8875 / Will an employer receive a notification if it owes a shared responsibility penalty under the ACA?
Editor's Note: The U.S. District Court for the Northern District of Texas, in Faulk Company, Inc. v. Xavier Becerra et al., invalidated an ACA employer mandate penalty assessment and the regulations under which the IRS assesses the employer shared responsibility payment (ESRP). This case has the potential to invalidate any IRS-imposed ESRP if not overturned on appeal. IRC Section 1411 gives the Department of Health and Human Services (HHS) the power to determine whether an employee is eligible for a premium tax credit (by evaluating whether any coverage provided by the employer was affordable). If HHS determines an employee is eligible for the premium tax credit and the employer is subject to the mandate, HHS must notify the employer that they may be liable for the ESRP. The employer must fail to offer required coverage and obtain a certification before the IRS can assess the ESRP. HHS delegated to the IRS authority to provide such certification that an employee has received a premium tax credit. As discussed below, the IRS uses Letter 226J to provide this certification. The Court here found that this process was improper, the HHS regulations delegating authority exceeded HHS' authority and that HHS was responsible for providing certification before the IRS can assess penalties.The case invalidated the HHS regulation delegating authority entirely, rejecting the government's argument that the IRS was in a better position to offer the certification. Later, in 2026, a federal court in the Southern District of Florida created a split at the trial court level by upholding the IRS' authority to certify ACA penalties. The Florida court found that the IRS has authority to administer the IRC absent an express delegation of authority to another agency--and that the authority had not been delegated here. The court further reasoned that the HHS regulation that the Texas court set aside does not prove that the HHS is responsible for the certification. Thus, the court found that the IRS Letter 226-J was the required certification.
According to IRS guidance, an employer will receive a notification if one or more of its employees has received the premium tax credit that can generate employer liability for a shared responsibility penalty. The IRS will then contact the employer with a determination of whether it owes a shared responsibility payment, giving the employer an opportunity to respond before a notice and demand for payment is made. Such contact will not be made, however, until after the due date for the individual employees' tax returns for the year, as this is how the individual employees will claim premium tax credits. The date of contact will also be delayed until after the filing deadline for the returns of applicable large employers that outline the number of full-time employees and any coverage offered.1
Planning Point: In late in December 2022, the IRS released final regulations2 to permanently extend the 30-day reporting relief provided in prior years. Taxpayers could rely on earlier proposed regulations for tax years beginning after December 30, 2020. As a result, the deadline for furnishing Forms 1095-B and 1095-C to individuals is now 30 days after January 31 of the year following the tax year in question (for 2026, March 3, 2025).
For part-time employees and non-employees enrolled in the plan, the employer is not required to mail the forms to the plan participants under the regulations. Instead, they can provide a clear and conspicuous notice on the website stating that these individuals can request a copy of their statement (employers must continue to send the forms to full-time employees).
Beginning in 2025, employers are not automatically required to furnish Forms 1095-C to employees under the 2024 Paperwork Burden Reduction Act. Employers can now satisfy their 1095-C reporting obligations by posting a "clear and conspicuous" notice for employees on a website or benefits site, notifying employees that they can request the form and providing instructions for obtaining it. The notice must be posted by the time that Forms 1095-C would otherwise be due to employees, and must remain until October 15 of the year following the calendar year to which the notice applies. If a request is made, the employer must provide the form by the later of (1) January 31 of the year following the year to which the form relates or (2) within 30 days of the request.
Form 1094-C and Form 1095-C that must be provided to the IRS are not subject to the extension. The employer must furnish these filings to the IRS by February 28 if the filing is on paper and March 31 if the employer is filing electronically. For 2020 only, the IRS extended the relief that may allow employers to escape liability if they made a good faith effort to comply with all filing requirements (the proposed regulations would eliminate the good faith penalty relief entirely).
Under current law, employers that submit 250 or more of the same form must use electronic filing systems. However, the IRS has proposed a new rule that requires nearly all employers to file electronically (lowering the threshold to 100 forms in 2022 and ten forms starting in 2023). Employers would also be required to aggregate all forms that they have submitted.
Because the individual mandate is now $0, the IRS will also not impose a penalty under IRC Section 6722 upon employers who fail to provide Form 1095-B to individuals if certain requirements are satisfied. These requirements include (1) the entity must post a statement on its website that Form 1095-B can be obtained upon request, including an email address and physical address where such requests can be made and a phone number for questions, and (2) Form 1095-B must be provided to any individual who makes the request within 30 days.3
The IRS has released guidance updating its procedures for notifying employers if they owe a shared responsibility penalty. Employers that may be liable for a penalty will first receive a Letter 226J, which will include:
- A brief description of IRC Section 4980H;
- A table summarizing the penalty for each month (including a description as to whether IRC Section 4980H(a) or 4980H(b) applied);
- An explanation of the summary table;
- An employer shared responsibility response form (Form 14764);
- A list of each full-time employee that received a premium tax credit for a month that the employer did not qualify for an affordability safe harbor (or other relief);
- A description of the employer's options based on whether the employer decides to pay the penalty or appeal; and
- A description of the actions the IRS will take if a timely response is not received.
Form 14765 will also be included with the Letter 226J, and will provide the name and a truncated Social Security number of each employee that (1) was identified on the employer's Form 1095-C, (2) received a premium tax credit and (3) for which the employer did not report an affordability safe harbor or relief from the employer mandate for a month where the employee received the premium tax credit. The identified employees will be those for which the employer may be liable for a penalty. The Form 14765 also instructs employers who believe there has been an error in the form to make the necessary changes to the Form 14765, and include the corrected form with the Form 14764 to indicate a disagreement with the IRS.
The employer has 90 days (extended from the previously-applicable 30 day deadline) to respond once it receives a Letter 226J, and if the employer fails to respond, the IRS will assess the penalty and issue Notice CP 220J demanding payment. If the employer does respond within the 30-day period, the IRS will respond with Letter 227 describing what further action the employer need take. If the employer still does not agree with the IRS position in Letter 227, it can request a pre-assessment conference with the IRS Office of Appeals. The IRS began issuing Letter 226J with respect to the 2015 calendar year late in 2017.4
Planning Point: A significant amount of time may pass between the year in which coverage was offered and the date the employer receives their 226J letter. Applicable large employers began to receive notices regarding liability for 2016 via 226J letters issued in 2019. It is important that any employer who receives a 226J letter responds within the time frame listed in the letter. The deadline for response is now 90 days after the letter was issued (employers may request an extension by calling a 4980H response unit number listed on the letter itself). It is important to get expert advice when drafting the response, but issues to consider include whether the IRS was using the correct data (i.e., was a corrected Form 1094 filed with the IRS in the year to which the letter relates?), whether the plan was a calendar year plan (transition relief may apply) and whether the employer did, in fact, offer minimum coverage during each month.
After the employer's response has been received, the employer may receive one in a series of Letter 227 documents from the IRS. Letter 227-J is used to acknowledge receipt of the employer's completed Form 14764 (which the employer uses to indicate agreement or disagreement with the IRS' calculation of the penalty) and no response is needed to this letter. Letter 227-K is issued if the employer's penalty has been reduced to zero (no response is required). Letter 227-L will contain information regarding a revised penalty amount, and will show the information used to arrive at the revised penalty (i.e., a revised calculation table and an updated Form 14765). The employer can agree or request a meeting with respect to this information. Letter 227-M is used when the employer's penalty amount did not change based on an initial disagreement, and provides the information used to arrive at this conclusion (the employer can agree or request a meeting). Letter 227-N acknowledges a decision reached on appeal, and shows the penalty amount based on that appeal (no response is required to this letter). The letter provided will explain the next steps that the employer is required to take in response (if a response is required) and will provide the relevant dates for providing any required response.5
In a reversal of practice, in the early weeks of August of 2019, the IRS began issuing Notice 972CG to employers informing them that they owe substantial penalties for failing to strictly comply with the certain filing and reporting requirements related to the ACA employer mandate. Generally, the Notice is sent to inform employers that they have made late or incorrect filings of Forms 1094-C and 1095-C, and that penalties now apply (the notices sent in 2019 generally applied for mistakes made in 2017). The penalty that applied in 2017 was $260 per return ($50 per return if the filing was made within 30 days of the original due date).
Employers must respond to the Notice 972CG within 45 days (from the date listed on the notice) or the IRS will bill the employer for the penalty amount listed. If the employer disagrees in whole or part with the proposed penalty, box B or box C of the notice should be checked and the employer must submit a signed statement detailing the disagreement, including supporting documentation if applicable. Generally, the employer will be required to explain that the late or incorrect filing was due to reasonable cause, meaning that the employer must show significant mitigating factors or demonstrate that the failure to comply arose from events beyond the employer's control. Additionally, the employer must demonstrate that it acted in a reasonable manner before and after the late or incorrect filing occurred.
1. IRS Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, available at: http://www.irs.gov/Affordable-Care-Act/Employers/Questions-and-Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act (last accessed Sept. 29, 2025).
2. RIN-1545-BQ11.
3. Notice 2020-76.
4. IRS Q&A on Employer Shared Responsibility Provisions Under the Affordable Care Act, available at https://www.irs.gov/affordable-care-act/employers/questions-and-answers-on-employer-shared-responsibility-provisions-under-the-affordable-care-act (last accessed September 29, 2025).
5. Understanding Your Letter 227, available at https://www.irs.gov/individuals/understanding-your-letter-227 (last accessed September 29, 2025).