Employers have been receiving letters from the IRS assessing Employer Shared Responsibility Payments -- penalties -- under the Affordable Care Act, usually for the 2015 or 2016 calendar years. We have seen penalty amounts ranging from thousands to millions (!) of dollars, depending on the size of the employer. What to do if you receive such a letter?
First, don’t panic. There is a good chance that you will be able to reduce, or eliminate entirely, the ACA penalties assessed by the IRS. The IRS identifies and calculates ACA penalties based on the Forms 1094-C and 1095-C filed by an employer for a particular year. In our experience, most of the penalties result from errors in completing the Forms 1094-C and 1095-C rather than from actual violations of the ACA.
Second, study the penalty letter and gather necessary information. The first penalty letter an employer receives from the IRS is Letter 226-J. That letter describes the ACA penalties for the particular year under Code sections 4980H(a) or (b) and provides instructions for how to respond to the letter, including Forms 14764 (ESRP Response) and 14765 (Employee Premium Tax Credit Listing). Responses are due 30 days after the date of the Letter 226-J. Upon request, extensions of the deadline are offered by the IRS, although the IRS recently announced that it will no longer grant extensions greater than 30 days.
Letter 226-J identifies the employees who triggered the ACA penalties, lists the relevant Form 1094-C and 1095-C data, and explains the penalty calculation under either Code section 4980H(a) or (b). Employers will want to carefully check the employment history, hours, pay, offer of health coverage, and health premium charge for each of the listed employees, then compare that data with the codes and other information entered on the Forms 1094-C and 1095-C. Very likely, corrections will need to be made on the Form 14765 before it is returned to the IRS.
Identifying the appropriate codes and whether the employer qualifies for relief can be a daunting experience. The instructions to Forms 1094-C and 1095-C attempt to explain what codes should be used and when relief is available, but lack of experience with the codes and forms trips up many respondents. In addition, some employers err on the side of providing too much information to the IRS, whereas the IRS requests that responses be succinct rather than elaborate.
After your initial response, you will receive a follow-up letter from the IRS. The letter you want to receive is Letter 227-K; that letter dismisses the penalties. Other follow-up letters include Letter 227-L, which revises the penalty amount, and Letter 227-M, which states that the penalty amount is unchanged. Depending on the letter you receive back from the IRS, you may need to file a second response with the IRS, which may require information different from the information provided in your first response.
