The IRS continues issuing Letter 226-J notices proposing assessments that are commonly referred to as “employer penalties” under the Affordable Care Act. The letters state that the IRS has made a preliminary calculation of the employer’s Employer Shared Responsibility Payment (“ESRP”) obligation. Letter 226-J is typically accompanied by Form 14764, ESRP Response; Form 14765, Employee Premium Tax Credit Listing; and states the amount of the proposed ESRP. Employers who disagree with the proposed ESRP must complete and return Form 14764 within thirty days and identify any errors in the letter on Form 14765. In addition, the IRS frequently issues a Letter 227-K or Letter 227-L to provide employers additional information about the proposed ESRP.
While employers often feel compelled to reply in the manner directed by Letter 226-J, the notice presumes that the employer is an applicable large employer (“ALE”). Before responding, an employer should determine whether it is, in fact, an ALE for the year at issue. Such a determination is based on the employer’s average employment during the year immediately preceding the calendar year at issue.
Subject to an exception for seasonal employers, an employer is an ALE if it had an average of at least fifty full-time and full-time equivalent employees in the preceding calendar year. For purposes of this test, a full-time employee is any employee who is credited with an average of thirty or more hours per week. In contrast, part-time employees are aggregated to determine the number of full-time equivalent employees.
For assistance responding to a Letter 226-J, or any other tax-related matters, please feel free to contact Aaron Borden at (214) 749-2402 or firstname.lastname@example.org.