By: Anabelle Davidow / Article /
For employers subject to the Affordable Care Act (ACA), receiving IRS Letter 226J can be alarming. The notice signals that the IRS believes an employer may owe an Employer Shared Responsibility Payment (ESRP) for failing to comply with ACA coverage requirements. While the letter is serious, it is also manageable, especially when employers respond quickly and strategically.
IRS Letter 226J is issued to Applicable Large Employers (ALEs), generally organizations with 50 or more full-time or full-time equivalent employees, when the IRS determines the employer may owe a penalty under the ACA’s employer mandate.
The notice is typically triggered when:
The letter outlines the IRS’s proposed penalty calculation and includes detailed employee data supporting the assessment.
There are two primary ACA employer mandate penalties associated with Letter 226J:
This applies when an ALE fails to offer coverage to at least 95% of full-time employees and their dependents.
This applies when coverage was offered but was either unaffordable or failed minimum value standards for certain employees who then received Marketplace subsidies.
The proposed assessment can range from thousands to millions of dollars depending on workforce size and reporting accuracy.
Many employers assume the notice automatically means they violated the ACA. In reality, letter 226J is often tied to reporting inconsistencies or administrative errors, including:
Even small data issues can trigger IRS scrutiny.
IRS Letter 226J includes a response deadline, usually 30 days from the date of the letter. Ignoring the notice can result in the IRS formally assessing the penalty and beginning collection efforts.
Employers should immediately route the notice to HR, benefits, payroll, finance, and legal or compliance teams.
The IRS provides:
Compare the IRS findings against your internal records, payroll data, enrollment records, and ACA filings.
In many cases, employers discover that the IRS relied on incomplete or inaccurate information.
One of the most common causes of incorrect penalties is coding errors on Forms 1095-C.
Employers should review:
A single incorrect code can create the appearance of noncompliance even when compliant coverage was offered.
Documentation is essential when disputing a proposed ESRP assessment. Employers should compile:
Clear documentation strengthens the employer’s response and improves the likelihood of penalty reduction or removal.
Employers respond to Letter 226J using IRS Form 14764, along with supporting explanations and documentation.
Responses generally fall into three categories:
If disputing the assessment, employers should provide concise explanations supported by evidence. In complex cases, working with ACA compliance specialists, legal counsel, or tax advisors can be valuable.
The best defense against future ACA penalties is proactive compliance management. Employers should:
Because IRS enforcement activity continues to increase, accurate reporting and documentation are more important than ever.
Receiving IRS Letter 226J does not automatically mean an employer owes a penalty. In many cases, the issue stems from reporting discrepancies or missing information that can be corrected through a timely response.
The key is acting quickly, reviewing the IRS findings carefully, and supporting your position with accurate documentation. Employers that take a proactive and organized approach are often able to significantly reduce or eliminate proposed ACA penalties.
Because ACA reporting rules and IRS penalty calculations can be highly technical, many employers also benefit from working with experienced compliance professionals. If your company receives a Letter 226J, consider reaching out to us at ACA Compliance Solution Services for guidance on reviewing the notice, evaluating potential reporting errors, and preparing an effective response strategy.