Paying the Piper: IRS Issues New 4980H Penalty Guidance and Letter 226J
The IRS recently updated its Frequently Asked Questions (“FAQs”) on Employer Shared Responsibility Provisions under the Affordable Care Act (“ACA”). The updates to FAQs 55-58 provide information on how the IRS will assess employer shared responsibility payments under Code Section 4980H (“Code Section 4980H penalties”) against employers. Specifically, in late 2017, the IRS will use Letter 226J to notify applicable large employers (ALEs) of proposed Code Section 4980H penalties. The IRS will use information reported on the employer’s 2015 Forms 1094-C and 1095-C and information about the ALE’s full-time employees who received a premium tax credit to make penalty determinations. Given the very short timeframe to respond to the penalty notification, ALEs should immediately gather their records regarding compliance with Code Section 4980H for the 2015 calendar year, including 2015 Forms 1094-C and 1095-C submitted to the IRS. An overview of the assessment process is below.
ALEs that fail to offer affordable, minimum value coverage to their full-time employees may be liable for penalties under Internal Revenue Code Section 4980H. Per IRS Notice 2015-87, the 2015 annual adjusted penalty amounts are $2,080 under Code Section 4980H(a) and $3,120 under Code Section 4980H(b). ALEs must comply with annual reporting requirements using the applicable Forms 1094 and
1095 and their corresponding instructions. The IRS will determine an ALE’s 2015 liability for Code Section 4980H penalties, and the amount of the potential penalty, based on information reported to the IRS on the employer’s 2015 Forms 1094-C and 1095-C and information about the ALE’s full-time employees who received a premium tax credit.
Penalty Assessment Process
1. Letter 226J Notification of Proposed Penalty
In late 2017, the IRS will send Letter 226J to notify ALEs of proposed Code Section 4980H penalties for the 2015 calendar year. Letter 226J will include, among other things, an itemization of the proposed penalty payment by month, a list of the ALE’s employees who received a premium tax credit on Form 14765 for whom the ALE did not qualify for an affordability safe harbor or other transition relief (see instructions for Forms 1094-C and 1095-C, Line 16), and the indicator codes the ALE reported on lines 14 and 16 on the applicable Form 1095-C.
Note: Employers are reminded that several forms of transition relief applied for purposes of Code Section 4980H in 2015. The use of a form of transition relief would have been notated on the 2015 Forms 1094-C and 1095-C.
2. Employer’s Response to Letter 226J
ALEs have only 30 days to provide a response to the IRS. If an ALE fails to provide a response to Letter 226J within 30 days, the IRS will assess the proposed penalty.
Letter 226J will include specific instructions for ALEs who wish to dispute the proposed penalty. The ALE will respond to Letter 226J by completing Form 14764 and submitting it to the IRS by the response date included in Letter 226J (generally 30 days from the date of Letter 226J). The ALE can include a signed statement explaining why the ALE disagrees with part or all of the proposed penalty. Supporting documentation should be included with the statement. The statement should describe changes, if any, the ALE wants to make to the information reported on Forms 1094-C or 1095-C.
3. IRS Acknowledgement of Response (Letter 227) and Requesting Pre-Assessment Conference
The IRS will acknowledge receipt of an ALE’s response to Letter 226J with an appropriate version of Letter 227 (a series of five different letters that, in general, acknowledge the response to Letter 226J and describe further actions the employer may need to take).
If an ALE still disagrees with the proposed or revised penalty received in Letter 227, the ALE may request a pre-assessment conference with the IRS Office of Appeals. The ALE should follow the instructions provided in Letter 227 and Publication 5 (Your Appeal Rights and How To Prepare a Protest if You Don’t Agree) for requesting a conference with the IRS Office of Appeals. A conference should be requested in writing by the response date shown on Letter 227 (generally 30 days from the date of Letter 227).
4. IRS Notice and Demand For Payment
If after all the correspondence described above between the IRS and an ALE (or a pre-assessment conference with the IRS Office of Appeals) the IRS determines that the ALE is liable for a penalty, or if an ALE does not respond to either Letter 226J or Letter 227, the IRS will assess the penalty and issue a notice and demand for payment using Notice CP 220J. Notice CP 220J will include instructions on how to make payment. ALEs will not be required to include the payment on any tax return that they file or to make any payment before a notice and demand for payment is made.
Employers must immediately take steps to gather their records regarding Code Section 4980H compliance during the 2015 calendar year. This includes gathering 2015 Forms 1094-C and 1095-C, which may need to be requested from a third party vendor.
It is important to closely monitor any correspondence you receive from the IRS during the coming months. Given the potential for employee absence during the upcoming holiday season, employers should have contingency plans in place to ensure IRS correspondence is promptly routed to the appropriate contact person.
Employers receiving Letter 226J, may want to contact legal counsel for assistance in preparing a response to the IRS. The coming months are a busy time given other employer obligations (including W-2s and 2017 Forms 1094 and 1095 to name a few) and employers may want to begin thinking about how they will manage responding to the IRS from a work-flow perspective. Care should be taken to respond within all applicable deadlines.
The content herein is provided for educational and informational purposes only and does not contain legal advice. Please contact our office if you have any questions about Letter 226J or compliance with Code Section 4980H.
Dated: November 20, 2017