The IRS ESRP Letter 226-J And What You Can Do About It

A group of business people discussing the IRS ESRP Letter 226-J and potential actions.

The Affordable Care Act (ACA) requires businesses of a certain size to offer sufficient health insurance coverage to employees of certain eligibility. If your business received a Letter 226-J from the IRS, it means that they have calculated Employer Shared Responsibility Penalties (ESRP). The IRS makes these calculations by data reported, for not providing either health insurance coverage for your employees, or for not providing affordable coverage.

The IRS bases this information off the income tax and 1094-C and 1095-C forms, filed by your business.

What is the ESRP?

The ESRP is a provision that requires employers to offer health insurance with minimum essential coverage that is also affordable. It may also be commonly referred to as the Employer Mandate or the Pay or Play act.

These employers have certain obligations to provide insurance and submit IRS information reporting to determine eligibility for premium tax credits.

What businesses are affected by the ESRP?

The ESRP applies to all Applicable Large Employers (ALEs). To find out if you are an ALE and if the Employer Shared Responsibility Penalty affects your business, you need to calculate the average full-time employee equivalents for your business in a year.

If you have less than 50 full-time employee equivalents, there are tax cuts for employers who provide coverage for their employees and the ESRP will not apply to your business.

If you have 50 or more full-time employee equivalents, your business is an ALE and you will be mandated to offer affordable minimum essential coverage health insurance.

You will need to continually monitor the number of employees you have every month, throughout the year, because it will make a difference in your obligation to comply. This is particularly important for businesses who hire seasonal employees.

How do I determine how many full-time employee equivalents are in my company?

A full-time employee, as defined by the federal government, is someone who works 30 hours a week and a part-time employee works 15 hours.

To find out the number of full-time employee equivalents you have, you must first add up the total number of hours worked by your part-time employees. Divide it by the number of hours a full-time employee would work in that period.

For example, two part-time employees who work 15 hours a week would equal one full-time equivalent employee working 30 hours a week.

Add the number of full-time employees equivalent to the number of full-time employees. If it exceeds 50, you are an Applicable Large Employer and the ESRP will apply.

If the mandate applies to my business, what steps do you need to take to remain in compliance?

A monthly review of your workforce, payroll, and benefits data will help you decide how to comply with the ACA’s employer guidelines for the ESRP. There are two provisions that apply to ALEs – the coverage mandate and the IRS reporting mandate.

The insurance you offer to your employees must be affordable and minimum essential. What that means is that the amount your employees are paying for their insurance cannot exceed 9.5% of their total household income and that your insurance plan must cover at least 60% of the total cost for healthcare.

It’s important to work with an employee benefits specialist, such as your Primary Care Insurance Solutions agent, to make sure that your plan meets minimum essential coverage.

You need to prove that you offered the right plan suitable to your employees and at the right time.

What are the possible ESRP penalties?

If you don’t provide coverage, you will have to pay a penalty of $2,000 for each employee, per year, with the exception of the first 30 employees.

If your coverage is too expensive or offers inadequate coverage, and any of your employees receive a federal subsidy from the exchange, then you’ll be required to pay $3,000 per employee, per year.

What to do if you’ve received the 226-J letter?

Your 226-J letter will explain what you are being penalized for and how it was calculated. Review the information given and compare it to the tax forms 1094-C and 1095-C to ensure that all information is correct. It will also include a response form to fill out, stating whether you’d like to appeal against it or accept it.

If you are agreeing to the penalty you’ve received, turn in a full payment along with your response form.

To indicate that you disagree with the letter, you must provide proof of offering adequate coverage and return all documents by the deadline given in your letter – usually 30 days.

Keep in mind that the letter is not a bill, but a proposed liability. It helps to call the number in your 226-J letter and notify them of your decision and that a response will be turned in. You may also call to request an extension if you need more time to prepare a response.

It is our initiative and responsibility to remain current on the Affordable Care Act and legislative changes and to diligently report those updates to our clients to ensure full understanding and administrative ease.

Frequently Asked Questions

What does receiving a Letter 226-J from the IRS indicate for a business?

Receiving a Letter 226-J from the IRS signifies that the business is being assessed Employer Shared Responsibility Penalties (ESRP) for either not providing health insurance coverage for employees or not offering affordable coverage.

What does the Employer Shared Responsibility Penalty (ESRP) require employers to do?

The ESRP mandates employers to offer health insurance with minimum essential coverage that is also affordable, to avoid penalties related to non-compliance.

Which businesses are affected by the ESRP?

The ESRP applies to Applicable Large Employers (ALEs). Businesses with 50 or more full-time employee equivalents are considered ALEs and must offer affordable minimum essential coverage.

How can a business calculate its full-time employee equivalents?

To calculate full-time employee equivalents, add the total hours worked by part-time employees and divide by the hours a full-time employee would work in the same period.

What is the monthly review businesses need to perform to comply with the ACA’s employer guidelines?

A monthly review of workforce, payroll, and benefits data is necessary to ensure compliance with the ACA’s employer guidelines. Two provisions apply to ALEs: the coverage mandate and IRS reporting mandate.

What constitutes affordable and minimum essential coverage health insurance?

Affordable health insurance must not cost employees more than 9.5% of their total household income. Minimum essential coverage plans must cover at least 60% of the total healthcare cost.

What steps should a business take upon receiving a Letter 226-J from the IRS?

Upon receiving a Letter 226-J, review the information provided, compare it to tax forms 1094-C and 1095-C, and consider appealing if necessary. The letter includes a response form to indicate agreement or disagreement with the proposed penalty.

How should a business respond if it disagrees with the penalty stated in Letter 226-J?

If a business disagrees with the penalty, it must provide proof of offering adequate coverage and submit all required documents by the specified deadline, typically within 30 days of receiving the letter.

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