If your company is an applicable large employer (ALE) and subject to the employer shared responsibility provisions of the Affordable Care Act (ACA), which require ALEs to offer health coverage to full-time employees and their dependents, then you probably are aware of the IRS’s efforts at the end of 2017 to begin enforcing the full-time employee coverage requirements and to assess excise tax penalties against ALEs that did not comply in 2015.
As explained briefly below, the IRS began sending Letter 226-J to notify companies that the IRS determined owed an employer shared responsibility payment (ESRP) for failing to comply with the ACA coverage requirements in 2015.1 Based on IRS guidance recently posted on its website, companies that received a Letter 226-J and responded to the IRS can now expect to receive a Letter 227 from the IRS, either to outline next steps or to close an ESRP inquiry.
As a reminder, an ALE will be assessed an ESRP if at least one full-time employee receives the ACA premium tax credit and any of the following conditions apply:
- The ALE failed to offer health coverage to full-time employees and their dependents.
- The ALE offered health coverage to full-time employees and their dependents, but the coverage was not affordable.
- The ALE offered health coverage to full-time employees and their dependents, but the coverage did not provide a minimum level of coverage.
The typical ESRP enforcement cycle involves the following stages:
- The IRS reviews the Forms 1094-C and 1095-C that an employer filed for the applicable tax year, along with the individual income tax returns filed by employees.
- If the IRS identifies an employer shared responsibility compliance error, then the IRS sends the employer a Letter 226-J that indicates the ESRP amount that the IRS intends to assess. In addition to the proposed ESRP, the Letter 226-J will include a summary of the information that was reported on the Forms 1094-C and 1095-C by month, how the IRS used this information to calculate the proposed ESRP for each month, and the steps the employer can take to respond to the proposed assessment. The IRS has posted information about Letter 226-J here.
- The employer will need to carefully review the information provided, as well as the Forms 1094-C and 1095-C that were filed for the relevant tax year (many of the proposed ESRP assessments that we’ve seen to date are the result of errors in information reporting for 2015).
- The employer should prepare its response to the Letter 226-J promptly (involving benefits legal counsel as needed) and submit the response to the IRS by the deadline stated on the Letter 226-J (generally 30 days). Failure to respond by the deadline is viewed by the IRS as agreement with the proposed ESRP.
- The IRS reviews the employer’s response, determines the next steps for the ESRP inquiry, and sends the employer one of five versions of Letter 227 (newly posted guidance on the Letter 227 is available here):
- Letter 227-J is used if the ALE agreed to the proposed ESRP liability in its response to the Letter 226-J. The inquiry is closed and no further action is required (other than to pay the ESRP liability when the IRS sends the ALE its bill).
- Letter 227-K is used if the ALE provided additional information in response to the Letter 226-J to show that it should not owe an ESRP payment and the IRS agreed with the ALE. The inquiry is closed and no further action is required.
- Letter 227-L is used if the ALE provided additional information in response to the Letter 226-J and the IRS revised its proposed assessment (but still asserts that an ESRP payment is owed by the ALE). The ALE can either agree to the revised ESRP liability assessment or request an appeal of the decision.
- Letter 227-M is used if the ALE provided additional information in response to the Letter 226-J and the IRS did not revise its proposed assessment. The ALE can either agree to the ESRP liability assessment or request an appeal of the decision.
- Letter 227-N is used to notify the ALE of the IRS’s decision following an appeals conference. The inquiry is closed and no further action is required (other than to pay the ESRP liability when the IRS sends the ALE its bill).
With the publication of Letter 227, it appears that the 2015 ESRP enforcement cycle may be wrapping up for many employers. However, employers can expect the 2016 ESRP enforcement cycle to begin soon!