Employer’s Guide: What to Do When You Get an ACA Penalty Notice from the IRS

Receiving IRS Letter 226-J can be alarming, especially when the proposed penalties reach into the tens or hundreds of thousands of dollars. But before you panic, understand that these notices are often based on incomplete information or reporting errors. Many employers successfully reduce or eliminate their proposed penalties through a careful response process.

Why You Got This Notice

Under the ACA’s Employer Mandate, businesses with 50 or more full-time employees (Applicable Large Employers, or ALEs) must offer health coverage that meets two tests: it must be affordable, and it must provide minimum value. If you don’t offer qualifying coverage to at least 95% of your full-time workforce, and even one of those employees gets a Premium Tax Credit through the Marketplace, penalties kick in.

The IRS sends Letter 226-J about two years after a tax year ends. Right now, they’re working through 2022 tax year assessments and gearing up for 2023.

The Penalties Are Significant (and Just Went Up)

For the 2026 tax year, ACA penalties increased roughly 15%:

4980H(a) Penalty (you didn’t offer coverage at all): $3,340 per full-time employee annually, minus the first 30 employees. So, a company with 100 full-time employees faces a potential penalty of $233,800 for the year.

4980H(b) Penalty (you offered coverage, but it was unaffordable or didn’t meet minimum value): $5,010 per employee who received a Premium Tax Credit.

The affordability threshold for 2026 is 9.96% of household income.

For reference, the IRS has proposed over $15 billion in penalties for tax year 2018 alone. They’re not messing around.

You Have 90 Days to Respond

Good news: as of January 2025, employers now have 90 days to respond to Letter 226-J (up from the previous 30-day window). This change came from the Employer Reporting Improvement Act signed in December 2024.

Your Letter 226-J will include:

• An ESRP Summary Table showing proposed penalties by month
• Form 14764 (your response form)
• Form 14765 (listing which employees triggered the penalty)

You can agree and pay, disagree with part of it, or dispute the whole thing.

Common Reasons Penalties Get Reduced or Eliminated

Most penalty assessments trace back to reporting errors on Forms 1094-C and 1095-C, not actual compliance failures. The IRS is working from the data you filed. If that data was wrong or incomplete, you have a solid case.

Typical issues that get penalties reversed:

• You forgot to check “Yes” in Part III of Form 1094-C (this alone can trigger a 4980H(a) penalty even when you offered coverage)
• Missing Line 16 codes on Form 1095-C (the “2F,” “2G,” or “2H” safe harbor codes that prove affordability)
• Employees listed as full-time who were part-time or seasonal
• Employees who had coverage but weren’t coded correctly
• Employees who waived coverage in writing

When you respond, use the second row of Form 14765 to show corrected codes. Gather documentation: enrollment records, waivers, payroll data, and anything showing the affordability safe harbor you used.

What Happens After You Respond

The IRS reviews your response and sends one of several Letter 227 variants:

• 227-K: Penalty reduced to zero. You’re done.
• 227-L: Penalty reduced but not eliminated. You can agree or request Appeals.
• 227-M: Penalty unchanged. They disagree with your arguments. Appeals is available.

If you’re still not satisfied after correspondence, you can request a conference with the IRS Independent Office of Appeals. For amounts under $25,000, an informal request works. Over $25,000 requires a formal written protest.

If penalties are sustained through the entire process, you’ll eventually receive Notice CP 220J demanding payment. Interest starts accruing from that date.

One Legal Development Worth Knowing

In April 2025, a federal court in Texas ruled that the IRS has been assessing ACA penalties without proper legal authority (Faulk Company v. Becerra). The court ordered a refund to the employer in that case. This ruling only applies in that district for now, and an appeal is expected, but it’s worth discussing with legal counsel if you’ve already paid penalties.

How Tesseon Can Help

Dealing with IRS penalty notices requires careful attention to detail and familiarity with ACA reporting requirements. One wrong code on a form can mean the difference between a six-figure penalty and zero.

Tesseon specializes in ACA compliance and penalty resolution. We can:

• Review your Letter 226-J and identify response strategies
• Correct errors in your 1094-C/1095-C filings
• Prepare your response documentation
• Work directly with the IRS on your behalf
• Set up ongoing compliance monitoring so you don’t end up here again

If an IRS notice just landed on your desk, contact us. The 90-day clock is ticking, and the sooner we start, the better your options.