The Internal Revenue Service (IRS) uses a series of letters to notify Applicable Large Employers (ALEs) that they may owe money for failure to comply with the Patient Protection and Affordable Care Act, or ACA. In response, if employers believe the IRS made a mistake, they can request and/or provide additional information to clarify, challenge or appeal the proposed assessment.
What’s an “ESRP,” Anyway?
On the IRS website, technical publications, or other guidance, you may see ACA penalty letters referred to as “Employer Shared Responsibility Payment” or “ESRP”. This is because the law uses the term ESRP to identify those amounts a large employer subject to ACA mandates might owe if they fail to offer the right type of coverage to the right type of employee on the right timeline.
IRS Penalty Letters and Notices
The following letters are deployed by the IRS to propose penalties, assess penalties and, ultimately, collect on those penalties:
Letter 5699 – “Missing Information Return Form 1094/1095-C Letter”
This letter is used to make initial contact with an employer the IRS believes should have filed Forms 1094-C and 1095-C but did not. Letter 5699 provides the employer with the reason for the contact and gives them general information about the filing requirements for Form 1094-C and Form 1095-C. Letter 5699 gives the employer response choices regarding their filing situation. The letter asks the employer whether they:
- Filed the forms under a different EIN. (They are asked to provide the name, EIN and date for when the returns were filed.)
- Should have filed the forms but did not. (They are asked to either submit the delinquent forms with the response or provide an explanation of when the returns will be electronically submitted.)
- Were not an ALE, and thus not required to file.
- Had another reason to not file.
Letter 5699 asks the employer to respond to the letter by marking the appropriate block and returning it as directed in the letter.
Letter 5698 – “Corrected Form 1094/1095-C”
If the employer does not respond to Letter 5699 within the allowed time, or responds but the issue is not resolved, the IRS issues Letter 5698. Letter 5698 is used to either request more information from the employer, or notify the employer of their potential liability for failure to furnish and/or file Forms 1094-C and 1095-C.
Letter 5005-A – “Information Return Penalty Cover Letter”
Letter 5005-A is the penalty notice that follows Letter 5699. If an employer fails to respond to Letter 5699, or the response is not adequate, Letter 5005-A sets forth the proposed penalties to be imposed.
Form 886-A – “Explanation of Items”
Letter 5005-A is accompanied by Form 886-A, which gives the employer the facts, law and conclusions that led to the application of penalties.
Notice 972CG – “Notice of Proposed Penalty”
The IRS sendsNotice 972CG when Forms 1094-C and 1095-C are filed after their due date, when Forms 1094-C and 1095-C are filed on paper exceeding the threshold of 10 total information returns (including Form W-2 and Form 1099-MISC), or when Forms 1094-C and 1095-C were filed with an incorrect or missing Taxpayer Identification Number (TIN).
Letter 1865-C – “Information Return (Paper) Incomplete or Rejected for Processing”
The IRS sends this letter when the Forms 1094-C and 1095-C submitted by the employer cannot be processed. Often, this is because the forms were incomplete or not in the required format. The letter contains instructions for how to resubmit.
Notice CP215 – “Notice of Penalty Charge”
IRS Notice CP215 notifies the employer that a penalty has been charged due to failure to file required information returns, including Forms 1094-C and 1095-C.
Notice CP220J – “Notification of Employer Shared Responsibility Liability”
IRS Notice CP220J is used to notify employers that the IRS has charged them, for one or more months, an ESRP.
Letter 226-J – “Proposed Employer Share Responsibility Payment (ESRP)”
Letter 226J means the IRS thinks you owe an employer mandate penalty for failure to comply with the ACA. This is the initial letter issued to large employers to notify them that they may be liable for an ESRP.
Letter 227 – “Acknowledgement Letters”
The various Letters 227 are acknowledgement letters sent by the IRS to close an ESRP inquiry or provide the next steps regarding the proposed ESRP. There are six different Letters 227:
Letter 227-J acknowledges receipt employer’s response and confirms that the ESRP will be assessed. After issuance of this letter, the case will be closed. No response is required.
Letter 227-K acknowledges receipt of information provided by the employer and shows the ESRP has been reduced to zero. After issuance of this letter, the case will be closed. No response is required.
Letter 227-L acknowledges receipt of information provided by the employer and shows the ESRP has been revised. The letter includes an updated Form 14765, Employee Premium Tax Credit (PTC) Listing and revised calculation table. The employer can either agree or request a meeting with the IRS manager and/or Appeals department.
Letter 227-M acknowledges receipt of information provided by the employer and shows that the ESRP did not change. The letter provides an updated Form 14765 (PTC Listing) PDF and revised calculation table. The employer can either agree or request a meeting with the IRS manager and/or Appeals department.
Letter 227-N acknowledges the decision reached by the Appeals department and shows the ESRP based on the Appeals review. After issuance of this letter, the case will be closed. No response is required.
Letter 227-O acknowledges receipt of information provided by the employer and shows the ESRP has been revised. It is sent to Tax Exempt and Government Entities employers. The letter includes an updated ESRP summary table and Form 14764.
Letter 1948C – “Requesting Additional Information”
The IRS may issue Letter 1948C to ask for additional explanation or information to support the request to waive the proposed penalty. This may occur when the employer responds using any form of magnetic media (CD, DVD, thumb drive, etc.), as the IRS cannot accept information on electronic media.
Letter 3064C – “General Letter”
The IRS sends this letter to employers to inform them that IRS has decided on a penalty assessment or to request additional documentation or information regarding a proposed assessment that is still pending.
Notice CP504B – “Notice of Intent to Seize Property or Rights to Property”
The IRS sends this notice to inform employers of an unpaid amount due on an account. If the employer does not pay the amount due immediately, the IRS can seize (levy) certain property or rights to property and apply it to pay the amount owed.
Current IRS Enforcement Activity
Currently, the IRS is in the process of assessing Employer Shared Responsibility Payments (ESRP) for the 2021 tax year. An ESRP is assessed to employers who either did not meet the requirements to offer coverage to the required number of full-time employees or offered coverage that did not meet the ACA’s affordability and adequacy standards.
What Triggers a Penalty?
Liability is triggered by an IRS determination that, for at least one month in the applicable tax year, one or more full-time employees was enrolled in subsidized Marketplace coverage and the employer did not qualify for a safe harbor or other relief.
Penalties are payable when a full-time employee receives financial assistance, referred to as a Premium Tax Credit, or “PTC,” to purchase coverage, and no safe harbor applies to protect the employer. After the IRS determines an employer mandate penalty is owed, it notifies the employer by issuing the series of letters and notices described above.
Two situations can trigger a penalty:
- Failure to offer coverage to “Substantially All” full-time employees. This occurs when a large employer fails to offer coverage to at least 95% of full-time employees and their dependent children up to age 26, and at least one full-time employee receives a PTC to help with the cost of coverage.
- Offering inadequate or unaffordable coverage. This occurs when a large employer offers coverage to at least 95% of full-time employees and their dependent children, but at least one full-time employee receives a PTC to help with the cost of coverage that was either a) not offered, b) inadequate, or c) unaffordable.
How Should Employers Respond to a Penalty Notice?
Employers receive advance warning that an ESRP may apply before the IRS issues a demand for payment. The first notification is often IRS Letter 226J, the initial letter notifying an employer that an ESRP payment may be due.
Employers who receive a penalty notice should follow the steps in Letter 226-J to submit an employer shared responsibility response form (ESRP Response) using IRS Form 14764, either agreeing with the proposed penalty or disagreeing with the proposed amount. A response date, generally 30 days from the date of issuance, will be shown in the letter. Employers should take care to respond by the response date. If the employer does not respond, the IRS will generally issue a Notice and Demand for Payment (Notice CP220J) with instructions on how to pay the Employer Shared Responsibility Payment amount.
Employers can contest the proposed penalty by submitting Form 14764, noting any corrections that apply to individual employees on Form 14765, and providing supporting documentation by the deadline stated in the letter. The IRS will respond with yet another letter, Letter 227, describing additional steps the employer may need to take. Letter 227 may also contain further direction on how to appeal the proposed or revised penalty assessment. After responding, employers that still disagree can request a pre-assessment conference with the IRS and, following the conference, may appeal the penalty determination.
What Mistakes Can Cause Errant Penalty Assessments?
If you receive Letter 226J, pay close attention to the ESRP Summary Table contained within the letter. This table explains how the IRS calculated the proposed penalty amount. If any of the information on the ESRP Summary Table is incorrect, the employer should submit information to explain why. Following are a few common mistakes that can result in an erroneous proposed penalty:
- Incorrectly answering “No” on Part III, Column A of Form 1094-C. A “No” answer tells the IRS that your organization failed to offer coverage to substantially all full-time employees for a given month. If any full-time employee received a premium tax credit, this is an automatic penalty trigger.
- Entering the wrong full-time employee count on Part III, Column B of Form 1094-C. The full-time employee count for each month is used to calculate the penalty amount due. If this count is wrong, it can impact the penalty calculation.
- Erroneously issuing a Form 1095-C to part-time, non-benefitted employees. Only employees with full-time status for at least one month during the tax year (as determined by the look-back measurement method or monthly measurement method, as applicable) should be sent Form 1095-C. (A narrow exception applies to self-insured employers, who issue a Form 1095-C with special coding to all employees enrolled in the self-insured coverage.)
- Problems identifying members of the employer’s full-time workforce. Some employers may have had difficulty applying the look-back measurement method rules to determine full-time status or may have faced data limitations or technology challenges resulting in forms being issued to part-time, non-benefit eligible employees. There is no place on Form 14765 to let the IRS know that a particular employee should not have received Form 1095-C. If a penalty is proposed for an employee who was not full-time, the employer should check the box indicating “Additional Information Attached” and include a separate statement explaining that the form was issued in error.
- Entering the wrong offer code on Line 14 of the Form 1095-C. Certain codes are automatic penalty triggers if reported for a full-time employee. This includes code 1H (no offer of coverage), codes 1B, 1D, and 1J (offer to the employee did not include dependent children), and code 1F (coverage did not meet the ACA’s “minimum value” adequacy standard).
- Forgetting to enter a safe harbor on Line 16 of the Form 1095-C. In some cases, there was no offer, but the employer is protected from a penalty assessment because a safe harbor applies. Leaving off the applicable safe harbor code may result in a penalty assessment. Safe harbor codes include code 2A (not employed), code 2B (not full-time), code 2C (enrolled in the coverage offered), code 2D (permissible waiting period or initial measurement period for a new part-time, seasonal, or variable hour employee), code 2E (multiemployer interim rule relief for certain union plans), and codes 2F, 2G, and 2H (affordability safe harbors).
What Happens if An Employer Fails to Respond?
If an employer fails to respond to IRS correspondence, a notice and demand for payment will issue automatically. By far the best time to deal with mistakes is while the penalty is still proposed and before the assessment of the ESRP is made. Employers are urged to pay close attention to IRS correspondence and to take care to submit all information by the stated deadlines.
If after submitting additional documentation and information in response to Letter 226J and Letter 227, the IRS still believes that a penalty applies, employers can appeal. If an employer disagrees with the penalty proposed by the IRS after following the response process outlined in Letter 226J, it may request a pre-assessment conference with the IRS Office of Appeals. After the employer’s response is complete and the pre-assessment conference (if requested) concludes, the IRS will determine liability. If the IRS decides the employer owes a penalty, it will issue a demand for payment of the assessed ESRP. Employers can submit questions about the ESRP calculations, request abatement, or challenge the assessment in court.
Frequently Asked Questions
I made a mistake when coding my Forms 1095-C. Can’t I just correct and re-file?
Generally, not after Letter 226J has been issued. Once the penalty notification process has begun, all corrections to Form 1095-C must be made using Form 14765, the Employee Premium Tax Credit (PTC) Listing. Employers should note all corrections to the Form 1095-C lines 14 and 16 codes on Form 14765. Depending on the situation, you may also need to issue corrected Forms 1095-C to impacted recipients.
The summary of information reported to the IRS is wrong. Can I amend my organization’s Form 1094-C to correct it?
Not after receiving Letter 226J. Employers can attach additional information to their response. This is your opportunity to explain any corrections that need to be made to your organizations, Form 1094-C. Carefully review the “ESRP Summary Table” contained in Letter 226J. Some employers have discovered discrepancies in the information reported. This can lead to a penalty being proposed where none is owed.
Where can I get more information?
In addition to Q&As 55-58, the IRS released a guide to help employers understand Letter 226-J.
Tips
- Consider engaging professional help. ACA penalties can be significant, and ACA rules are complex. Employers may need to hire expert assistance.
- Respond timely to all correspondence. Failure to timely respond may result in a notice and demand for payment.
- Request an extension if necessary. If you need more time to gather information and put together a thorough, well-thought-out response, contact the IRS at the number listed on Letter 226J and request an extension of time as soon as possible.
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