226-J penalty letters are coming. Here’s why you might get one

The IRS continues to add to the 30,000 Letter 226-J penalty notices it has already sent to applicable large employers (ALEs) who failed to comply with the Affordable Care Act’s (ACA) employer mandate in the 2015 tax year. Now, the agency is also preparing to send out notices for 2016.

If you believe you’re in the clear because you didn’t receive a notice for 2015, let this serve as a warning: You’re not out of the woods yet.

Requirements for 2015 and 2016 compliance were not the same

In 2015, under the ACA, ALEs were required to offer affordable health care with minimum essential coverage (MEC) to at least 70 percent of their full-time employees. Companies that failed to do so could be on the hook for employer shared responsibility payments (ESRPs) in the form of one of the following penalties:

  1. 4980H(a) – Company failed to offer coverage to at least 70 percent of its full-time employees and at least one full-time employee received a premium tax credit (PTC) from the government. The fine for this violation is $173.33 per employee per month ($2,080 per year), resulting in an overall penalty calculated by taking $173.33 multiplied by the number of full-time employees (minus 30) times the number of months a full-time employee received a PTC.
  2. 4980H(b) – Company offered coverage to at least 70 percent of its full-time employees, but at least one employee qualified for a PTC because the coverage was unaffordable or didn’t meet minimum value (MV). The fine for this violation is $260 per month ($3,120 per year), resulting in an overall penalty that’s calculated by taking $260 for every employee that qualified for a PTC multiplied by the number of months they received a PTC.

Unfortunately for employers, not only did the required percentage of full-time employees they needed to offer health care to go up for the 2016 tax year, but so, too, did the penalties.

In 2016, companies were required to offer coverage to at least 95 percent of their full-time employees (up from 70 percent in 2015). This was a drastic change, and one that could have seriously affected compliance with the ACA. To make matters worse for employers, the “A” penalty in 2016 is $180 per employee per month ($2,160 per year) and the “B” penalty is $270 per employee per month ($3,240 per year).

As a result, there’s a real possibility that while companies complied with the ACA in 2015, they failed to do so for 2016. This may result in unexpected and potentially hefty fines.

Penalties are only going up

There will be more penalties from the 2016 tax year than there were for 2015. There’s no other way around it. According to a Treasury Report, the IRS did not flag everyone that should’ve been for 2015 violations. This adds up to millions of dollars in missed penalties.

For instance, in some locations, the machines used to grade IRS paper filings to determine if an employer should be penalized or not were broken. The IRS also had problem with the system it used for e-filing.  The IRS has made about $3 million worth of investments to ensure this won’t happen again. That’s how committed the IRS is to tracking down perpetrators.

And if you think the 2016 penalties were bad, they pale in comparison to 2018. For the 2018 filing year, the “A” penalty is increasing to $193.33 per employee per month ($2,320 per year), and the “B” penalty is going up to $290 per employee per month ($3,480 per year).

How to act moving forward

The midterm elections could very well determine the fate of the ACA. However, as it stands, the law and its employer requirements aren’t going anywhere. The IRS is motivated to penalize any and all companies that failed to comply with its regulations.

Just because you didn’t get flagged for 2015, doesn’t mean you won’t for 2016. Employers need to be prepared and proactive. You should audit and review your past filings to ensure you don’t have any glaring issues and check that you’re accurately tracking employee hours.

Penalties are only going to continue to increase. It’s better to be safe than sorry.