Employer Shared Responsibility Payment (ESRP) and IRS Letter 226-J – What Employers Need to Know
By Tracey Martin, CPA, Partner
Employers are now receiving Letter 226-J from the IRS notifying them of their potential 2018 Employer Shared Responsibility Payment (ESRP). First, if you receive this letter, don’t panic – there may be ways to reduce your penalty. Second, please do not ignore it! With only 30 days to review for potential errors and respond to the IRS, you could find yourself subject to the ESRP, which is both costly and not tax deductible.
In 2010, the Affordable Care Act (ACA) was signed into law requiring employers with 50 or more full-time employees (“applicable large employer” or ALE) to offer health insurance to at least 95% of their full-time employees. The health insurance coverage has to be both Minimal Essential Coverage (MEC) and affordable. Each of these terms is defined by the ACA, and each triggers a different type of penalty.
You may recall hearing about these “pay or play” penalties when the ACA was introduced. Employers may be subject to either the pay or play penalties but not to both. The first is penalty 4980H(a) for not offering MEC (the “play” penalty). An ALE not offering group health insurance or offering a plan that isn’t considered MEC is subject to a penalty. This penalty, which is triggered by at least one employee receiving a premium tax credit through the State Health Exchange, is $2,320 per year per employee over a 30-employee threshold. This amount is indexed annually. While most group health plans now meet the MEC requirement, employers who offer group health should confirm with their group health provider that the plan they are offering qualifies.
The second is penalty 4980H(b) for not offering affordable coverage (the “pay” penalty). Policies are deemed affordable if the employee contribution required to cover the employee-only premium is less than a certain percentage of the employee’s household income. This percentage was 9.56% in 2018 and is indexed annually (adjusted to 9.83% in 2021). If at least one employee receives a premium tax credit through the State Health Exchange, the 4980H(b) penalty is triggered. For 2018, this penalty was $290 per month per employee receiving the credit.
There are three safe harbors for the 4980H(b) penalty based on W-2 wages, employee rate of pay and the Federal Poverty Line.
- W-2 wages – annual premiums are no more than 9.56% of the employee’s current W-2 Box 1 wages.
- Rate of pay – monthly premiums are no more than 9.56% of the product of 130 hours x employee’s hourly rate.
- Federal Poverty Line – monthly shared premiums are no more than 9.56% of a monthly amount determined as the FPL for a single individual divided by 12. For 2018, the FPL for a single individual was $12,140, which calculates the safe harbor at $12,140 / 12 x 9.56% = $96.72 per month for employee coverage.
As employees receive a Premium Tax Credit (PTC), employers receive a Marketplace Notice alerting them to the fact that an employee had applied and was deemed eligible for the PTC. These notices are mailed to the address provided by the employee applying for coverage. It is important to have processes in place to watch for and respond to these notices. Appeals are due within 90 days. It is easier to appeal as the notices are received rather than waiting several years and reviewing as you receive Letter 226-J assessing the ESRP.
What should you do if you receive Letter 226-J? First, review for errors. Confirm whether all employees listed by the IRS were actual full-time employees at the end of each month noted. Confirm that the information reported on the employee’s 1094-C and 1095-C was correct. Review to determine if any of the above three safe harbors apply for each employee. If there are errors found, respond to the notice indicating the discrepancies and providing supporting documentation. If no errors are found, respond to the notice including payment of the ESRP.
If you receive Letter 226-J or have questions about the ESRP, please do not hesitate to reach out to your tax advisor.
Tracey Flynn Martin Partner, CPA
Tracey has over 30 years of experience as a CPA and is a tax and consulting partner in our Wilmington office. She applies her knowledge and practical ideas to meet the needs of firm clients from both a business and tax perspective. Tracey leads our Firm’s CAS service line (Client Accounting Solutions – a […]