226-J letters from the IRS

What you need to know about 226-J letters from the IRS

It’s not easy and it’s not cheap, but you’ve finally figured out a way to offer health plans to your team members. It’s one of the best ways you’ve found to attract and hold on to great employees.

So why did the IRS just send you a letter saying you may owe penalties for failing to meet the Affordable Care Act’s “employer mandate”?

Thousands of employers, restaurant companies included, are now receiving these IRS letters, called 226-J letters. And while the letters frequently look innocuous, they can pack a big punch.

Now’s the time to be sure you understand what 226-J letters are -- and what you should do if you receive one.


  • Who receives the 226-J letters? Letters are going to employers of 50 of more full-time-equivalent employees who have at least one full-time employee who received a federal tax subsidy – called a premium tax credit (PTC) – to buy an individual health plan through HealthCare.gov or a state-based insurance marketplace. A National Restaurant Association survey of restaurant HR exec in spring 2019 showed about that four in 10 of their companies report receiving 226-J letters. Payroll firm ADP says across all industries, more than one in 10 organizations have reported receiving penalty notices.

  • What do the 226-J letters do? The IRS’s letters propose “Employer Shared Responsibility Payments” – the agency’s term for an ACA penalty assessment -- for any “large” employer with 50+ FTE employees that (1) failed to offer health plans to at least 95 percent of their full-time employees, or (2) offered coverage, but the coverage was considered unaffordable (by IRS standards) or didn’t meet minimum-value standards.

  • Why now? Five years after the ACA’s employer mandate took effect in 2015, the IRS has a better flow of data coming from employers, government-based insurance marketplaces and health insurers telling the agency which full-time employees get health plans through work and which don’t. The IRS began sending out 226-J letters in late 2017; its most recent letters, sent starting in the summer of 2019, are based on the 2017 tax year.

  • What are the proposed assessments against employers? It depends. ACA penalty calculations are complicated, but if you meet the ACA’s definition of a large employer, you could face fines of up to $2,000 for every full-time employee on your payroll (minus the first 30) if you failed to offer qualifying plans to 95 percent of your eligible full-timers and if even one of your full-time employees got a PTC to buy coverage through a government marketplace.

  • What should I do if I get a letter? In many cases, the letters are a result of simple mistakes, such as typos, errors you made in transmitting data to the IRS, and other situations that are easy to fix. Talk to your benefits provide, tax counsel and other experts to be sure you understand the problem and take steps to either respond. Above all, act! The 226-J letters generally give companies 30 days to respond. Without a response, the IRS will assume you agree with the assessment and will take steps to collect it.


Tune into our Restaurant Law Center’s Oct. 10, 2019, webinar on Protect Yourself from IRS-Issued 226-J letters.