IRS Begins Enforcement of the Affordable Care Act’s Employer Penalty

Under the Affordable Care Act, large employers who do not provide certain coverage to full-time employees may owe a tax known as the employer shared responsibility penalty. The penalty took effect on January 1, 2015, but has not been enforced until now. The Internal Revenue Service (IRS) recently announced the process it will follow this year to enforce the penalty for calendar year 2015. Large employers that receive a new Form Letter 226J from the IRS should review it immediately because a response will generally be required within 30 days.

Criteria for Paying the Penalty

Large employers1 are subject to a penalty under Internal Revenue Code (IRC) Section 4980H(a) if they do not offer health coverage to their full-time employees (and those employees’ dependent children). A large employer will be treated as having offered coverage to its full-time employees and their dependent children for a calendar month if, for that month, it offers coverage to 95 percent (70 percent in 2015) of its full-time employees (and to their dependent children through the end of the month in which they turn 26).

The employer shared responsibility penalty will also apply under IRC Section 4980H(b) to large employers that offer health coverage to their full-time employees if that coverage does not provide minimum value — defined generally as paying, on average, at least 60 percent of expected claims costs2 — or is not considered affordable under various safe harbors established in implementing regulations.3

Process for Enforcing the Penalty for 2015

The IRS recently updated its Questions and Answers on Employer Shared Responsibility to include details about the enforcement process. Starting in late 2017, the IRS began sending Letter 226J to large employers that the IRS believes may owe a penalty for 2015. The IRS is identifying such employers by reviewing the Forms 1095-C and 1094-C filed by large employers for the 2015 calendar year, along with full-time employees’ tax returns, which will include information about whether that full-time employee received a premium assistance tax credit for federal Marketplace/state Exchange coverage (the event that triggers the penalty).

Letter 226J includes a table itemizing the proposed penalty payment for each month of 2015, a list of full-time employees who received premium assistance for at least one month during 2015 (on Form 14765), a description of the actions that an employer should take if it agrees or disagrees with the IRS position (including returning a new response form, Form 14764, to the IRS), and a description of the actions the IRS will take if the employer does not respond by the deadline.

As the response time will generally be 30 days from the date of Letter 226J, any employer receiving this letter will need to take immediate action to determine if it agrees or disagrees with the penalty amount. Employers that disagree with the penalty amount — and respond to the IRS by the deadline set in Letter 226J — will have the opportunity to provide additional information to the IRS, including through a conference with the IRS Office of Appeals, before the IRS issues a formal notice and demand for payment.

Implications for Employers

Given the short response time of 30 days, it is essential that employers review the letter with legal counsel and other professional advisors as soon as possible upon receipt and devise a plan for responding to the IRS. In the meantime, employers should contact any professional services firms that may have assisted them in completing and filing the forms, and determine what type of assistance these companies can provide if the employer receives a letter.

How Sibson Can Help

Sibson works with plan sponsors and their legal counsel on compliance issues. This includes providing guidance on the employer penalty and the related reporting forms that the IRS is using to identify employers that may owe a penalty.


For more information about how these new rules may affect your plan, please contact your Sibson consultant or the Sibson office nearest you.


1 In 2015 only, the penalty applies to employers with at least 100 full-time employees (those who work on average 30 or more hours per week) on business days during the previous year. Starting in 2016, the penalty applies to employers with at least 50 full-time employees.

2 To meet the minimum value standard, the plan must also provide significant coverage for inpatient hospitalization and physician services.

3 For more information on affordability and how the employer penalty is calculated, see Sibson Consulting’s January 15, 2015 Capital Checkup, “Affordable Care Act's Employer Shared Responsibility Penalty Takes Effect in 2015.”


Update is Sibson Consulting’s electronic newsletter summarizing compliance news. Update is for informational purposes only and should not be construed as legal advice. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.


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News Highlights:


  • The IRS recently announced how it will enforce the employer shared responsibility penalty for 2015.
  • The IRS will send Letter 226J to any large employer that the IRS believes owes a penalty for one or more months of 2015.
  • In light of the 30-day deadline to respond to Letter 226J, employers will need to take immediate action as soon as they receive it.