You've Received an IRS Employer Shared Responsibility Penalty (ESRP) Notice...Now What?

 April 13 2018     Diane Cross
As promised, the IRS has been issuing Affordable Care Act (ACA) ESRP Notices for the 2015 tax year via Letter 226J to employers believed to owe a penalty (see our previous blog post on the topic). As a reminder, under the ACA’s employer mandate, an ESRP can be assessed for 2015 if either:
  • Minimum essential coverage (MEC) was not offered to at least 70% of full-time employees (and their dependents) and at least one full-time employee received a premium tax credit (4980H(a) Penalty); or
  • MEC was offered to at least 70% of full-time employees (and their dependents), but at least one full-time employee received a premium tax credit because the coverage was deemed unaffordable or did not provide minimum value, or the full-time employee was not offered coverage (4980H(b) Penalty).

As with any new process, employers who have received Letter 226J are asking questions, and here are some considerations: 

  • Note the Response Date. Letter 226J will provide a specific response date, typically 30 days from the date of the letter. This is important to note, and be sure to respond within the given time frame. If an ALE fails to respond, the IRS will assess the amount of the proposed penalty and issue a notice and demand for payment, Notice CP 220J.
  • Read the Entire Notice. It is important for employers to understand what penalty is being assessed and how to respond. From what we have seen, it appears as though the IRS is assessing the 4980H(a) penalties at this time. In addition to the proposed ESRP amount, Letter 226J provides detailed instructions on how to respond, as well as an explanation as to how the proposed penalty amount was determined. 
  • Review your 2015 filing. Employers will want to compare their Forms 1094-C and 1095-C from its 2015 filing to the information provided in Letter 226J. Should an employer disagree with the proposed ESRP (e.g. employer realized that there was a filing error in 2015), Letter 226J outlines how to respond, and employers should submit any supporting documentation (e.g. a Summary of Benefits Coverage showing MEC was offered) along with the response. The IRS is clear that employers should not file a corrected 2015 Form 1094-C/1095-C.  Instead, the employer should provide a signed statement explaining the disagreement with the proposed ESRP that includes changes (if any) to the information reported on Forms 1094-C or Forms 1095-C. 

Additionally, if a 4980H(a) penalty is being proposed and an employer disagrees, the employer’s response should be contesting the entire proposed penalty amount due to the nature of the 4980H(a) penalty (i.e. an employer either did or did not offer MEC). Regardless if an employer agrees or disagrees with the proposed ESRP, the employer must complete, sign, and return the Form 14764 to the IRS per the instructions (and importantly, the form must be received by the response date stated in Letter 226J). If you need help understanding a proposed assessment and how to respond, we can help. Please contact your HORAN representative with questions.