How to Respond to a 226-J Penalty Assessment

When the IRS issues Letter 226-J, an Applicable Large Employer (ALE) has a defined window to respond before a formal penalty assessment under Internal Revenue Code § 4980H becomes final. The letter proposes a specific dollar amount in Employer Shared Responsibility Payments (ESRPs) for a given tax year, and failing to respond within the stated deadline—typically 30 days—results in a Notice and Demand (Letter 227) that treats the proposed amount as assessed. Understanding the structure of the response process, the categories of disputes available, and the evidentiary standards the IRS applies is essential for any employer that receives one of these notices.

Definition and Scope

Letter 226-J is the IRS's formal mechanism for proposing ESRP liability under IRC § 4980H, as administered by the IRS under the Affordable Care Act employer mandate framework. The letter identifies the tax year under review, the number of full-time employees for whom a premium tax credit (PTC) was allowed through a Marketplace, and the resulting proposed penalty amount broken down by month.

The scope of a 226-J response encompasses two distinct dispute tracks:

Factual disputes — challenges to the underlying data, such as whether specific individuals were actually full-time employees, whether offers of coverage were made, or whether PTC eligibility was correctly determined.
Computational disputes — challenges to how the IRS calculated the penalty amount itself, including application of the § 4980H(a) versus § 4980H(b) penalty structure.

The IRS publishes procedural guidance for Letter 226-J responses through its ESRP FAQ page and Publication 5005. The notice is addressed to the employer's last known address on file, so outdated IRS records can complicate receipt timelines.

For broader context on how the penalty regime operates within the ACA's regulatory structure, the regulatory context for ACA covers the statutory and regulatory authority that underpins § 4980H enforcement.

How It Works

The 226-J response process follows a structured sequence with firm procedural checkpoints.

Review the ESRP Response Form (Form 14764). Every Letter 226-J is accompanied by Form 14764, which is the official instrument for submitting a response. The employer checks one of three positions: agree with the full proposed amount, partially disagree, or fully disagree.
Gather the Employee Premium Tax Credit List (Form 14765). This attachment to the letter lists each employee whose PTC triggered the proposed penalty, along with the months involved. Employers must annotate this form—using indicator codes provided in the letter—to identify errors in employee classification, coverage offers, or affordability determinations.
Compile supporting documentation. The IRS expects employers to provide evidence such as offer-of-coverage records, enrollment or waiver forms, payroll records establishing full-time status, and 1094-C/1095-C filings. Corrected forms may also be submitted at this stage; guidance on fixing underlying filing problems appears at correcting ACA reporting errors.
Submit within the response window. The letter specifies a response deadline, generally 30 days from the date of the letter. Extensions may be requested in writing before the deadline expires.
Await IRS acknowledgment. After submission, the IRS issues one of five Letter 227 variants (227-A through 227-M series), each indicating a different outcome: agreement, partial adjustment, no change, or referral to the IRS Independent Office of Appeals.
Exercise appeal rights if necessary. If the 227 response is unsatisfactory, the employer may request a conference with the IRS Office of Appeals. If a full ESRP assessment is issued and paid, the employer may also pursue a refund claim.

Common Scenarios

Three factual patterns account for the majority of 226-J disputes.

Misidentified full-time employees. The IRS derives its employee list from Form W-2 data cross-referenced with Marketplace PTC records. Employees classified as part-time, variable-hour, or in a waiting period are sometimes incorrectly flagged. The employer must produce measurement period records and stability period documentation to establish correct classification. Resources on measurement periods and stability periods describe the look-back method and monthly measurement method frameworks relevant to this evidence.

Coverage offered but not recorded correctly. An ALE may have offered compliant coverage that was not reflected in the 1094-C/1095-C filing, or the offer was coded incorrectly. The § 4980H(b) penalty—which applied at $4,460 per affected employee annualized for the 2024 tax year (IRS Revenue Procedure 2023-29)—applies when coverage was offered but was neither affordable nor minimum value. Distinguishing which subsection applies directly affects the penalty computation, and the employer mandate penalties under § 4980H page details the mathematical distinction between § 4980H(a) and § 4980H(b) liability.

Affordability safe harbor eligibility. Employers that relied on the W-2, Rate of Pay, or Federal Poverty Line safe harbors but failed to document the safe harbor election on Form 1095-C (Line 16 codes) frequently receive erroneous 226-J letters. The corrective path requires amended 1095-C filings alongside a written explanation to the IRS.

Decision Boundaries

Not every 226-J warrants a full dispute. Employers should evaluate four decision thresholds before choosing a response strategy.

Threshold 1: Is the proposed penalty amount within the range of correction costs? If the administrative cost of assembling a multi-year response exceeds the penalty amount itself—which can occur when the proposed ESRP is below $10,000—paying the assessed amount and correcting forward-looking compliance may be the most efficient path.

Threshold 2: Is the underlying ALE determination correct? If the employer was not actually an ALE for the relevant year, the entire 226-J is legally unfounded. ALE status is determined by the prior-year headcount method under § 4980H(c)(2). The applicable large employer determination framework and controlled group rules govern whether related entities aggregate toward the 50 full-time equivalent threshold.

Threshold 3: Are the 1094-C and 1095-C records correctable? When original filings contain errors that caused the erroneous penalty, corrected filings submitted with the 226-J response carry significant weight. The IRS has accepted corrected returns as dispositive evidence in partial-adjustment outcomes.

Threshold 4: Has the statute of limitations on assessment been considered? The IRS generally has a 3-year assessment window from the filing date of the employer's returns. If a penalty is proposed for a year outside this window without a tolling event, the employer should raise the limitations issue in the written response.

The IRS's ESRP overview page and the main ACA resource index provide foundational references for employers building a response strategy.

Frequently Asked Questions

What happens if an employer misses the 30-day response deadline for Letter 226-J?

If no response is submitted within the deadline, the IRS proceeds to issue a Notice and Demand (Letter 227), treating the proposed ESRP as assessed. At that point, the employer can still pay the assessed amount and file a refund claim, or request Appeals consideration, but the procedural posture becomes significantly less favorable than responding during the 226-J window.

Can an employer dispute only part of the proposed penalty?

Yes. Form 14764 allows a partial disagreement position. The employer annotates Form 14765 line-by-line to identify specific employees or months where the proposed liability is contested while conceding other months or individuals. The IRS issues a revised computation for the undisputed portion.

Does paying the proposed 226-J amount constitute an admission of ACA noncompliance?

Payment of an ESRP assessment does not constitute an admission that the employer failed its coverage obligations in any legally binding sense for subsequent years, but it does create a record that may inform future IRS enforcement targeting. Employers with systemic compliance gaps should address underlying offer and reporting practices before the next filing cycle.

What is the difference between Letter 226-J and Letter 227?

Letter 226-J proposes the penalty and initiates the response process. Letter 227 is the IRS's reply after reviewing the employer's response; it either adjusts the proposed amount, confirms it, or closes the matter. The specific 227 variant received signals the next procedural step.

References

The law belongs to the people. Georgia v. Public.Resource.Org, 590 U.S. (2020)