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Start by identifying the IRS notice, tax year, legal entity, and response deadline. If it is Letter 226J, the IRS is proposing an employer shared responsibility payment under Internal Revenue Code Section 4980H—not announcing a final assessment. Reconcile every listed employee and month against payroll, hours, eligibility, coverage, contributions, and Forms 1094-C and 1095-C, then respond through the forms and instructions included with the letter.
The guidance below addresses the most identifiable pathway: ACA employer shared responsibility and related coverage reporting. Other IRS inquiries about a health plan can involve different rules, notices, and deadlines, so the correspondence itself controls.
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What “IRS scrutiny” can mean for an employer health plan
An IRS inquiry is not automatically a Letter 226J or an employer-mandate case. The IRS may examine tax reporting, eligibility, self-insured coverage reporting, or another qualification issue. The practical steps in this article focus on the ACA employer shared responsibility provisions under Section 4980H and reporting under Sections 6055 and 6056 because those are the rules associated with a Letter 226J and Forms 1094-C and 1095-C.
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Random freezes, missing sound and display glitches usually trace back to one bad driver. Find and replace yours safely.Free scan · under a minuteWhat a Letter 226J is
Letter 226J is a proposed employer shared responsibility payment notice. It identifies a proposed amount by month and lists employees associated with premium tax credit information. It is an opportunity to review the IRS’s facts and respond before the agency assesses a payment. It is not, by itself, a final bill.
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Why the tax year matters
Thresholds, affordability calculations, reporting codes, indexed payment amounts, and correction procedures can change by year. Do not use a deadline, form instruction, or liability example from another year. Use the tax year and response date printed on your notice, and check the current IRS instructions for that year’s forms.
First 24 to 48 hours after receiving a notice
1. Create a notice log
Record the date received, tax year, response deadline, legal entity name, employer identification number (EIN), notice number, proposed amount, and every IRS telephone number or mailing address shown. Keep the original notice and all enclosures together. Scan them into a restricted folder, but retain the paper copy if your organization uses one as its official tax file.
2. Route it to the right people
Send the notice promptly to the person who owns benefits administration and the person responsible for payroll or tax reporting. Include the plan administrator, human-resources data owner, and finance lead when their records are needed. If the proposed amount is material, the legal entity structure is complicated, or the facts are disputed, involve counsel or a tax professional experienced with ACA employer shared responsibility. Professional help is a risk-management choice, not a condition imposed by the IRS.
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IRS guidance says employers should not calculate their liability or make a payment before being contacted by the IRS. Once a Letter 226J arrives, follow that notice. A payment made before the facts are reconciled does not replace the required response and can make an incorrect position harder to unwind.
Read the Letter 226J package before changing any records
Read every page, including the forms and instructions. The package normally gives you the information needed to identify the proposed issue.
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| Document or section | What it tells you | What to check |
|---|---|---|
| Letter 226J | The proposed payment, tax year, months at issue, and response instructions. | Confirm the legal entity, EIN, deadline, and whether the proposed amount is monthly or total. |
| Monthly summary | How the IRS calculated the proposed amount for each month. | Mark every month with an amount and compare it with your payroll and coverage calendar. |
| Form 14765 | The employees and monthly indicators associated with the proposed assessment. | Match names, taxpayer-identifying information, employment status, and months to your source records. |
| Form 14764 | The employer’s response form for agreeing or disagreeing with the proposed payment. | Follow the form’s signing, explanation, and submission instructions exactly. |
The IRS says: “The employer will then have an opportunity to respond before any assessment or notice and demand for payment is made.” Treat that opportunity as a structured fact review, not as an informal request to call the agency.
Confirm whether the entity was an applicable large employer
Section 4980H analysis begins with employer classification. An applicable large employer (ALE) generally averaged at least 50 full-time employees, including full-time equivalents, during the preceding calendar year. The preceding-year average is important: a workforce that crossed the threshold for only a few months in the notice year may still be an ALE based on the earlier calculation.
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| Question | General rule | Evidence to pull |
|---|---|---|
| Did the employer meet the ALE threshold? | At least 50 full-time employees, including full-time equivalents, on average in the preceding calendar year. | Prior-year monthly employee counts, part-time hours, and the calculation used to determine the average. |
| Who is full-time? | Generally an employee averaging at least 30 hours of service per week or 130 hours per month. | Payroll hours, paid-leave records, measurement-period results, and status-change dates. |
| Are related companies combined? | Related entities may have to be aggregated when determining ALE status. | Ownership, controlled-group, common-control, and corporate-structure records. |
| Who reports? | Each ALE member generally has reporting responsibilities under its own EIN. | The EIN used on Forms 1094-C and 1095-C and the entity named in the notice. |
Do not assume that one parent-company calculation answers every reporting question. A related group can be combined for the ALE test while each ALE member still reports under its own EIN. Reconcile the entity and EIN on the notice with the entity that filed the forms.
Reconcile every employee and month listed
Use Form 14765 and the monthly summary as a work queue. Build one row for each listed employee and month, then compare the IRS entry with your records. The goal is to determine whether the person was full-time for that month, whether an offer was required, what offer was made, and whether the filed code accurately described it.
Five comparison questions
- Was the person employed by this ALE member? Check hire, termination, transfer, leave, and rehire dates against the EIN in the notice.
- Was the person full-time under the method used? Compare weekly or monthly hours and any applicable measurement and stability periods. Include hours of service credited during paid leave where your rules require them.
- Was an offer required for the month? Identify waiting periods, limited nonassessment periods, seasonal status, and other status codes used on the filed return.
- What coverage was offered and when? Verify the offer date, effective date, employee-only and dependent coverage, and whether an employee accepted or waived it.
- Do the filed codes match the evidence? Compare the 1095-C offer and affordability codes with enrollment, contribution, and payroll records.
Records that usually resolve an employee-month dispute
- Payroll registers and timekeeping data showing hours of service by month.
- Eligibility files, measurement-period and stability-period outputs, and status-change reports.
- Offer letters, enrollment confirmations, waivers, termination notices, and dependent-offer records.
- Plan documents and summaries describing eligibility, minimum essential coverage, and contribution terms.
- Employee contribution amounts by month, including changes caused by a midyear event.
- Filed Forms 1094-C and 1095-C, transmission confirmations, and any prior corrections.
- Records showing which legal entity employed the person and which EIN reported the person.
This is a practical investigation set, not a universal IRS checklist. The records required will depend on the issue shown in your notice and the correction or response position you take.
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Test whether the coverage offer met Section 4980H rules
The central coverage question is not simply whether the employer had a health plan. For the relevant full-time employees and their dependents, the offer generally must be minimum essential coverage, affordable under the applicable year’s rule, and provide minimum value. The IRS describes a potential payment when an ALE fails the offer rules and at least one full-time employee receives a premium tax credit.
The 95% offer standard
The IRS generally describes an offer threshold of 95% of full-time employees and their dependents. The exact calculation is tied to the applicable tax year and the employees considered full-time under the rule. A single missed employee can matter differently depending on whether the employer fell below the broad offer standard or whether the individual-employee affordability or minimum-value rule is implicated.
Minimum essential coverage
Verify that the coverage identified on the return was the type treated as minimum essential coverage for the relevant month. A wellness program, limited-scope arrangement, or stand-alone benefit may not satisfy the same requirement as major medical coverage. Use the plan documents and the administrator’s classification for the specific year rather than relying on a plan nickname.
Affordability
Compare the employee’s required contribution for the applicable lowest-cost self-only option with the affordability safe harbor or test used on the filing. Preserve the monthly contribution schedule and the data supporting the safe harbor selected. A contribution can change after a qualifying event, plan-year renewal, or status change, so a yearly rate sheet alone may not prove the amount for every month.
Minimum value
Confirm that the offered plan met the minimum-value standard for the relevant period. Keep the plan’s actuarial or administrative documentation that supports the determination. Do not substitute the plan’s deductible or employee premium for a minimum-value determination; those are different measures.
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Dependents and effective dates
Check whether the offer extended to the dependents required by the rule and whether coverage was actually available for the month at issue. An offer made after the first day of a month, an employee’s waiting period, or a termination during the month can alter the applicable code and analysis.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Verify Forms 1094-C and 1095-C against source records
ALEs generally report offers of coverage on Forms 1094-C and 1095-C. Section 6056 applies to ALEs. Section 6055 reporting applies to providers of minimum essential coverage, including self-insured employers even when they are not ALEs.
| Employer situation | Reporting generally involved | Key reconciliation |
|---|---|---|
| ALE with insured coverage | Forms 1094-C and 1095-C for Section 6056 reporting. | Employee status, offer codes, affordability information, and ALE-member details. |
| Self-insured employer that is not an ALE | Section 6055 reporting for covered individuals. | Covered-person months, identifying information, and enrollment periods. |
| Self-insured ALE | Generally combines ALE reporting and covered-individual reporting on Forms 1094-C and 1095-C. | Offer data for full-time employees plus coverage data for enrolled individuals and dependents. |
If a source record conflicts with a filed form, do not silently overwrite the old file. Have the responsible tax or reporting adviser determine whether a correction is required under the current instructions for the relevant year, what recipient statements or transmittals are affected, and how the correction should be documented.
Choose an agree-or-dispute position and respond correctly
If the proposed payment appears correct
Use Form 14764 and the Letter 226J instructions to agree, sign, and submit the response. Follow the notice’s payment process rather than sending money to an address or account copied from an unrelated IRS page. The IRS indicates that a later notice and demand will explain how to pay after liability is determined.
If you dispute all or part of the amount
Identify each disputed employee and month, state the factual or coding reason, and attach calculations and source records that let the IRS reproduce your position. A useful schedule has columns for EIN, employee identifier, month, full-time determination, offer date, coverage type, employee contribution, applicable code, requested correction, and supporting document.
Submit the response by the deadline printed on Letter 226J. Do not rely on a generalized deadline from a prior year, an online example, or the date your internal reviewer finished the file. Keep proof of delivery and a complete copy of everything submitted.
When the amount is partly right
Separate agreed and disputed months instead of arguing broadly that the entire notice is wrong. Explain uncontested entries, identify the exact changes requested, and show the revised calculation. A precise partial response is easier to evaluate than a narrative that mixes unrelated employees and months.
Common failure modes and how to fix them
| Failure mode | Why it causes trouble | Better practice |
|---|---|---|
| Missing the response date while gathering records | The IRS response opportunity is tied to the notice deadline. | Open the case immediately, assign owners, and submit a timely response with a clearly identified supplement if permitted by the notice. |
| Using a corporate-wide answer for one EIN | Each ALE member generally reports under its own EIN. | Reconcile the entity, EIN, and employee assignment shown in the letter. |
| Counting headcount without full-time equivalents | The ALE threshold includes full-time equivalents. | Recreate the preceding-calendar-year average using monthly full-time and part-time data. |
| Proving enrollment but not proving an offer | An employee who waived coverage may still have received a valid offer. | Retain offer and waiver records, effective dates, and the employee contribution required to accept coverage. |
| Treating affordability as a plan-year average | Employee contributions and status can vary by month. | Reconcile the amount and safe harbor for every month listed. |
| Correcting forms without preserving the original | You lose the audit trail needed to explain the change. | Keep the filed form, correction decision, revised form, transmission evidence, and calculations together. |
| Paying before the facts are reviewed | Payment does not replace the response process. | Follow the notice and wait for the IRS determination and payment instructions. |
After the response: preserve the case and fix the process
Maintain a single case file containing the notice, Forms 14764 and 14765, employee-month schedules, source reports, plan and contribution records, filed forms, correction work, delivery proof, and every IRS follow-up. Restrict access because the file contains health and payroll information.
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When to escalate to benefits or tax counsel
Escalation is especially sensible when ownership changes affect aggregation, employees moved between EINs, measurement-period rules are disputed, the plan’s minimum-value status is unclear, records are missing, a correction could affect many recipient statements, or the proposed amount is financially significant. Give the adviser the complete notice package and your employee-month reconciliation rather than only the headline amount. That lets the adviser focus on the actual disputed facts and the response required by the letter.
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