The Internal Revenue Service (IRS) has announced that it will begin mailing employers letters informing them of their potential liability for a "pay or play" penalty for the 2015 calendar year in late 2017. However, before any penalty is assessed and notice and demand for payment is made, employers will have an opportunity to respond to the agency.

The IRS has issued a sample Letter 226J which may be sent to applicable large employers (ALE).  An ALE is generally an employer with at least 50 full-time employees, including full-time equivalent employees, on average during the prior year.  If you receive Letter 226J, that means the IRS has determined that, for at least one month in the year, one or more of the ALE's full-time employees was enrolled in a qualified health plan for which a premium tax credit was allowed (and the ALE did not qualify for an affordability safe harbor or other relief for the employee). Letter 226J will include, among other things:

• A brief explanation of the employer mandate;
• A penalty payment summary table, itemizing the proposed payment by month;
• An "employee premium tax credit list" which lists, by month, the ALE's employees who for at least one month in the year were full-time employees allowed a premium tax credit and for whom the ALE did not qualify for an affordability safe harbor or other relief;
• A description of the actions the ALE should take if it agrees or disagrees with the proposed penalty payment;
• A description of the actions the IRS will take if the ALE does not respond in a timely manner to Letter 226J; and
• Form 14764, a response form.

A response to Letter 226J will be due by the response date shown on the letter, which generally will be 30 days from the date of Letter 226J. Letter 226J will also contain the name and contact information of a specific IRS employee that the ALE should contact if the ALE has questions about the letter. Letter 226J will provide instructions for how the ALE should respond in writing, either agreeing with the proposed employer shared responsibility payment or disagreeing with part or all or the proposed amount.  This 30-day period is very tricky since who knows how long it will be hung up in the mail or internally within an organization.  There is no discussion in any of these materials on time extensions being available.

 If the ALE responds to Letter 226J, the IRS will acknowledge the ALE’s response to Letter 226J with an appropriate version of Letter 227 (a series of five different letters that, in general, acknowledge the ALE’s response to Letter 226J and describe further actions the ALE may need to take). If, after receipt of Letter 227, the ALE disagrees with the proposed or revised employer shared responsibility payment, the ALE may request a pre-assessment conference with the IRS Office of Appeals.

If the ALE does not respond to either Letter 226J or Letter 227, the IRS will assess the amount of the proposed employer shared responsibility payment and issue a notice and demand for payment, Notice CP 220J.

While the penalties under Code Section 4980H are referred to as “assessable payments,” they are really excise taxes.  But unlike the complicated procedures for assessing and challenging excise taxes, the IRS intends to establish a separate enforcement scheme that is unique to the ACA’s employer shared responsibility provisions.

The IRS has made available a comprehensive set of Questions & Answers- “Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act”. These are the rules that are codified in Section 4980H of the Internal Revenue Code, the compliance with which is reported on IRS Forms 1094-C and 1095-C, etc.  Until recently, these Q&As merely said that the IRS “expects to publish guidance of general applicability describing the employer shared responsibility payment procedures in the Internal Revenue Bulletin before sending any letters to ALEs”.   On November 2, that changed.  In a series of newly revised Questions and Answers, the IRS explained in detail how it proposes to assess and collect employer shared responsibility payments in Q&As 55 – 58.

Q&A 55 was explained in the opening paragraphs regarding the issuance of a letter.  Q&A 56 was also discussed already as that Q&A addresses what opportunity an employer has to respond to the IRS about the proposed payment, including requesting a pre-assessment conference with the IRS Office of Appeals.

The manner in which an employer will remit the shared responsibility payment is described in new Q&A 57.  Notice CP 220J will include a summary of the employer shared responsibility payment and will reflect payments made, credits applied, and the balance due, if any. That notice will instruct the ALE how to make payment, if any. ALEs will not be required to include the employer shared responsibility payment on any tax return that they file or to make payment before notice and demand for payment. For payment options, such as entering into an installment agreement, refer to Publication 594, The IRS Collection Process.

Q&A 58 is simply confirmation that the IRS will begin notifying employers of any potential liability for an employer shared responsibility payment.