For many employers, an IRS ACA penalty letter arrives without warning.
Whether it’s a Letter 226J proposing an Employer Shared Responsibility Payment (ESRP), Letter 5699 asking about missing filings, or Form Letter 5005 requesting additional information, the first reaction is often the same: What do we do now?
The good news is that receiving an IRS notice does not automatically mean the proposed penalty is set in stone. Many ACA penalty cases begin with reporting errors, missing filings, or incomplete information that can often be addressed if employers act quickly.
Not Every ACA Letter Means You Owe the IRS
A Letter 226J typically proposes an Employer Shared Responsibility Payment because the IRS believes an Applicable Large Employer (ALE):
- Failed to offer coverage to 95% of full-time employees,
- Offered coverage that was unaffordable or did not meet the minimum actuarial value, or
- Reported information on Forms 1094-C or 1095-C that indicates a potential compliance issue.
Other employers may receive Letter 5699 or Form Letter 5005 when the IRS believes required ACA reporting was never filed. In some cases, the employer may not have been an ALE for that year. In others, the filing may have been submitted but cannot easily be verified.
Respond Promptly
Time is of the essence when it comes to the IRS.
Employers generally have 90 days to respond to a proposed ESRP notice. Waiting too long can limit your available options for correcting errors or disputing the proposed assessment.
Before responding, employers should carefully review:
- Whether ACA forms were filed correctly
- Whether Forms 1094-C and 1095-C contain coding errors
- Which employees triggered the proposed penalty
- Whether payroll and eligibility records support the reported information
In many cases, reporting mistakes, not benefit eligibility, are what triggered the proposed penalty.
Missing ACA Filings? Don’t Ignore Them
If ACA forms were never filed, employers should act before the situation escalates. When required forms haven’t been filed, the IRS may calculate proposed penalties using W-2 information rather than actual full-time employee counts, which can greatly inflate the proposed penalty. Completing back filings helps establish the employer’s actual reporting obligations and may significantly reduce potential penalties.
Can Reasonable Cause Apply?
Some employers may qualify for penalty relief under the IRS’s reasonable cause rules, but it’s more than simply explaining what went wrong.
This generally requires demonstrating either:
- Significant mitigating factors, or
- Circumstances beyond the filer’s control.
However, simply experiencing operational challenges is not enough. The IRS looks for evidence that the employer acted responsibly before and after the failure.
Examples include:
- Determining ALE status correctly
- Testing payroll and HRIS data before filing
- Requesting extensions when appropriate
- Correcting known system issues promptly
- Completing missed filings as soon as possible
A Proactive Approach Pays Off
The best way to minimize ACA penalties is to identify problems before the IRS does. Employers should periodically review their reporting status, confirm prior-year filings were completed accurately, and resolve any discrepancies before the next filing season.
If issues are discovered, a structured approach can make a significant difference: complete any necessary back filings, evaluate whether reasonable cause relief may apply, and determine the actual penalty exposure based on corrected filings rather than estimates.
Staying proactive not only improves compliance but can also reduce the time, cost, and stress of responding to IRS correspondence.
And as always, Medcom is here to help! We offer comprehensive services, including ACA employer reporting, FTE benefit eligibility tracking, back filings, and penalty appeal support, to help you stay compliant and reduce reporting burdens.
