Employer Guide & Glossary
IRS 226J PENALTY LETTERS
The IRS issues 226J PENALTY LETTERS when ALEs fail to comply with the EMPLOYER SHARED RESPONSIBILITY PROVISION [also called the EMPLOYER MANDATE] under the AFFORDABLE CARE ACT [ACA].
More specifically, IR CODES 4980H(a) and 4980H(b). We refer to the respective penalties relating to these codes as PENALTY A & PENALTY B.
PENALTY A
PENALTY A relates to IR CODE 4980H(a) and tends to incur more punitive fines than PENALTY B. A 4980H(a) penalty is incurred by the employer when both the following transgressions are made:
- The employer fails to make offers of MINIMAL ESSENTIAL COVERAGE [MEC] to at least 95% of its FULL-TIME EMPLOYEES & their dependents.
- AND at least one employee who should have been made an offer instead received a PREMIUM TAX CREDIT (PTC) from a state or federal HEALTHCARE MARKETPLACE.
- NOTE: HOW BIG ARE PENALTY A FINES? For TY21 [the latest IRS penalty letters issued], 4980H(a) NON-COMPLIANCE means the employer is fined an annualized penalty of $2,700 [or $255 a month] for every FULL-TIME EMPLOYEE on its workforce [minus 30 standard exemptions]. In other words, this is an all or nothing fine, not just a sum for each offending PTC issued.
- For TY23 this figure has gone up to $2,880 per employee and will rise to $2,970 in TY24. So an ALE with 230 FULL-TIME EMPLOYEES, for example, would be fined $540,000 [200 x $2,700] for non-compliance in TY21 — even if only one employee eligible for cover made a PTC claim.
- The IRS has already announced that PENALTY A for TY25 will actually go down compare to TY24 penalties — to $241.67 a month or $2,900 annualized.
PENALTY B
The other non-compliance penalties relate to IR CODE 4980H(b). These fines are incurred by the employer when both the following transgressions are made:
- The employer offered full-time employees coverage that DID NOT meet either AFFORDABILITY or MINIMUM VALUE criteria — or both.
- AND at least one of these employees received a state or federal PTC.
- NOTE: HOW BIG ARE PENALTY B FINES? Unlike 4980H(a) fines, the 4980H(b) penalty is applied on a per-case basis. When employees receive a PTC, the IRS cross-references the employer’s FORM 1095-C filings to check if the employees were offered MINIMUM ESSENTIAL COVERAGE that met MINIMUM VALUE and was AFFORDABLE.
- For every failure in TY21, the employer is subject to an annualized penalty of $4,060 [$338.33a month]. For TY23 this figure has gone up to $4,320 per employee and will rise to $4,460 in TY24.
- So, for example, if 100 FULL-TIME EMPLOYEES obtained PTCs in TY21 because the offered cover was unaffordable, the employer would be fined $406,000 [100 x $4,060].
- For TY25, PENALTY B is $362.50 per month, or an annualized $4,350, per employee. This is also a decrease from the TY24 annualized amount of $4,460.
WHAT TO DO NEXT
If you receive a 226J PENALTY LETTER for any tax year, be sure to respond quickly. Within 30 days of the date the penalty letter was issued, you will need to provide the IRS with a raft of relevant data, such as health plan details and affordability calculations. The letter will include the IRS employee to be contacted and instructions on how to respond.
BENEFITSCAPE recommends you enlist specialist support assembling this response, particularly if you wish to contend part or all of the penalty assessment against you.
As the leading specialist in ACA compliance, BENEFITSCAPE frequently exercises power of attorney on behalf of employers who have received a 226J PENALTY LETTER.
BENEFITSCAPE helps employers assemble quickly and accurately all the relevant data needed to respond to the IRS. It also runs ACA REGTECH DIAGNOSTICS on the employer’s IRS submission to identify if the penalty has been triggered by filing errors or non-compliance.
Whatever triggers the 226J, BENEFITSCAPE can help with PENALTY REMEDIATION.
Last year alone, BENEFITSCAPE saved employers over $50 million in IRS fines.
The best solution to penalty notices is, of course, prevention. So please do not hesitate to contact BENEFITSCAPE for support with your ACA compliance.
BENEFITSCAPE works for 1000s of employers of all sizes, in all sectors, and on all HCMs and ACA modules, providing best-in-class ACA services and intelligent FLAG & FIX REGTECH DIAGNOSTICS.