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Responding to a IRS Letter 226J: Considerations and Common Mistakes

By: Krista J. Maschinot, Esq.

If you are an applicable large employer (ALE), the Internal Revenue Service (IRS) could possibly be sending a Letter 226J notice your way. Will you be ready to respond accurately within 30 days of receipt if needed?

We discussed in a recent blog post that IRS enforcement of the Employer Shared Responsibility Provision of the Affordable Care Act (ACA) is very real and ALEs should be prepared as such.

There are two types of ESRP penalties that the IRS will assess based upon the information the ALE provided on Forms 1094-C and 1095-C:

§4980H(A) – Assessed when an employer fails to offer minimum essential coverage to enough of its full time employees

§4980H(B) – Assessed when an employee enrolls in the Marketplace and qualifies for the premium tax credit because the employer failed to offer affordable coverage

We recommend comprehensively reading and reviewing the information provided in the Letter 226J as to the reasoning for ESRP penalties and ensuring that this matches up with your internal documentation. This review is particularly significant because it will help you determine whether you have made an administrative/filing oversight or if there are larger compliance issues to deal with.

There are common mistakes to be aware of based on how Forms 1094-C and 1095-C were filled out that could trigger a Letter 226J. An ALE could, for instance, forget to check the “Section 4980H Transition Relief” box (Box C of line 22) on Form 1094-C. It may also fail to correctly code Line 14 of Form 1095-C regarding offer of coverage based on months offered coverage, as opposed to months of actual coverage. These types of errors are easy enough to make, but it is important to identify that they have been made prior to responding to the IRS. The monetary penalties will be assessed much differently based on filing mistake rather than actual ESRP non-compliance.


The Phia Group Saves an Employer Thousands of Dollars

By: Erin Hussey, Esq.

The IRS has recently been enforcing the Employer Shared Responsibility Mandate (“employer mandate”) by sending letters to employers implicating that they may have violated the employer mandate rules and may owe a substantial penalty called an Employer Shared Responsibility Payment (“ESRP”). This employer mandate was put in place by the Affordable Care Act (“ACA”).  The ACA requires Applicable Large Employers (“ALEs”) who have 50 or more employees to (1) provide minimum essential health coverage to all full-time employees and their dependents (or the employer will face a subsection (a) penalty); or (2) offer eligible employer-sponsored coverage that is “affordable” and meets “minimum value” (or the employer will face a subsection (b) penalty). Employers who receive these letters may have to pay the ESRP, but have a chance to respond to the letter before the penalty is mandated.

A client was presented with one of these letters from an employer. The employer was facing over $50,000 dollars in penalties if they did not respond to the letter properly and explain why they were/were not at fault. The IRS has specific guidelines of how to respond to these letters. This can become very daunting and confusing for employers facing these high penalties. The client reached out to The Phia Group for consultation. Krista Maschinot and Erin Hussey analyzed the situation and explained what the employer may or may not have done wrong to receive this large employer mandate penalty, and with their consultation, the employer was able to identify their mistake and properly respond to the IRS letter. After the employer explained their mistake and properly responded to the IRS letter, the IRS sent a second letter to the employer which lowered their penalty to less than $2,500, saving the employer thousands in penalties.

Disclaimer: As these forms are heavily based in IRS regulations and taxation, we strongly recommended to the broker that the employer should discuss this with their tax advisor and/or the entity that assisted in preparing their tax forms.