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My company received a 226-J letter from the IRS. What now?

The National Restaurant Association presses Congress, IRS for solutions as more employers receive letters.
Photograph: Shutterstock

Your restaurant company is growing, and you’re offering health insurance so you can recruit and retain the best workforce in your area. It can be expensive—but you believe health insurance is an investment in your people.

So why did you just get a tax-penalty letter from the IRS saying you didn’t meet the “employer mandate” to offer a healthcare plan? For too many restaurant and hospitality companies, this 226-J letter has become a reality.

The Affordable Care Act’s (ACA) employer mandate took effect in 2015, but the IRS is now ratcheting up the number of 226-J letters it sends employers notifying them of possible penalties. Under the ACA, large employers—defined as those with 50 or more full-time-equivalent employees—risk tax penalties if they fail to offer qualifying health plans to eligible full-time employees.

Nearly 4 in 10 HR executives from large restaurant companies reported in a recent National Restaurant Association survey that their companies have received such letters. Payroll firm ADP says an April 2019 survey showed that across all industries, about 11% of organizations have reported receiving penalty notices.

In many cases, the letters stem from simple paperwork mistakes or erroneous assumptions.

For example, a Virginia restaurant group with more than 300 employees received a $230,000 tax-penalty letter this summer—based on five restaurant employees who declined the employer’s offer of health insurance in 2017. Those five employees decided to buy their own insurance at HealthCare.gov in 2018 and got a federal tax credit to do so. This led the IRS to assume the restaurant wasn’t offering compliant health insurance coverage, and the IRS then sent the restaurant the 226-J letter.

Employer penalty letters can be triggered when at least one full-time employee gets a tax subsidy to buy a plan through a government marketplace; the federal system then assumes the employer didn’t offer affordable coverage.

The National Restaurant Association is working to get Congress and the IRS to address the compliance challenges associated with the ACA. As the Association pursues legislative and regulatory relief, here are a few steps to take if you receive a 226-J letter:

  • Don’t ignore it. If you fail to respond within 30 days, the IRS will assume you agree with the proposed penalty assessment and move forward to collect it.
  • Get help. Consult with your broker or benefits provider, tax advisers and attorneys to understand the issues and see how to dispute the fines.
  • Correct what you can. It’s likely you’ll be able to resolve data-entry, data-transmission or other errors with the IRS fairly quickly.

Heading into 2020, use your open-enrollment period to communicate clearly and consistently with your full-time employees. If you’re a large employer, help them understand that if they decline your offer of affordable coverage, “they are generally not eligible for a federal tax subsidy when buying a plan through HealthCare.gov or any state marketplace,” says Aaron Frazier, the Association’s director of healthcare policy.

“If they get a subsidy payment in error, both the employer and employee could take a hit,” says Frazier. “The IRS can come back to the employee to reclaim the subsidy payment, and the employer could face major penalties.”

Get resources and tune into our Restaurant Law Center’s Oct. 10 webinar on 226-J letters at Restaurant.org/healthcare.  

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