As we enter the final straight for TY23 filings, the IRS continues to process a backlog of 226J penalty letters for ACA non-compliance in previous tax years.
WHAT IS AN IRS 226J PENALTY LETTER?
The IRS issues 226J notices when Applicable Large Employers [ALEs] fail to comply with the Employer’s Shared Responsibility Provision [Employer Mandate] under the Affordable Care Act [ACA]. More specifically, IR Codes § 4980H(a) and § 4980H(b). Penalties for TY21 are being issued now.
IRC 4980H(a) NON-COMPLIANCE
There are two types of non-compliance in this context — with different penalties. The first relates to 4980H(a) and tends to incur the more punitive fines. A 4980H(a) penalty is incurred by the employer when both the following transgressions are made:
» The employer fails to make affordable offers of Minimal Essential Coverage [MEC] to at least 95% of its full-time employees and their dependents.
» AND at least one employee who should have been made an affordable offer instead received a Premium Tax Credit (PTC) from a state or federal healthcare marketplace.
You can learn about affordability and MEC criteria here.
HOW BIG ARE 4980H(a) FINES?
For TY21, 4980H(a) non-compliance means the employer is fined an annualized penalty of $2,700 [or $255 a month] for every full-time employee on its workforce [minus 30 standard exemptions]. In other words, this is an all or nothing fine, not just a fine for each offending PTC issued. For TY23 this figure has gone up to $2,880 per employee and will rise to $2,970 in TY24.
So an ALE with 230 full-time employees, for example, would be fined $540,000 [200 x $2,700] for non-compliance in TY21 — even if only one employee eligible for cover made a PTC claim.
IRC 4980H(b) NON-COMPLIANCE
The other non-compliance penalties relate to 4980H(b). These fines are incurred by the employer when both the following transgressions are made:
» The employer offered full-time employees coverage that was either unaffordable or not Minimum Value [MV] — or both. [You can learn about MV criteria here.]
» AND at least one of these employees received a state or federal PTC.
HOW BIG ARE 4980H(b) FINES?
Unlike 4980H(a) fines, the 4980H(b) penalty is applied on a per-case basis.
When employees receive a PTC, the IRS cross-references the employer’s 1095-C filings to check if the employees were offered Minimum Essential Coverage (MEC) that met Minimum Value (MV) and was affordable. For every failure, the employer is subject to an annualized penalty of $4,060 [$338.33 a month]. For TY23 this figure has gone up to $4,320 per employee and will rise to $4,460 in TY24.
So, for example, if 100 full-time employees obtained PTCs in TY21 because the offered cover was unaffordable, the employer would be fined $406,000 [100 x $4,060].
WHAT TO DO NEXT
If you receive a Letter 226J penalty notice for TY21 or any other year, be sure to respond quickly. Within 30 days of the date the penalty letter was issued, you will need to provide the IRS with a raft of relevant data, such as health plan details and affordability calculations. The letter will include the IRS employee to be contacted and instructions on how to respond.
We recommend you enlist specialist support assembling this response, particularly if you wish to contend part or all of the penalty assessment against you.
As the leading specialist in ACA compliance, BENEFITSCAPE can not only help you assemble quickly and accurately all the relevant data, we can run regtech diagnostics on your ACA submission to identify if the penalty has been triggered by filing errors rather than non-compliance.
Either way, we are black belts at penalty remediation. Last year alone, we were able to save employers over $50 million in fines.
The best solution to penalty notices is, of course, prevention.
So please do not hesitate to contact BENEFITSCAPE for support with your TY23 ACA compliance. We work for 1000s of employers of all sizes, in all sectors, and on all HCMs and ACA modules. We are not only the leading ACA specialists but our best-in-class regtech diagnostics work compliance magic.*
Call +1 508-655-3307 or email email@example.com
Even the IRS is a client of our advanced regtech.