IRS Letter 226-J Explained: What It Means and How to Respond

Receiving IRS Letter 226-J can be unsettling, but it does not automatically mean your organization owes an ACA penalty. The letter is the IRS’s initial proposal that an Applicable Large Employer (ALE) may owe an Employer Shared Responsibility Payment (ESRP) under the Affordable Care Act.

If your organization recently received Letter 226-J, contact James Moore’s ACA Penalty Reduction experts to review your notice and understand your options before responding to the IRS.

What Does IRS Letter 226-J Mean?

The IRS generates Letter 226-J after comparing information reported on Forms 1094-C and 1095-C with employee tax return information. If the IRS believes one or more full-time employees received a Premium Tax Credit through the Health Insurance Marketplace while your organization may not have met ACA requirements, it issues Letter 226-J.

The letter includes:

• Proposed Employer Shared Responsibility Payment (ESRP) and how it was calculated
• Employees who received the PTC that triggered the review
• The months involved
• Response instructions and deadlines

Letter 226-J also includes an Employer Shared Responsibility Payment (ESRP) Summary Table that shows how the IRS calculated the proposed assessment for each calendar month. The table identifies whether the proposed liability is based on IRC Section 4980H(a), Section 4980H(b), or both, making it an important starting point when reviewing the IRS calculations.

The good news: Letter 226-J is only the beginning of the process. Employers have an opportunity to review the IRS findings, correct reporting errors and challenge proposed penalties when appropriate.

Don’t Respond Before Reviewing Your Options

Many employers may be able to reduce or eliminate proposed ACA penalties after a careful review of their reporting and supporting documentation.

James Moore’s ACA specialists help employers analyze IRS calculations, identify reporting issues and prepare well-supported responses designed to reduce unnecessary penalties.

Need help reviewing Letter 226-J? Contact our ACA Penalty Reduction specialists for an experienced review before responding.

Why Employers Receive Letter 226-J

Proposed ACA assessments can result from reporting discrepancies, coding errors, incomplete employee data, or underlying coverage or compliance issues.

Common reasons employers receive Letter 226-J include:

• Incorrect Forms 1094-C or 1095-C
• Incorrect Line 14 or Line 16 indicator codes
• Employees receiving Marketplace Premium Tax Credits
• Affordable coverage calculations that fail IRS safe harbor requirements
• Failure to offer coverage to enough full-time employees
• Employee classification errors
• Payroll and eligibility data inconsistencies

In many cases, the employer actually offered compliant coverage, but reporting errors caused the IRS to calculate a proposed penalty.

Learn how our ACA Reporting Services help employers avoid reporting errors before IRS notices arrive.

Understanding IRS Forms 14764 and 14765

Letter 226-J includes two important response documents.

Form 14764 – Employer ESRP Response

Form 14764 tells the IRS whether your organization:

• Agrees with the proposed assessment
• Disagrees with all or part of the assessment

If you disagree, supporting documentation should accompany your response.

Form 14765 – Employee Premium Tax Credit Listing

Form 14765 identifies the full-time employees and months included in the IRS’s proposed assessment, along with the applicable indicator codes reported on Form 1095-C.

Each employee record should be reviewed carefully for:

• Full-time status
• Coverage offers
• Indicator codes
• Employment dates
• Enrollment records

Should You Agree or Disagree With the Proposed Penalty?

Before agreeing with any proposed assessment, employers should carefully verify that the IRS calculations are accurate. ACA penalties are often based on complex reporting requirements, and even small errors in Forms 1094-C or 1095-C, employee classifications or affordability calculations can affect the proposed assessment.

Agreeing

If your review confirms that the IRS findings are accurate, you can indicate your agreement by signing and returning Form 14764. The IRS will then review your response and generally issue a Letter 227 followed by Notice CP220J, which formally assesses the Employer Shared Responsibility Payment and provides payment instructions.

Agreeing with the proposed penalty means:

• You accept the IRS’s proposed Employer Shared Responsibility Payment.
• The IRS will formally assess the penalty and expect payment according to the instructions provided.
• Interest may continue to accrue on unpaid balances after the assessment is finalized.
• The assessment generally concludes the review process for that tax year unless additional issues arise.

However, paying the penalty should not be viewed as the end of your ACA compliance responsibilities. If the underlying reporting or coverage issues are not corrected, similar penalties may occur in future reporting years.

After resolving a Letter 226-J, employers should review their ACA compliance processes to identify what caused the assessment. This may include evaluating employee eligibility determinations, affordability calculations, reporting procedures and payroll data to reduce the risk of future IRS notices.

Disagreeing

Many organizations successfully reduce or eliminate proposed ACA penalties after identifying reportarget=”_blank” rel=”noopener”ting errors or providing additional documentation. Common reasons employers disagree with a proposed assessment include:

• IRS reporting codes were incorrect.
• Employees were improperly classified as full-time.
• Affordable, minimum essential coverage was offered but not accurately reported.
• Marketplace eligibility information was inaccurate.
• Payroll records, enrollment documentation or other supporting information contradicts the IRS findings.

A detailed response supported by complete documentation often results in a reduced assessment or complete penalty removal.

Before responding to the IRS, have your Letter 226-J reviewed by James Moore’s ACA specialists. We can evaluate the proposed assessment, identify reporting discrepancies and help prepare a well-supported response designed to achieve the best possible outcome.

Documentation to Gather Before Responding

A complete response package helps the IRS evaluate your position more efficiently.

Employers should collect:

• Forms 1094-C and 1095-C
• Payroll records
• Employee eligibility reports
• Health plan enrollment records
• Employee waiver forms
• Affordability calculations
• Hours-of-service documentation
• ACA measurement period records
• Summary plan documents

Employers must respond by the date shown on Letter 226-J, which is generally 30 days from the date of the letter.

What Happens After You Respond?

After you submit your response, the IRS will review the information and supporting documentation you provided. Depending on its findings, the agency may:

• Remove the proposed Employer Shared Responsibility Payment.
• Reduce the assessment.
• Uphold the original penalty.
• Request additional information before making a final determination.

This review process often takes several months. Throughout that time, employers should retain copies of all correspondence and documentation submitted to the IRS. If the IRS requests clarification or additional records, having organized documentation readily available can help keep the process moving and support your position.

Understanding Letter 227 and CP220J

After reviewing an employer’s response, the IRS generally sends one of several versions of Letter 227. Depending on the version, the letter may:

• Confirm that the proposed assessment has been reduced to zero
• Present a revised assessment
• Leave the proposed amount unchanged
• Close the inquiry
• Explain the employer’s next steps

If the employer continues to disagree with a proposed or revised assessment, certain versions of Letter 227 provide instructions for requesting a meeting or pre-assessment conference with the IRS Office of Appeals.

If the IRS ultimately determines that an ESRP is owed, or if the employer does not respond within the required timeframe, the IRS may assess the payment and issue Notice CP220J. CP220J states the amount assessed, the balance due, and the available payment options.

Section 4980H(a) vs. Section 4980H(b)

Understanding which ACA penalty applies is critical because the financial impact can differ significantly.

Section 4980H(a)

Applies when an employer fails to offer minimum essential coverage to at least 95% of full-time employees and eligible dependents.

The penalty is calculated using nearly every full-time employee, making these assessments substantially larger.

Section 4980H(b)

Applies when coverage was offered but:

• Wasn’t affordable
• Didn’t provide minimum value
• Wasn’t offered to specific eligible employees

This penalty generally applies only to employees who received Premium Tax Credits.

Frequently Asked Questions About ACA Penalties

How long do I have to respond to Letter 226-J?

Generally, employers have 30 days from the date of the letter to respond.

Can ACA penalties be reduced?

Yes. Many proposed Employer Shared Responsibility Payments are reduced or eliminated after corrected reporting and supporting documentation are submitted.

Do I have to pay immediately?

No. Letter 226-J is only a proposed assessment. Payment is generally not required until the IRS completes its review or if the IRS does not receive a response to the initial notice.

Can reporting mistakes trigger ACA penalties?

Yes. Incorrect Forms 1094-C and 1095-C are among the most common causes of Letter 226-J.

Should I handle the response myself?

ACA reporting rules are highly technical. Working with experienced ACA advisors can help identify reporting issues that may substantially reduce a proposed assessment.

Ready to Respond to Letter 226-J?

Receiving an IRS ACA penalty notice doesn’t necessarily mean your organization owes the amount proposed. Many employers successfully reduce or eliminate penalties after carefully reviewing their reporting and supporting documentation.

At James Moore, our ACA specialists help employers:

• Review IRS Letter 226-J
• Analyze Forms 1094-C and 1095-C
• Evaluate payroll and eligibility records
• Prepare responses to Forms 14764 and 14765
• Respond to Letter 227 and CP220J
• Strengthen ACA reporting processes to reduce future risk

Contact James Moore today to schedule an ACA penalty review before your IRS response deadline.