ACA Penalties and IRS Letters: What Employers Need to Know When the IRS Comes Knocking
Few things can make an HR professional’s heart sink faster than opening the mail and seeing the words “Internal Revenue Service.”
Now add a six-figure dollar amount and a reference to the Affordable Care Act (ACA).
An immediate sense of panic is understandable, but it may not be necessary.
Receiving an IRS letter about ACA compliance does not automatically mean your organization owes the amount listed. If you understand the notice, the stage of the process, and your response options, you can make a significant difference in the outcome.
Key takeaways
- An IRS ACA penalty letter often contains a proposed amount. The proposed amount is not necessarily the final amount you owe.
- The letter or notice number (such as 5699, 226-J, or a CP notice) tells you where you are in the IRS process.
- Responding before the IRS issues a CP notice generally gives employers more options.
- Compare the IRS’s information with your own payroll, benefits, and ACA records before you pay.
Table of Contents
What Is an ACA Penalty?
Under the Affordable Care Act, certain employers are considered Applicable Large Employers (ALEs). An ALE may be subject to an Employer Shared Responsibility Payment (ESRP) if it does not meet certain coverage requirements.
What is an Applicable Large Employer (ALE)? An ALE is an employer that averaged 50 or more full-time employees, including full-time equivalents (FTEs), during the prior calendar year. For ACA purposes, a full-time employee generally works an average of at least 30 hours per week (130 hours per month).
The Two Types of ACA Penalties Under Section 4980H
- 4980H(a) penalty: Generally applies when an ALE does not offer minimum essential coverage to at least 95% of its full-time employees and their dependents, and at least one full-time employee receives a premium tax credit.
- 4980H(b) penalty: Generally applies when an ALE offers coverage, but at least one full-time employee receives a premium tax credit because coverage was not offered to that employee, was unaffordable, or did not provide minimum value.
ACA compliance involves more than whether a company offers health insurance. Employee status, hours worked, measurement periods, offers of coverage, affordability, and reporting all matter.
And then there is the IRS correspondence.
Types of IRS ACA Letters and Notices
Not all IRS letters are created equal. The first step is to understand which type of notice you received, because the notice number can tell you a lot about where you are in the process.
Letter 5699: “Where Are Your ACA Forms?”
The IRS generally sends Letter 5699 when it believes an employer may be an ALE but does not have the required ACA information returns, such as Forms 1094-C and 1095-C, on file.
There may be a legitimate reason for the discrepancy, but you should address it promptly. Ignoring it and hoping it goes away is not a strategy.
Letter 226-J: The Proposed ACA Penalty
The IRS issues Letter 226-J to ALEs it believes may be liable for an ESRP. The letter includes a proposed assessment, an explanation of how the IRS arrived at that amount, and instructions for responding.
Here is the important part: a proposed assessment is not necessarily the final amount you will owe.
Employers have an opportunity to review the information, identify discrepancies, and respond with supporting documentation. The first number the IRS sends may not be the last one.
CP Notices: When the Process Has Moved Forward
What CP notices are: CP notices are IRS communications identified by the letters “CP” followed by a number. They address a range of tax matters, including balances due, account changes, payments, and civil penalties.
What the number means: The specific CP number identifies the issue covered by the notice and explains what action, if any, the recipient must take.
Some employers assume that once they receive a CP notice, the opportunity to address the issue has passed. That isn’t necessarily how the process works.
However, a CP notice does mean the situation has progressed, which can limit what can be done to reduce the penalty. That’s why it’s important to respond to IRS letters before you receive a CP notice.
If you do receive a CP notice, contact the IRS immediately to find out which options may still be available to reduce the penalty.
The number in the upper corner of the letter isn’t there just to make it look official. It tells you where you are in the process.
Why You Shouldn’t Assume the IRS Calculation Is Correct
This is where an ACA penalty review becomes especially important.
For ESRP purposes, the IRS bases its determination on information that includes the Forms 1094-C and 1095-C the ALE filed and information from employees’ individual income tax returns.
But the IRS doesn’t have your entire HR department sitting next to it.
There may be differences between what the IRS has on record and what your payroll, benefits, HR, or ACA records show. There may also be reporting errors that need to be identified and corrected.
That’s why an ACA penalty should be reviewed, not simply paid.
How an ACA Expert Can Help You Respond
ACA penalty correspondence is not the place for guesswork. The rules surrounding full-time status, measurement periods, offers of coverage, affordability, reporting requirements, and ESRPs can be complicated, and a mistake in one area can affect an employer’s liability.
An experienced ACA professional can help you:
- Understand what the IRS is asking for
- Identify the type of notice you received and where you are in the process
- Review the proposed assessment
- Compare the IRS’s information with your records
- Identify potential discrepancies
- Determine whether additional documentation may support your position
- Prepare an appropriate response
- Understand the potential financial impact of the notice
Most importantly, a professional review may uncover information that changes the outcome.
Depending on the circumstances, a properly supported response can result in a proposed assessment being reduced or even eliminated. That doesn’t mean every penalty can be removed. Some assessments may ultimately be correct and payable.
But if you accept the first number the IRS sends without reviewing it, you may miss an opportunity to correct an inaccurate assessment.
The Cost of Doing Nothing Can Be Higher
Imagine opening an IRS letter and seeing a proposed penalty of $75,000.
The natural reaction might be: “We need to figure out how to pay this.”
The better first question may be: “Is $75,000 actually what we owe?”
Those are two very different questions.
An employer that immediately pays a proposed amount without investigating may never know whether the assessment could have been challenged or reduced. An employer that ignores the correspondence altogether may allow the IRS process to move forward without providing information that could have changed the assessment.
What to Do When You Receive an ACA Penalty Letter: 3 Steps
Don’t wait until the deadline is tomorrow. When an ACA-related IRS letter arrives, start with these three steps:
- Identify the notice. Is it a Letter 5699? A 226-J? A 227? A CP notice? Something else?
- Identify the deadline. IRS correspondence typically gives a specific date by which the employer needs to respond or take action.
- Get the right help. If the notice involves a significant potential penalty or complicated ACA compliance issues, consider having an experienced ACA professional review it before you respond.
The sooner you begin, the more time you have to gather records, evaluate the situation, and prepare an appropriate response.
Frequently Asked Questions About ACA Penalty Letters
Do I have to pay the amount on a Letter 226-J?
Not necessarily. Letter 226-J contains a proposed assessment. Employers can review the IRS’s information, identify discrepancies, and respond with supporting documentation, which may reduce or eliminate the proposed amount.
What does IRS Letter 5699 mean?
Letter 5699 generally means the IRS believes your organization may be an Applicable Large Employer but doesn’t have your required ACA information returns (Forms 1094-C and 1095-C) on file.
Is it too late to act if I’ve received a CP notice?
Not necessarily, but your options may be more limited. Contact the IRS right away to find out what may still be available.
Who is subject to ACA employer penalties?
Applicable Large Employers, meaning employers that averaged 50 or more full-time employees (including full-time equivalents) during the prior calendar year, may owe an Employer Shared Responsibility Payment if they don’t meet certain coverage requirements.
ACA Penalties Don’t Have to Be a Mystery
Receiving an IRS letter can be stressful, and seeing a large dollar amount can be even worse.
Whether you’re dealing with a Letter 5699, a Letter 226-J, a CP notice, or another ACA-related notice, understanding what the IRS is asking for is the first step. The next step is determining whether the information and calculation behind the notice accurately reflect your organization.
Understand it. Review it. Respond to it.
And when the stakes are high, get an expert in your corner.
Join Our Free Webinar: ACA Penalties and IRS Letters
HR Service, Inc. will present a webinar on ACA penalties and IRS letters on October 28, 2026. We’ll take a closer look at the types of correspondence employers may receive, what those notices mean, and why getting the right expertise involved early can make a difference.
Join us on October 28 and let’s make IRS letters a little less intimidating.