The Employer Shared Responsibility Provision (ESRP) and the Letter 226J are critical components of the Affordable Care Act (ACA) that employers must understand. Both have significant implications for businesses, potentially leading to severe penalties for non-compliance. This article explores the details of ESRP and Letter 226J and provides essential guidelines for employers to operate effectively within these regulations.

What is the Employer Shared Responsibility Provision (ESRP)?

The ESRP, also known as the employer mandate, is part of the ACA. The provision requires employers with 50 or more full-time employees to offer healthcare coverage to at least 95% of their full-time staff and dependents up to age 26, or potentially face penalties. This healthcare coverage must be affordable and provide minimum value as defined by the ACA.

Specifics of the ESRP

  1. Qualified Employers: Those with at least 50 full-time equivalent employees.

  2. Minimum Essential Coverage: Coverage must be offered to 95% of full-time employees and their children up to age 26.

  3. Minimum Value: The plan must cover at least 60% of the total allowed costs of benefits expected to be incurred.

  4. Affordability: The employee’s share of the premium cost for the lowest cost self-only coverage that meets the minimum value standard cannot exceed 9.5% of the employee’s household income.

Understanding Letter 226J

Letter 226J is a communication from the Internal Revenue Service (IRS) that notifies employers about possible non-compliance with the ESRP. If the IRS determines that an employer failed to comply with the ESRP in a given year, the employer will receive a Letter 226J. This notification includes the proposed ESRP penalty and a listing of employees who potentially triggered the penalty by receiving a premium tax credit.

How to Respond to Letter 226J?

Employers must respond to Letter 226J within 30 days from the date of the letter. The response should either agree with the proposed ESRP assessment or disagree entirely or in part. If disagreeing, a detailed explanation and supporting documentation must be provided.

ESRP and Letter 226J FAQs

What happens if an employer ignores Letter 226J?

If an employer does not respond to Letter 226J within the given timeframe, the IRS will assess the proposed ESRP penalty, and the employer will receive a notice and demand for payment.

Can ESRP penalties be appealed?

Yes, ESRP penalties can be contested. It’s advisable for employers to consult with a tax professional or legal counsel to understand the appeal process and potential ramifications.

Do ESRP and ACA requirements apply to small businesses?

No. The ESRP only applies to applicable large employers with 50 or more full-time equivalent employees. Small businesses with fewer employees are not subject to the requirement.

Understanding ESRP and Letter 226J is critical for managing ACA responsibilities as an employer. By remaining informed, employers can take proactive steps to avoid non-compliance penalties and successfully navigate the ACA landscape.