium Tax Credit Listing, which names the employees whose credits triggered the assessment and the months involved. That list is where the response starts.

The two payments

• The section 4980H(a) payment applies when coverage was not offered to at least 95 percent of full-time employees. It is calculated on all full-time employees, less an allowance, not just those who received a credit, which is why it is usually the larger of the two.
• The section 4980H(b) payment applies when coverage was offered but was unaffordable or did not provide minimum value for a particular employee. It is calculated only for the employees who actually received a credit.

A single coding error, such as reporting no offer of coverage for a month when coverage was in fact offered, can turn a case that should be a small (b) payment into a large (a) payment. Correcting the codes usually corrects the amount.

Responding within 30 days

1. Reconcile Form 14765 against your payroll and benefits records, month by month, for each listed employee.
2. Identify coding errors on the 1095-Cs and the correct codes. Common ones involve waiting periods, employees who left mid-year, and affordability safe harbors.
3. Complete Form 14764, the ESRP Response, indicating agreement or disagreement, and attach a signed statement explaining each change with the supporting records.

The IRS replies with a Letter 227 stating the revised amount, if any. If you disagree with that, you can request a conference with the Independent Office of Appeals. If no response is made to the 226-J, the IRS issues a Notice CP220J assessing the payment and demanding it.

Why this is worth getting right

Employer shared responsibility payments are not deductible, and once assessed they are collected like any other tax, with the full collection sequence behind them. The 30-day response window is the cheapest point to fix the record. The notices and letters overview covers how a proposal becomes an assessment when a deadline passes.