No Cause for Alarm: Understanding and Responding to an IRS Employer Shared Responsibility Payment (ESRP) Notice

Receiving a notification from the IRS about possibly owing money is usually a downer. Here, we will help you understand Letter 226-J and walk you through any steps you may be required to take.

IRS Letter 226-J

At the end of 2017, the IRS started notifying employers they might owe an Employer Shared Responsibility Payment (ESRP) under the Affordable Care Act (ACA). The IRS urged employers receiving such notices to respond promptly. They should seek professional legal advice, review records for the subject tax year, and correct any reporting inaccuracies. Since reporting under the ACA is still relatively new, chances for errors were, and still are, high. Letter 226-J provides an opportunity to dispute or resolve errors.

Understanding your Letter 226-J

Letter 226-J is the initial notification letter issued to Applicable Large Employers (ALEs) that they may be liable for an ESRP. The determination of whether an ALE may be liable for an ESRP and the amount of the proposed ESRP in Letter 226-J is based on information from Forms 1094-C and 1095-C filed by the ALE and by the ALE’s employees’ individual income tax returns.

What Employers Need to Do

Read your letter and attachments carefully. Remember, the letter is merely the initial proposal of the ESRP and not a bill. Errors could have been made in the reporting process, or an employee or former employee could have made an error when filing their personal income tax return (i.e., they erroneously indicated that they were not offered coverage when, in fact, they were offered coverage).

Thoroughly review the information reported on Forms 1094-C and 1095-C for the applicable year to confirm that the information filed with the IRS was accurate because the IRS uses that information to compute the ESRP. These documents explain the ESRP process and how the information received affects the computation.

The letter fully explains the steps to take if you agree or disagree with the proposed ESRP computation. Complete the response form (Form 14764), indicating your agreement or disagreement with the letter. If you disagree with the proposed ESRP liability, you must provide a full explanation of your disagreement and/or indicate changes needed on Form 14765 (PTC Listing). Return all documents as instructed in the letter by the response date.

If you agree with the proposed ESRP liability, simply follow the instructions to sign the response form and return with full payment.

If you require any assistance with the ESRP process or have any questions, please contact one of our attorneys.