IRS Letter 226-J: anatomy of an employer mandate proposal

The envelope is thick. Inside is a proposed dollar figure with more digits than anyone expected, and the subject is health coverage for a year your company closed the books on long ago.

That's IRS Letter 226-J, the first notice an employer receives when the IRS believes it may owe an employer shared responsibility payment. Most owners know that payment by its nickname, the Affordable Care Act's employer mandate penalty.

It's a proposal, and it's built almost entirely from forms your own company filed. We'll take the packet apart in the order an owner usually reads it.

Who gets the letter, and why it concerns an old year

Only an applicable large employer, or ALE, can owe this payment. The IRS describes an ALE as an employer that averaged at least 50 full-time employees, counting full-time equivalents, during the preceding calendar year.

Full-time means averaging 30 or more hours of service a week, or at least 130 hours in a month. Full-time equivalents are part-time hours pooled and converted into a headcount. They count toward the 50 threshold and nowhere else: the payment itself is figured on actual full-time employees.

Two wrinkles matter for closely held companies in Oklahoma and Texas.

Businesses under common ownership are generally combined for the count. The IRS's own example is one individual who owns 80 percent or more of two separate businesses. A cluster of small companies can cross 50 together even though no single entity comes close, and each company is then an ALE member with its own exposure.

There's also a seasonal exception, and it's narrow. It applies when the workforce, counting full-time equivalents, exceeded 50 full-time employees for 120 days or fewer during the preceding calendar year and all of the employees above 50 in that stretch were seasonal workers. Employers with harvest or holiday crews often assume it covers them, and it deserves an actual count.

All of this is federal law, and no Oklahoma counterpart is discussed here.

Employers don't compute this payment on any return; the IRS calculates it, partly from whether employees claimed the premium tax credit, the subsidy for coverage bought through a Health Insurance Marketplace. The agency says it doesn't contact an employer until after employees' individual returns for that year are due.

A pattern we see: by the time the letter lands, the payroll vendor has changed and the person who signed off on the forms is gone.

IRS Letter 226-J, page by page

The cover pages

The opening pages explain section 4980H, the Internal Revenue Code section that creates the payment, and state a proposed amount. A response date appears here too, along with a description of what the IRS will do if it hears nothing by then.

On its own page, the IRS says plainly that this isn't a bill. Nothing has been assessed yet, and the agency's guidance says an employer isn't required to pay before a formal notice and demand.

Silence, though, turns the proposal into an assessment.

The summary table

Next comes a table that itemizes the proposed payment month by month. For each month it shows which of two provisions the IRS is relying on, section 4980H(a) or section 4980H(b), if either.

The (a) payment applies for a month when the employer didn't offer minimum essential coverage, meaning health coverage under an eligible employer plan, to at least 95 percent of its full-time employees and their dependents, and at least one full-time employee received a premium tax credit. Dependents here means children under 26, not spouses.

Its formula is what startles owners. The count is every full-time employee, minus up to 30, multiplied by one-twelfth of $2,000 (adjusted for inflation) for each month. In the IRS's illustration, an employer with 70 full-time employees that offers no coverage all year, and has one employee who receives the credit, owes (70 minus 30) times $2,000, or $80,000, before any inflation adjustment.

One employee's credit triggers it. The whole workforce measures it.

A small cushion sits inside the 95 percent test: according to the IRS, an employer may miss the greater of 5 percent of its full-time employees or five of them and still pass.

The (b) payment covers a different kind of month: coverage went to enough people, yet a particular full-time employee still received a credit, because the coverage wasn't affordable for that employee, didn't provide minimum value, or wasn't offered to that employee at all. Minimum value is a floor on the share of benefit costs a plan pays, and affordability is tested against a percentage of income that's adjusted each year.

This one counts only the full-time employees who received a credit, at one-twelfth of $3,000 (as adjusted) per month, and it can never exceed what (a) would have produced. The IRS's example is 125 full-time employees with 14 receiving the credit all year: 14 times $3,000 is $42,000, well under the cap of (125 minus 30) times $2,000, or $190,000. Again, those are unadjusted figures.

Actual per-employee amounts run higher than $2,000 and $3,000 because the statute indexes them. The IRS's Q&A lists adjusted amounts year by year through 2023, when they stood at $2,880 and $4,320. For any other year, the figure that matters is the adjusted amount for the calendar year printed on your letter.

Related companies have one more line of arithmetic. A commonly owned group shares a single 30-employee reduction, divided ratably by full-time headcount, while each member's payment is computed on its own employees. As a hypothetical, three commonly owned companies with 20 full-time employees each would each get a reduction of 10, not 30.

Form 14765, the employee listing

The packet also includes Form 14765, the Employee Premium Tax Credit Listing. It lists employees by name and the last four digits of a Social Security number, with a column for each month.

Each month carries indicator codes pulled from two lines of the Form 1095-C your company filed for that employee. Line 14 holds the code describing the offer of coverage. Line 16 holds the code for a safe harbor or other relief, such as the employee not being employed or not being full-time that month, or an affordability safe harbor.

Those safe harbors let an employer test the employee's required contribution against Form W-2 wages, rate of pay or the federal poverty line, rather than the household income figure the general rule uses.

Per the form itself, a month that isn't highlighted is a month the IRS treats that person as an assessable full-time employee: a credit was allowed and no safe harbor or other relief applied. Codes that begin with X in place of the usual 2 mean the IRS concluded the employer didn't qualify for the affordability safe harbor it claimed on line 16.

Those line descriptions follow the 2025 form instructions. A letter about an earlier year calls for that year's instructions.

Form 14764, the response form

Form 14764 is where the employer says it agrees or disagrees. Agreement means signing the form and returning it with full payment. Disagreement means explaining why and marking the needed changes on Form 14765, then returning the documents by the response date.

If someone will speak to the IRS for the company, the IRS requires a Form 2848, and it must state the year and that it covers the Section 4980H Shared Responsibility Payment. We've written separately about how Form 2848 differs from Form 8821.

Where the numbers came from

The IRS builds the proposal from two places: the Forms 1094-C and 1095-C the employer filed, and the individual returns of its full-time employees. That makes most disputes data disputes, and it's why the IRS's page on the letter tells employers to review the forms they filed for the year.

Form 1094-C, the transmittal, has a column called the Minimum Essential Coverage Offer Indicator. The employer answers yes or no on whether it made the 95 percent offer, for the full year or for particular months. A pattern we see is an (a) payment proposed against a company that did offer coverage broadly, because that column said otherwise.

Employee-level errors have their own shape. Someone is coded full-time for months before hire or after termination. Sometimes the listing includes a part-time employee or one who was in a waiting period: the IRS states that a part-time employee's credit can't be the basis for liability, and that an employer isn't liable for an employee during what it calls a limited non-assessment period.

Who prepared the forms matters less than owners hope. A payroll vendor or professional employer organization may have generated every page, but the letter comes to the employer, and the response has to rest on the company's own records.

The response date: two numbers and the one on your letter

So which is it, 30 days or 90? Both numbers appear in primary sources, and they answer slightly different questions.

The IRS's Q&A on these provisions says the response is due by the date shown on the letter, and that the date generally falls 30 days after the letter's date.

Congress has spoken to the timing as well. An amendment enacted December 23, 2024, in the Employer Reporting Improvement Act, added a paragraph to section 4980H requiring the IRS to allow an employer at least 90 days from the date of the first letter proposing an assessment to respond before the agency takes further action. By its terms, the amendment applies to assessments proposed in taxable years beginning after the date of enactment.

We don't read these as a contest. One is the agency's description of its general practice. The other is a statutory floor for the letters it covers, and which letters it covers turns on that effective-date language, not on a guess.

In practice, the date printed on your letter is the one that goes on the calendar. A letter showing a shorter window is a reason to get advice quickly, not a reason to assume more time exists. The IRS's own page says an employer that needs more time should contact the agency using the information in the letter.

After you respond: Letter 227 and Appeals

The IRS answers a response with a version of Letter 227. Like the first letter, it isn't a bill. The versions the IRS describes include:

• Letter 227-J acknowledges a signed agreement. The payment will be assessed and the case closed.
• Letter 227-K shows the proposed payment reduced to zero and closes the case.
• Letter 227-L shows a revised amount, with an updated Form 14765 and calculation table.
• Letter 227-M says the amount didn't change.
• Letter 227-N reflects a decision reached in Appeals and closes the case.

With a 227-L or a 227-M, the employer can agree or can request a meeting, and the IRS lists both the manager and Appeals as available. Appeals is the IRS's administrative review office, and the conference it offers here happens before assessment.

The Q&A says the Appeals request should be in writing, by the response date on Letter 227, which it describes as generally 30 days from that letter's date. The 90-day statutory floor speaks to the first letter, and nothing we read extends it to this one.

Our general view of how IRS Appeals works applies here with one adjustment: the argument is almost always about records. An Appeals request tends to go further when the first response already laid out hire dates, hours, offers and employee contributions month by month.

Assessment and what follows

If the employer answers neither letter, the Q&A says the IRS assesses the proposed amount and issues Notice CP 220J, the notice and demand for payment.

From there the posture changes. The statute makes the payment payable on notice and demand and has it assessed and collected in the same manner as an assessable penalty. The IRS refers employers to its collection publication for payment options such as installment agreements.

One more feature belongs in the budget conversation: the payment isn't deductible for federal income tax purposes.

How far back the IRS can go

The same December 2024 law added a limitations period to section 6501 of the Code. For an assessable payment under section 4980H, the period for assessment expires six years after the due date for filing the return under section 6056 for the calendar year involved, or six years after that return was actually filed, if later. The section 6056 return is the coverage reporting behind Forms 1094-C and 1095-C.

Its effective-date provision ties the rule to returns due after December 31, 2024. What governs earlier years is a separate question, and not one to answer from the face of a letter.

What the letter won't forgive, and what it will

Honesty about the government's side helps here. The figures come from what the employer itself reported, and if the filed forms were right, the calculation is arithmetic set by statute. Nothing in the IRS materials cited here describes a waiver for good intentions or a tight year.

The employer's side is just as real. The process gives a chance to respond before anything is assessed, and one version of the IRS's reply exists for a proposal reduced to zero. A letter built on a miscoded form is a different problem from a letter built on a missing offer of coverage.

That difference is where this stops being a payroll question. ALE status turns on ownership structure, and the answer to the letter turns on employment records that may sit with a former vendor.

If a Letter 226-J has arrived, or your group of companies sits close enough to 50 full-time employees that one could, we're glad to talk through how the process works. You can reach us through the contact page or at our Oklahoma City office. An early conversation tends to cost less than a late one.

This article is general information about Oklahoma, Texas, and federal law, not legal advice, and it does not create an attorney-client relationship. Facts matter; talk to a lawyer about yours.