If you have clients that meet the Affordable Care Act’s definition of a “large group,” they may soon receive an unwelcome letter from the Internal Revenue Service — if they haven’t already. This Letter 226J informs these groups that they may be liable for an Employer Shared Responsibility Payment (ESRP) based on a discrepancy between what the group submitted to the IRS in 1094-C and 1095-C forms for the 2015 tax year and the individual income tax returns filed by some of the group’s employees for that tax year.

If your client gets this letter they’re likely to be … confused and perhaps a bit unsettled. Since they’ll figure out the letter involves their benefit plans they’ll soon be calling you.

What’s going on here? And what are you supposed to do about it?

Before we answer those questions a caveat: this post is not providing legal advice. Consult your lawyer for that. Instead, think of this article as a heads-up: expect calls from some of your larger clients (because you’re not busy enough in the fourth quarter). When those calls come in you’ll want to be ready.

What’s Going on Here

Remember the ACA’s employer mandate to offer health care coverage to their employees? This requirement creates an opportunity for employers to pay-or-play. If they offer qualifying coverage, great. If they don’t, they are required to make an Employer Shared Responsibility Payment. An ESRP is government-speak for “hefty fine.”

Groups demonstrate they chose to play and provided coverage when they 1094-C and 1095-C with the Internal Revenue Service. If the group’s workers income tax filings show they had no qualifying coverage when employed by the firm, however, a flag gets raised deep in an IRS basement somewhere (figuratively speaking). The raising of this flag triggers an IRS Letter 226J to your client

When it comes to determining if your client is subject to an ESRP, size matters. So does timing. Originally the large group employer mandate was to take effect in 2014. The Obama Administration, however, postponed enforcement until the 2015 tax year for groups of 100 or more full time equivalent employees (FTEs). Groups of 50 or more FTEs needed to comply with the mandate in 2016. FTEs is different than a simple headcount of full-time employees. FTEs take into account hours worked by employees working part-time or for part of the year.

This means groups with 100 or more FTEs in 2015 were required to provide qualifying coverage or pay a fine. Letters concerning that fine are going out now. In 2016, clients with 50 or more FTEs will be subject to this requirement. That means in 2018 even more IRS letters are likely to flow out of that basement. And that, in turn, means more unsettled clients.

What You Are Supposed to Do About It

If the terms like ESRP, FTE, 1094-C and the like sound like gibberish to you, don’t worry. Most acronyms sound like gibberish. But that doesn’t mean you don’t need to get educated about them. Now. Fortunately, that’s a relatively straightforward process.

If you’re a member of the National Association of Health Underwriters, head over to NAHU’s Compliance Corner. There’s a plethora of information there. You can also submit questions on the site and have them answered by HR professionals. If you’re not a NAHU member, join today. Access to the tools and resources in the NAHU Compliance Corner alone is worth the membership fee (and membership gets you so much more).

Even if you consider yourself an ACA pro, NAHU’s resources are invaluable. So is information available on the IRS site. They offer a clear explanation of the explanation of the Letter 226-J and a useful guide to the employer mandate, including a guide for calculating FTEs.

Several companies specialize in supporting insurance professionals and their clients with expert benefit advice and help in navigating the ACA. Ask your colleagues and peers for recommendations. Just a word of caution: some vendors will try to tie you into multi-year, expensive contracts. Be careful, you’re looking for answers to benefit questions and that shouldn’t require such a long-term commitment.

When your clients receiving an IRS Letter 226J call you, remember, you’re an insurance professional, not an attorney or CPA. Channel your inner Doctor McCoy and inform them of this reality. (Unless, of course, you are an attorney or CPA in which case, proceed at your own risk).

The point is, be careful of offering advice — and accepting liability — you’re not qualified to provide. When you get the call, your job is to calm your client, let them know this is happening across the country, and reassure them you’re happy to work with their tax advisor. Then encourage them to call that tax advisor, share the letter, and give that adviser your contact information.

As a rule, letters from the IRS are rarely fun and Letter 226Js are not the exception to that rule. They will require you to put in some additional effort. That’s OK. Providing service to your clients is a critical part of what professional insurance brokers do. Arm yourself with an understanding of this area of the law and take your own advice: stay calm.


About the Author

Alan Katz is the CEO of Take 44, the company behind NextAgency. He previously served as SVP for Individual and Small Group Sales at WellPoint (now Anthem) and Chief Sales Officer at SeeChange Health. Alan entered the insurance industry in 1983 and is a past President of the National Associations of Health Underwriters. He received NAHU’s “Person of the Year” award in 2013. In his off time, Alan can be found playing competitive poker or catching up on a Star Wars movie.