IRS Letter 226-J: How to Respond to an ACA Penalty Notice

If an envelope from the IRS marked Letter 226-J lands on your desk, your first reaction is usually a jolt of panic — followed by a number with a lot of zeros in it. Take a breath. IRS Letter 226-J is a proposed penalty, not a final bill, and as of 2025 you have far more time to respond than employers used to get. Most proposed assessments are reduced or wiped out entirely once the employer responds with the right documentation. This guide walks through exactly what the letter is, why you received it, and how to respond — step by step — before the deadline runs.

What is IRS Letter 226-J?

IRS Letter 226-J is the notice the IRS sends an Applicable Large Employer (ALE — generally an employer with 50 or more full-time-equivalent employees) when its records suggest the employer owes an Employer Shared Responsibility Payment (ESRP) under the Affordable Care Act's employer mandate. It is the opening move in the IRS's enforcement process, not the closing one.

The letter is generated by a computer match. The IRS lines up the offer-of-coverage data you reported on Forms 1094-C and 1095-C against a second data set: which of your employees received a Premium Tax Credit (PTC) when they bought coverage on a health insurance Marketplace. When those two data sets collide in a particular way, the system flags you.

Why you received it

For the IRS to propose a §4980H(a) penalty, two things generally have to be true in the same month:

1. Your filings indicate you did not offer minimum essential coverage to at least 95% of your full-time employees (and their dependents), and
2. At least one of your full-time employees received a Premium Tax Credit for Marketplace coverage that month.

The §4980H(a) penalty — the "sledgehammer" — is the larger of the two ACA employer penalties, because it is assessed against almost your entire full-time headcount, not just the employees who got a credit. The IRS can also propose the separate §4980H(b) penalty (the "tack hammer") when you did offer coverage, but the coverage was unaffordable or didn't provide minimum value, and an employee got a credit as a result. If the distinction between those two penalties is fuzzy, our explainer on §4980H(a) vs. §4980H(b) breaks it down.

Here's the part that catches employers off guard: a large share of 226-J letters are triggered not because coverage was actually missing, but because the codes on the 1095-C misdescribed what was offered. More on that below — it's the single most important thing to check.

What's inside the envelope

Letter 226-J is a packet, not a one-page notice. Expect to find:

• A summary of the proposed ESRP, broken down by month, telling you whether the proposed amount is a §4980H(a) or §4980H(b) assessment.
• Form 14765 — the Employee Premium Tax Credit (PTC) Listing. This is the heart of the packet: a month-by-month list of the specific employees who received a credit and whose 1095-C codes (Lines 14 and 16) led the IRS to believe a penalty applies.
• Form 14764 — the ESRP Response. This is the form you send back to agree or disagree.
• A response date — the deadline by which the IRS must receive your reply.

The proposed dollar amount is calculated at the §4980H penalty rate for the specific tax year being assessed, indexed for inflation each year. For 2026, that rate is $3,340 per full-time employee under §4980H(a) and $5,010 per credit-receiving employee under §4980H(b) — you can see how those figures are built up in our 2026 ACA penalties guide. Because the IRS typically runs about two years behind, letters arriving in 2026 most often assess the 2024 or 2025 tax years, at those years' (lower) indexed rates.

You now have 90 days to respond — not 30

This is the most important recent change, and it's good news. The Employer Reporting Improvement Act (H.R. 3801), signed into law on December 23, 2024, requires the IRS to give employers at least 90 days to respond to Letter 226-J — up from the previous 30-day window. The longer clock applies to any Letter 226-J issued on or after January 1, 2025, including letters that assess returns filed in earlier years.

The same law also set a six-year statute of limitations on ESRP assessments, running from the due date of your §6056 return (your 1094-C/1095-C filing) or the date you actually filed, whichever is later. That gives both sides a defined window — and it means old filing years don't stay open indefinitely.

How to respond to Letter 226-J, step by step

Whether you ultimately agree or disagree, the response process is the same: reconcile, decide, document, and submit on time.

The most common — and most fixable — scenario is a coding error. Say you offered an affordable, compliant plan to a full-time employee all year, but the 1095-C reported code "1H" (no offer) for several months instead of the correct offer code. The IRS sees "no offer," matches it to that employee's Marketplace credit, and proposes a penalty for coverage you actually provided. Correcting the codes on Form 14765 and showing your underlying offer records typically resolves it.

What happens after you respond

After the IRS reviews your Form 14764, it issues a version of Letter 227 — a series of acknowledgment letters that close out or continue the case:

• Letter 227-K closes the case with the penalty reduced to zero.
• Letter 227-L reduces the proposed penalty to a revised (lower) amount.
• Letter 227-M maintains the original proposed amount and explains why.

If you still disagree after a Letter 227, you can request a pre-assessment conference with the IRS Independent Office of Appeals — your deadline for that is stated in the 227. Only after all of that, if the penalty stands, does the IRS issue Notice CP220-J, the actual bill. The takeaway: there are multiple off-ramps between the first letter and an enforceable assessment — but every one of them depends on you having responded.

Most 226-J penalties trace back to your 1095-C — not missing coverage

If there's one lesson compliance teams take from 226-J season, it's that clean reporting is the best defense. The errors that most often generate a phantom penalty are predictable:

• Variable-hour employees moving in and out of full-time status, mis-coded on Line 16 for the months they were (or weren't) full-time.
• Mid-year hires and terminations, where the limited non-assessment period coding for a new hire's first months gets missed.
• Affordability safe-harbor mismatches — reporting the rate-of-pay safe harbor for salaried employees who should be on the W-2 safe harbor, or vice versa.
• FTE miscounts on the 1094-C that don't reconcile with the headcount the IRS expects.

For employers managing large hourly and variable-hour workforces — restaurants, staffing, hospitality, retail, healthcare — this is exactly where manual tracking breaks down, and exactly where a 226-J becomes more likely.

How to prevent the next Letter 226-J

The durable fix is upstream of the letter: offer compliant coverage to substantially all of your full-time workforce, and report it accurately.

That offer threshold is where a minimum essential coverage plan does real work. Offering an MEC plan to at least 95% of your full-time employees directly addresses the §4980H(a) trigger behind most Letter 226-J assessments — the "no offer to 95%" finding simply doesn't apply when the offer is documented and consistent.

Benefi is a minimum essential coverage plan built for hourly and variable-hour workforces — the kind of population where major medical economics rarely pencil out but the penalty math still bites. One honest caveat, stated plainly: because MEC does not provide minimum value, it satisfies §4980H(a) but does not, on its own, eliminate the separate §4980H(b) penalty tied to affordability and minimum value. MEC closes the larger sledgehammer exposure; the affordability question is a distinct calculation you still manage. Used correctly — offered to substantially all full-time employees, reported with accurate codes — it removes the most common reason a 226-J shows up at all.