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The Internal Revenue Services (IRS) is continuing to send Letter 226J to employers for which the agency believes an Employer Mandate penalty is due. Currently, these notices are being sent to employers for penalties that apply to the 2016 calendar year.
Employers who receive Letter 226 should scrutinize the notice carefully. Often, the IRS believes a penalty is due because of something reported inaccurately on Form 1094-C and/or Form 1095-C.
For example, Form 1094-C is where an employer indicates if an offer of coverage was made to at least 95% of full-time employees. This information is reported in Part III, Column A of Form 1094-C. Letter 226J should indicate whether an employer reported a “yes” answer to offering coverage to at least 95% of its employees. If it were inaccurately reported as a “no” answer for any months, that will most likely be a driving factor as to why a penalty notice was received. Luckily, employers can appeal a penalty notice by following the instructions in Letter 226J.
Similarly, errors are commonly made on Form 1095-C. These are the forms that are completed for each full-time employee. In Part II, Lines 14 and 16, codes are used to provide information to the IRS about the offer of coverage to an employee. In general, an offer must be made to all full-time employees that is affordable and has minimum value. Line 14 will use a code that starts with the number 1 followed by a letter, and it tells the IRS if no offer of coverage was made, or if an offer of coverage was made and to which family members of the full-time employee. Remember, an offer of coverage must at least be made to the employee and their dependent children up to age 26.
Line 16 will tell the IRS additional information about the offer of coverage or lack thereof. Line 16 will use a code that starts with the number 2 followed by a letter. For example, maybe there wasn’t an offer of coverage in a month because an employee was a new hire in their waiting period. Alternatively, maybe there was an offer of coverage that wasn’t taken by the employee, but coverage was considered affordable under one of the three allowable safe harbor methods. Line 16 provides this type of information to the IRS using codes. Codes should only be entered on Line 16 if one is applicable.
Employers will have the ability to agree or disagree with the proposed penalty notice, and they should follow the steps outlined in Letter 226 if they wish to appeal some or all of the penalty amount.
