For years, the 30-day response window for IRS Letter 226J limited available time for employers to locate and audit historical records. That has finally shifted with the enactment of the Employer Reporting Improvement Act.
The Act now mandates a 90-day response window for proposed penalty assessments. This change acknowledges the operational complexity of ACA compliance and provides the time to accurately review your data from prior tax years.
You can focus on thoroughly identifying errors and preparing a robust defense to eliminate unwarranted penalties, rather than prioritizing speed over accuracy.
How to Use the 90-Day Window Strategically
The primary driver of ACA penalties is often data discrepancies rather than actual non-compliance. Common triggers include incorrect Line 14 codes, unrecorded waivers, or employees flagged as “full-time” who were actually in a Limited Non-Assessment Period.
With 90 days, you can move beyond a surface-level review to a full eligibility redetermination. This allows you to audit the payroll data for the penalized year, re-run measurement periods, and validate the IRS findings against your internal records.
How Do You Validate Retroactive ACA Affordability?
Penalties often arise (even when health coverage was offered) when Line 16 is left blank, leading the IRS to assume coverage was unaffordable. The extended window allows you to test W-2 wages or Rate of Pay against the affordability threshold for that tax year. If the employee met a Safe Harbor, you can correct the code to eliminate the assessment.
How to Approach Your Penalty Letter Response
The danger of a longer deadline is complacency. The IRS assessment process remains automated, and delaying your resolution can lead to additional interest accrual if the penalty is upheld.
To avoid a scramble, we recommend structuring your defense into three distinct phases:
The Discovery Phase: What Should You Look for in the ESRP Summary Table?
- Objective: Information gathering
- Actions: Review the ESRP Summary Table in Letter 226J to understand your total liability breakdown (4980H(a) vs. 4980H(b)). Then, review Form 14765 (Employee Premium Tax Credit List) to identify the specific employees who triggered the assessment. Retrieve raw payroll and benefits data for the relevant tax year immediately.
The Redetermination Phase: How Do You Audit Form 14765 for Coding Errors?
- Objective: Forensic analysis
- Actions: This is the critical audit phase. Re-calculate the eligibility of every employee listed on Form 14765. Identify the specific coding errors (e.g., a missing 2A code for a non-employed month) and draft the technical arguments for each disagreement.
The Defense Phase: How Do You Complete Form 14764 to Dispute the Assessment?
- Objective: Finalization
- Actions: Complete Form 14764 (ESRP Response) to formally disagree with the assessment. Mark your corrections directly on Form 14765 (using the column for corrected codes). Attach all supporting documentation, including plan documents and waivers, and submit the package via certified mail.
How Do I Prove My Full-Time Employee Counts to the IRS?
While the Employer Reporting Improvement Act gives you more time to respond to 226J penalty assessments, the IRS is simultaneously increasing the burden of proof required during non-filing (5699) audits. The agency is no longer accepting summary data at face value; they are demanding the math behind your compliance.
As you utilize your 90-day 226J response window, be prepared to address documentation demands for non-filing penalties:
The “Non-Filer” Inquiry (Letter 5699)
Often a precursor to a financial penalty, IRS Letter 5699 is sent to employers who the IRS suspects were ALEs but failed to file Forms 1094-C and 1095-C.
- The Risk: Ignoring Letter 5699 creates a presumption of non-compliance, often triggering a massive failure-to-file penalty assessment. Crucially, Letter 5699 is not covered by the new 90-day extension under the Employer Reporting Improvement Act. You still only have 30 days to respond.
- The Defense: You must provide definitive proof of your status. If you were not an ALE for that tax year, you must provide the payroll data showing your full-time equivalent (FTE) count remained below 50. If you did file, you must produce the specific receipt ID and submission status to prove the IRS simply lost the record.
How Trusaic Can Help With Penalty Letter Response
The Employer Reporting Improvement Act has provided a more realistic timeline, but it hasn’t changed the burden of proof. It remains entirely on the employer to demonstrate why the IRS assessment is incorrect.
We have saved our clients more than $1 billion in ACA penalties, with many achieving reductions of 90% or more. Our Penalty Response Service maximizes the new 90-day window to build a defensible case through:
- Penalty Risk Assessment: We review your notice to determine the validity of the assessment and estimate your potential reduction.
- Data Correction & Analysis: We identify the underlying data discrepancies (such as missing filings or incorrect codes) and perform the necessary data corrections to satisfy IRS requirements.
- Customized Response: We craft a tailored response letter and handle all necessary IRS correspondence, providing expert guidance throughout the entire resolution process.
Responding to Letter 226J is a complex data challenge. If you have received a penalty notice, contact Trusaic immediately.
