The Internal Revenue Service (IRS) issues Letter 226J to employers as part of enforcing the Employer Shared Responsibility Payment (ESRP). Receiving this notice can be an unwelcome surprise for many businesses. It can be complicated to understand, however, understanding the purpose and response procedure can demystify the process.

Understanding Letter 226J

Letter 226J is a notice that the IRS issues to notify employers concerning potential liability for an ESRP for a specific year. This liability occcurs under the Affordable Care Act’s (ACA) employer shared responsibility provisions. The document details why the IRS believes the company might owe the ESRP and offers information about how to respond.

The ESRP and ACA

The ACA requires large employers to offer affordable and minimum-value healthcare coverage to their full-time employees or face a possible ESRP. ‘Large’ employers are those with 50 or more full-time employees. Firms are assessed an ESRP if one or more full-time employees receive a premium tax credit for purchasing individual coverage in a Health Insurance Marketplace.

Deciphering the Letter

Letter 226J presents a summary of the proposed ESRP by month with a list of employees who received a premium tax credit and therefore triggered the ESRP. The IRS also includes Form 14764 (ESRP Response) and Form 14765 (Employee Premium Tax Credit Listing).

Responding to Letter 226J

Upon receiving Letter 226J, it’s important to take prompt action. The letter provides instructions on how to respond if the employer agrees with the proposed ESRP. But if the employer disagrees, they must provide a full explanation and include supporting documentation.

Frequently Asked Questions (FAQs)

What if my company doesn’t respond to Letter 226J?

If no response is given within the time limit set by the IRS (usually 30 days), the IRS will assess the amount of the proposed ESRP and issue a notice and demand for payment, Notice CP 220J.

Can I appeal the ESRP?

Yes, the employer can challenge the IRS’s proposed ESRP by detailing why they disagree in their response to Letter 226J.

Dealing with IRS Letter 226J and the potential for ESRP can be challenging for employers. It involves understanding complex tax legislation and IRS procedures. However, knowing what to expect and how to respond can make the process less daunting and possibly alleviate or eliminate the proposed payment.