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

Receiving IRS Letter 226-J can be unsettling, but the letter is a proposal, not a final bill. It means the IRS believes an Applicable Large Employer may owe an Employer Shared Responsibility Payment, or ESRP, for a specific calendar year. The calculation generally combines information reported on Forms 1094-C and 1095-C with information showing that one or more full-time employees received a premium tax credit through the Marketplace.

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. The IRS generally allows about 30 days from the date of the letter, but the date printed on your Letter 226-J is the date that matters. 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.

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 2026 plan years, the IRS affordability percentage is 9.96% for the applicable safe harbors. The indexed 2026 annual amounts are $3,340 for the Section 4980H(a) calculation and $5,010 for the Section 4980H(b) calculation. 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. 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

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. 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.