The IRS will be sending enforcement notices by December 2017 to applicable large employers (ALEs) on what they owe for penalties under the Affordable Care Act’s (ACA) employer shared responsibility mandate for 2015 tax year filings.

This notice is called Letter 226J.

Penalty: Failure to Provide Coverage

Under the ACA, if an ALE fails to offer coverage to enough of its full-time employees, then they are subject to section 4980H(a) of the Internal Revenue Code and the original annual penalty of $2,000 ($2,260 in 2017).

An employer who does not offer “minimum essential coverage” (MEC) to at least 95% of its full-time employees and their dependents may be subject to a penalty. The penalty is calculated monthly. The annual penalty is the sum of 12 months of penalties. The monthly penalty is $166.66 per month (for 2015) times the total number of eligible full-time employees, minus the first 30 employees.

IMPORTANT DUE TO TRANSITION RELIEF IN PLACE AT THAT TIME: When calculating the 4980H(a) penalty, employers receive a credit of 80 full-time employees in 2015. For example, a company with 100 full-time employees only has to consider 20 employees for purposes of the penalty. Additionally, for 2015 only, the transition relief decreased the minimum offering percentage from 95% to 70%.

Penalty: Failure to Offer Affordable Coverage That Provides Minimum Value

An ALE may be subject to the 4980H(b) $3,000 annual penalty ($3,390 in 2017) If an employer does offer MEC to at least 95% of its full-time employees and their dependents (70% in 2015), but the coverage is not ‘affordable’ or doesn’t provides ‘minimum value.’ The ALE would be subject to a monthly penalty equal to $250 (in 2015) for each full-time employee who purchases coverage through a Marketplace and qualifies for a premium tax credit (subsidy).

For purposes of any penalty assessment, the IRS determines whether an employer may be liable for an employer shared responsibility payment, and the amount of the potential payment, based on information reported on Forms 1094-C and 1095-C and information about those full-time employees that are allowed the premium tax credit.

If you think you may receive a Letter 226J, now is the time to seek outside counsel to help you provide a timely and complete response.

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Disclaimer: Please note that this is not all inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.  Consult your own legal advisor regarding specific application of the information to your own plan.