The IRS has issued its first ACA penalty letters for tax year 2021. While employers have been forewarned, many may not be fully armed to respond in a timely and compliant manner. The IRS is making good on its promise, and goal, of clearing its backlog of penalty notices by issuing Letter 226J to employers suspected of ACA non-compliance for a particular year.

ACA penalty letters have become a topic of concern for many. Letters 226J for 2020 began to be issued in November 2022. As the IRS now moves into a new tax year, employers should know that, even if they received letters for tax year 2020, they may also receive a letter for 2021 (and, subsequently as the IRS moves forward, for 2022). In addition, employers that had penalty letters in 2020 may also receive a penalty letter for 2021. The process and implications remain unchanged.

The IRS is picking up the pace of ensuring that companies are adhering to the ACA Employer Mandate.

ACA Employer Mandate

The ACA Employer Mandate, formally known as the Employer Shared Responsibility Payment (EESRP) took effect in 2015. It requires Applicable Large Employers (ALEs) with 50 or more full-time employees and full-time equivalent employees (FTEs) to offer Minimum Essential Coverage (MEC) to at least 95% of their eligible workforce and their dependents. In addition, that coverage must meet Minimum Value (MV) requirements and be affordable for employees.

In addition, employers must report on their coverage through annual 1094-C and 1095-C form filings. Not all impacted employers have been compliant—not out of malice, or purposeful neglect, but often because of the complexity of reporting requirements. These requirements can be especially burdensome for small employers. But even if unintentional, failing to meet requirements can result in heavy scrutiny and steep penalties.

In an effort to spur additional compliance, the IRS is turning to funding and added IRS agents to close gaps and ensure that employers are following guidelines and providing the necessary coverage options for employees.

Funding and Additional Tax Agents Drive Progress

As part of the Inflation Reduction Act, the IRS received an infusion of $80 billion over the next decade designed to focus on targeting high income tax evaders. Businesses, of course, fall squarely within these ranks. In addition to funding, the IRS has announced plans to hire additional IRS agents—87,000 in numbers—to focus on these efforts. Their goal: to drive compliance and expedite the process of reviewing filings to identify employers who are non-compliant or not meeting requirement.

If you receive a letter, there are some important steps to take immediately:

• Verify the notice. Ensure that the notice is intended for your business and that the information provided is accurate.
• Check employee data. Cross-reference your employee data with the information provided by the IRS.
• Request an extension if not able to comply within the required timeframe.
• Respond promptly. If you disagree with the assessment, provide supporting documentation.
• Document all of your communications with the IRS, keeping records for at least three years.

Health insurance coverage is critically important to your employees and their families. That’s an important reason to provide the coverage required. Beyond ensuring health and wellness for your employees, though, it’s also important to meet IRS requirements both in terms of offering affordable healthcare insurance coverage and meeting filing deadlines.

Responsiveness matters. The IRS’s approach indicates an era of stricter ACA compliance. With enforcement actions accelerating, we recognize the burden and complexity involved and have the resources to help employers meet their compliance and reporting requirements.