United States: Irvine Attorney Previews New ACA Penalties

Last Updated: November 8 2018
Article by Melissa Shimizu

What You Need to Know

Within the last few months, employers have begun to be assessed fines by the IRS in Letters 226J for not complying with employer shared responsibility payments (ESRPs) dating back to 2015. Employers have 30 days to challenge or accept an ESRP penalty. While there is nothing they can do to prevent penalties from 2015, employers should make sure to submit all applicable 2018 tax forms in a timely manner to not repeat prior mistakes.

Beginning in November 2017, employers began to receive Letters 226J from the IRS regarding potential liability for employer shared responsibility payments (ESRPs) pursuant to the Affordable Care Act's employer "play-or-pay" mandate. The first of these letters proposed and assessed Section 4980H(a) penalties for 2015 — the first year "applicable large employers" (ALEs) could be assessed ESRPs. Since then, employers began to be assessed penalties for noncompliance of Section 4980H(b), which has the potential to cover a much broader group of employers.

Types Of Penalties

There are two types of ESRPs: Section 4980H(a) and (b) penalties. An (a) penalty may be assessed when an ALE does not offer minimum essential coverage to at least 95 percent of its full-time employees, and at least one full-time employee receives a premium tax credit (PTC). However, for 2015, there was transitional relief so that ALEs only had to offer coverage to at least 70 percent of their full-time employees to avoid the (a) penalty.

A (b) penalty may be assessed if an ALE offers minimum essential coverage to at least 95 percent of its full-time employees, but at least one full-time employee receives a PTC because the particular coverage offered was not considered affordable and/or did not provide minimum value.

The Letter 226J

Letter 226J will include:

  • an explanation of the penalty;
  • a table summarizing and itemizing the proposed payment for each month;
  • a response form (Form 14764);
  • an Employee Premium Tax Credit (PTC) Listing (Form 14765), which lists by month all of the employer's full-time employees who received a Marketplace subsidy and were not reported as being offered employer coverage that met an affordability safe harbor; and
  • a description of the actions the employer should take, depending on whether it agrees or disagrees with the proposed payment.

Challenging an ESRP Assessment

In general, ALEs have 30 days to challenge or accept an ESRP penalty. In our experience, the IRS has been very reasonable in granting extensions of between 30 and 60 days. If the IRS does not receive a response by the due date, it may issue a Letter 5040-J, requiring payment within 15 days.

If an ALE challenges an ESRP penalty, it should explain in writing why the penalty does not apply. Many times, this requires describing errors on Forms 1094-C and/or 1095-C. When possible, it is preferable to provide supporting documentation. On occasion, when ALEs challenged the (a) penalties and the IRS ultimately agreed that the ALE had offered minimum essential coverage to at least 70 percent of their full-time employees in 2015 and avoided (a) penalties, the IRS then went on to assess (b) penalties instead.

(b) Penalty Assessments Received

Within the last few months, ALEs began to receive Letters 226J relating solely to (b) penalties for 2015. Prior to this, we had not seen IRS send Letters 226J that did not involve (a) penalties. This is significant, because it could mean that most of the 2015 (a) penalty letters have already been sent.

It is also significant because (b) penalties will likely impact a much broader range of ALEs.

Appealing IRS Penalties

After an ALE responds to a Letter 226J, the IRS will respond with a Letter 227. These Letters 227 may include a revised proposed penalty (Letter 227L) or inform the ALE that it does not owe a penalty at all (Letter 227K). If a Letter 227K is received, the case is closed and no response is required. If an ALE receives a Letter 227 and the ALE disagrees with the revised proposed assessment, it may request a pre-assessment conference with the IRS Office of Appeals. Depending on the ALE's reasons for disagreement, it may be worthwhile to have a conference with the IRS Office of Appeals; in other instances, it may be preferable to immediately and formally appeal the matter. How an ALE appeals the matter will depend on the amount of the assessed penalty. If the amount of the assessed penalty is $25,000 or less, ALEs will be directed to make a small case request. If the assessed penalty is greater than $25,000, a formal written protest will have to be submitted.

Next Steps

At this point, there is not much employers can do to prevent the penalties for the 2015 tax year. Since the opening of the Marketplace in 2014, many employees have misunderstood their eligibility for subsidies, and many may have improperly applied for these subsidies. Thus, a number of complying ALEs may receive Letters 226J.

The process for responding to a Letter 226J assessing a (b) penalty will not differ significantly from responding to a letter assessing an (a) penalty. However, given the technical nature of these forms and potential for significant exposure, it may be beneficial to get legal counsel involved in the drafting of the response and any negotiations with the IRS, as in most instances there are legal and factual arguments to be made.

If you have received a Letter 226J for 2015, you may now be aware of issues with subsequently filed Forms 1094-C and 1095-C. These are the Forms that employers file with the IRS to inform them of the coverage that was provided to their full-time employees. As such, there may still be time to review and submit amended Forms for the 2016 and 2017 tax year to avoid getting another round of Letters 226J. Additionally, the 2018 Forms 1094-C and 1095-C will be due early in 2019, so at the least, it would be worthwhile to review previously filed Forms to identify potential issues and not repeat those mistakes.

Originally published in Corporate Compliance Insights

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Melissa Shimizu
Similar Articles
Relevancy Powered by MondaqAI
Fisher Phillips LLP
Proskauer Rose LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Fisher Phillips LLP
Proskauer Rose LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions