by Tony Pandiscia
The Internal Revenue Service “IRS” has recently been issuing “226J Letters” to businesses to conduct inquiry into whether compliance was properly maintained under the Affordable Care Act [“ACA”] for the 2016 Tax Year. While the IRS has been authorized to issue this correspondence in the past, the 2016 Tax Year is significant because it marks the first year following the sunset of favorable “transitional relief” rules that had been available in prior years for businesses that were not in compliance with the ACA. When a business is not in compliance with the ACA healthcare mandate, the result is exposure to the “employer shared responsibility penalty” [or “ESRP”].
A business may incur the “ESRP” under the ACA when it is an applicable large employer [“ALEs”] whom fails to offer:
- “minimum essential” health insurance coverage to its full-time employees and their children, or
- insurance coverage that is “considered affordable”.
Technical rules help determine exactly whom is an ALE [i.e. how to properly count the “full-time equivalent” employees], what would be considered “minimum essential” [health insurance coverage], as well as whether the premiums charged employees were “considered affordable”. Most businesses confronted the myriad of health insurance options designed to meet ACA compliance beginning back in 2013 when the law was initially announced, although various provisions of the law effectively delayed the assessment of penalties until after January 1, 2015 to give businesses ample time to implement suitable health insurance programs and permit the IRS opportunity to develop adequate record keeping and tracking mechanisms.
It is important to understand that receipt of a the 226J Letter is not the actual assessment of the liability. Instead it is a notification from the IRS that based on certain records in its database, the business may be subject to the ESRP and the business now has the responsibility to formally contest or confirm the assertion. [Typically the records the IRS has analyzed include Forms 1094, 1095, W-2 along with the Premium Tax Credit database that is populated through the “Exchange” where individuals obtained coverage through “Healthcare.gov”.] The formal response to the 226J Letter must be submitted to the IRS using Form 14764, plus attachments. Included in the 226J Letter will be a “response deadline” [generally 30 days from the date of the letter] for which a business owner must submit the response or by default the IRS will assume no additional evidence is available to refute the ESRP assertion.
Due to the complexity and time-constraints involved, upon receipt of a 226J Letter a business owner should immediately contact a Tax Professional to assist with the response process. The format of the Form 14764 allows for submission of explanations and substantive documentation that may help update or correct the IRS’ records, as well as counter (if applicable) the government’s ESRP assertion. As with other IRS dispute resolution matters, reliance on a qualified Tax Professional will permit the business owner to avail him/herself of all applicable ESRP response strategies (including extensions of time, available exemptions, review of formula computations and ratios, and even installment payment plan negotiation attempts, as necessary). Langdon & Company LLP is well-versed in ESRP issues, so feel free to connect with us if you have any questions.