Employers are seeing a noticeable increase in IRS Letter 226‑J notices — the letters the IRS uses to propose an Employer Shared Responsibility Payment under Section 4980H of the Affordable Care Act. The rules themselves have not changed. What has changed is the technology behind how the IRS enforces them, and one improvement in particular is driving the surge: the IRS can now link individual Marketplace insurance subsidies directly to employer identification data.

So far this year, I have assisted dozens of clients on their analysis and response to ESRP 4980H penalty notices.  Those notices have ranged from the modest amount of a few thousand dollars, to hundreds of thousands of dollars, for each employer.  I have even helped new clients that have received multiple years of notices in the same year.  Most of the notices earlier this year were for tax year 2023, then later, a flood of 2024 notices came out, with again, some employers getting both years at once.  So what it happening?

For years, the bottleneck in ACA enforcement was the IRS’s own plumbing. To connect an individual’s Marketplace subsidy back to the employer who should have offered that person affordable coverage, the agency had to reconcile three separate sets of data — employer filings on Forms 1094‑C and 1095‑C, subsidy determinations made by the Marketplaces, and individuals’ own tax returns — and much of that work was done by hand. That is exactly what has changed. Significant improvements to the IRS’s Affordable Care Act Information Returns (AIR) system now allow the agency to automatically tie each subsidized individual to the specific Employer Identification Number (EIN) and to the coverage that employer reported. The moment an employee receives a Marketplace subsidy, the system can trace it directly back to the employer’s EIN and compare it against what was filed — automatically, and at scale.

The impact comes down to speed and scale. Because the IRS can now analyze employer reporting and generate proposed penalties in a largely automated fashion, it can work through far more employers and far more reporting years in far less time than ever before. The multi‑year lag that many employers came to treat as a de facto grace period should no longer be assumed, and as this technology continues to mature that window will keep compressing. In short, the IRS can identify apparent non‑compliance and issue penalties faster today than at any point since the employer mandate took effect.

This is precisely why broker review has become so important. Because the process is now automated, a 226‑J can be triggered by a simple reporting error rather than any actual coverage failure, which makes a knowledgeable review of ACA reporting before it is filed more valuable than ever. Right Path Benefits works alongside employers to review their 1094‑C and 1095‑C filings for the kinds of discrepancies these systems flag, and to correct problems while they are still easy to fix. And if a 226‑J notice does arrive, it should not be set aside — it is a proposed assessment, not a final bill, and employers generally have only 30 days to respond. Employers are encouraged to contact us promptly, and our team will help assemble a documented response that can reduce or eliminate the proposed penalty.

This article is provided by Right Path Benefits for general informational purposes and does not constitute legal or tax advice.