Received IRS Letter 226-J? ACA Employer Penalty Response Checklist

IRS Letter 226-J proposes an ACA Employer Shared Responsibility Payment; it is not a final bill. Employers should preserve records, reconcile employee-month data and respond with evidence. The Employer Reporting Improvement Act adds an at-least-90-day response period for covered proposals and a six-year assessment limit for qualifying returns, with different effective-date rules.

Do not assume the proposal is correct, and do not set it aside. The response date printed on page one controls your next step. The right approach is to preserve the record, reconcile the IRS list month by month, and involve the people who can evaluate the benefits, payroll, reporting, and tax issues.

1. Calendar the response date immediately

Record the exact response date from the letter, identify the IRS contact named in it, and assign one person to coordinate the response. Under Section 4 of the Employer Reporting Improvement Act, the IRS must allow at least 90 days from the date of the first letter proposing an ESRP before taking further action. This applies to assessments proposed in taxable years beginning after December 23, 2024. Do not apply a blanket 30-day rule to a covered proposal. If the printed date appears inconsistent with this protection, promptly contact the IRS and counsel to resolve the discrepancy rather than ignoring the notice. If you need more time, contact the IRS representative promptly and ask whether an extension is available. Do not assume a request changes the deadline unless the IRS confirms it.

Notify your benefits adviser, payroll or ACA reporting vendor, and the person responsible for tax filings. Bring in benefits counsel or tax counsel when the proposed amount is material, the facts are disputed, related companies are involved, or you are unsure how to characterize an employee or coverage offer. A broker can organize plan and enrollment records, but legal and tax conclusions belong with the appropriate counsel.

Understand the six-year assessment limit

Section 5 of the Employer Reporting Improvement Act establishes a six-year assessment period beginning on the due date for the Section 6056 return, or the actual filing date if later, for the calendar year at issue. The rule applies to returns due after December 31, 2024; it does not automatically close every older employer-mandate year. Have tax counsel evaluate the filing history and applicable exceptions before asserting that a proposal is out of time.

The assessment limit is not a universal record-destruction deadline. Preserve documents while a proposal, appeal or related dispute is open and assess other retention duties. Retain proof of the original return’s filing date, not just a vendor invoice, because the later filing date can affect the assessment period.

2. Preserve every relevant record

Place a hold on records for the calendar year identified in the letter. Keep the letter, Form 14764, the Form 14765 employee listing, all Forms 1094-C and 1095-C, transmission receipts, correction files, payroll records, hours-of-service data, eligibility files, enrollment and waiver records, contribution schedules, plan documents, and communications showing when coverage was offered.

Preserve records by employee and month. Include information for hires, rehires, terminations, leaves, transfers, seasonal workers, and variable-hour employees. If you used a look-back measurement method, retain the measurement, administrative, and stability-period calculations. Keep a complete copy of everything sent to the IRS plus proof of delivery.

3. Reconcile Forms 1094-C and 1095-C

Start with the employees and months on Form 14765. Compare each entry with the corresponding Form 1095-C and the underlying benefits and payroll records. Check the offer code on Line 14, the employee contribution on Line 15, and the safe-harbor or relief code on Line 16. Confirm whether the employee was full-time, whether an offer was made, whether the employee enrolled or waived, and whether a waiting period or limited non-assessment period applied.

Then reconcile Form 1094-C. Confirm full-time employee counts, total employee counts, the 95% offer indicator, and the Authoritative Transmittal. A coding error, omitted correction, incorrect Social Security number, or employee reported under the wrong EIN can produce a proposal that does not match the employer's actual offer. If a filing needs correction, coordinate the correction with the response rather than submitting unexplained changes.

4. Review the controlled group

The 50-full-time-equivalent ALE test aggregates businesses under common ownership or control. Once the group is an ALE, each separate employer generally reports as its own ALE Member under its own EIN. Review ownership charts, acquisitions, dispositions, payroll transfers, and employee assignments for the year at issue. Confirm that the letter names the correct entity and that employees were not omitted, duplicated, or reported under an affiliate's EIN.

Controlled-group questions can change both ALE status and the penalty calculation. This is a strong reason to involve tax counsel rather than relying only on benefits administration records.

5. Test the proposed ESRP against the correct year's rules

Letter 226-J concerns a past calendar year, so use the affordability percentage and penalty amounts for the year identified in the letter, not today's figures. For current planning figures and the difference between the two penalty calculations, consult the ACA employer mandate, affordability and penalties guide. Those figures do not replace the historical amounts for an earlier letter year.

The Section 4980H(a) issue generally concerns failure to offer minimum essential coverage to at least 95% of full-time employees and their dependents when at least one full-time employee receives a premium tax credit. The Section 4980H(b) issue can arise when a particular full-time employee receives a premium tax credit because the offer was unaffordable or did not provide minimum value. Review the proposed calculation under the provision and calendar year shown in the letter.

For a broader review of the employer rules, see ACA Employer Responsibilities for Houston Businesses. Primary Care Insurance Solutions (PCI Solutions) also provides ongoing HR compliance and benefits support and can help gather plan, enrollment, and contribution records.

6. Prepare a clear, supported response

The IRS explanation of Letter 226-J describes the proposal, response forms and next steps. Use this response checklist to keep ownership and evidence clear:

1. Calendar the printed deadline, check the statutory response period and resolve discrepancies promptly.
2. Preserve the letter, filing receipts, payroll and benefits records for the year at issue.
3. Reconcile each Form 14765 employee and month to Forms 1095-C and 1094-C and the underlying records.
4. Have the appropriate tax or benefits professional review ALE status, safe harbors, calculations and the assessment period.
5. Complete Form 14764 and any Form 14765 corrections, attach indexed support, and retain the signed response and proof of delivery.

If you agree, follow the payment and signature instructions in the letter. If you disagree, complete Form 14764, mark corrections or explanations on Form 14765, and attach a concise month-by-month explanation with supporting documents. Use an index so the IRS reviewer can connect each disputed employee and month to the evidence.

Before sending, have the response reviewed by the appropriate benefits and tax professionals. Confirm the delivery method, retain the tracking record, and keep a final copy. After the IRS responds, compare any Letter 227 or later notice with the position you submitted and meet the next stated deadline.

Make the next filing easier to defend

Once the immediate response is complete, fix the process that produced the mismatch. Use the ACA reporting forms and deadlines guide to reconcile payroll, eligibility, enrollment, and ACA codes before filing; document who owns corrections; and review related-entity reporting each year. If you need help organizing the benefits side of the record, contact PCI Solutions. We can work with your reporting vendor and counsel without pretending that a benefits review replaces legal or tax advice.