Article

IRS noncompliance letters: Just when you thought it was safe to get out of the (ACA) water

May 23, 2025 · Authored by Eric Pochas

With the 2024 Affordable Care Act (ACA) reporting season now officially behind most employers, the focus of those responsible for managing ACA compliance tends to shift to the beach and fun in the sun. It takes a lot of hard work after all to wrangle those complex 1094s and 1095s to a place of confidence and out the door to individuals. Then there’s the second wave of stress that hits with navigating filings into the IRS Affordable Care Act Information Returns (AIR) system, which this year we know was a wave that hit more employers than ever. But just when it feels safe to get back into the water, new ACA “shark fins” start appearing out of nowhere and without warning.

As background, the Internal Revenue Service tends to show employers grace by suspending notice or letter issuance tied to suspected ACA during the months when reporting for the most recent tax year is due. By way of the calendar, this most recent “grace period” was represented by the months of January through March of 2025 for informational reporting related to the January through December of 2024 tax year. Employers subject to Form 1094/1095 reporting requirements were required to provide information about offers of coverage made and coverage maintained by individuals for each month of the 2024 tax year.

True to form, employers are now starting to see notices land with IRS issuance dates of early May 2025 for suspected noncompliance during the 2023 tax year. The correspondence tends to take two primary forms:

• IRS Letter 226-J: This letter proposes penalties when the IRS suspects that certain individuals were not offered coverage by Applicable Large Employer (ALE) subject to the ACA’s Employer Shared Responsibility (“pay or play”) provision.
• IRS Letter 5699: This letter is issued when the IRS, based on a review of the total Forms W-2 filed for a particular tax year, suspects the employer is an ALE subject to the 1094/1095 filing requirement but is unable to determine such because it cannot locate any forms for that same ALE within its database.

By way of form, these letters look the same. They are not the same, however, when it comes to substance. The only traits they have in common are the following:

• Response timing: Both letters require that a response be mailed to the IRS at the address shown at the top of the letter within 30 days from the date of the letter.
• Meet the 4980H Response Unit: The unit within the IRS specifically structured to handle both types of these responses is known as the 4980H Response Unit. The letters contain telephone and e-fax contact information for this unit.

The letters are different when it comes to the investigative work required to formulate an intelligent, well-structured response:

• Are the forms hiding in plain sight? In some instances, an employer who received Letter 5699 may very well have filed the forms. Employers are often confused by the form’s terminology and file forms for multiple companies under a single Federal Employer Identification Number (FEIN). The letter itself provides a mechanism to indicate when that is true.
  More often, though, the opposite is true. Employers believe a single FEIN that is “small.” Let’s say only five full-time employees are employed under the FEIN in question. Since it’s less than 50 employees, the employer assumes it does not have a filing obligation and therefore does not file forms for these employees. In this scenario, the employer is advised to reverse course and prepare and file forms under this FEIN for these employees as quickly as possible.
• Are the forms just plain hiding? When Letter 226-J is received, the IRS is making coverage assumptions based on information reported on Form 1095. This means a filing was made — and that’s the good news. The bad news in some instances is that employers lose track of either the forms, the form filings, or both. Not being able to evaluate forms and form filings from prior tax years is problematic because it limits the employer’s ability to conclude if it was the offer of coverage or the forms themselves that were the problem. These conclusions matter.
• What else might be “lost?” As people and systems change, it becomes increasingly difficult to understand who did what and when without the benefit of both the forms and documentation relating to that year’s filing effort. The forms are complicated and the files even more so, so it helps when actions taken and assumptions made by the employer to handle unique situations are written down. When that doesn’t happen and both the people and the systems disappear, be prepared to take a slow, laborious road to a response… without a map!

In any case, it is important to reemphasize the response action. In other words, it’s important to do something! Eventually, letters that go without responses move out of the 4980H Response Unit. Once this happens, it becomes much more difficult to provide responses appropriately and to gain understanding for past problems and delays.

Lastly, effective response documentation leans heavily upon the “science of the ACA.” For this reason, and because qualified and credentialed resources can interact directly with all IRS units, gaining help from ACA and IRS tax controversy experts is recommended whenever these notices are received. The good news is that penalty assessments can be fully rectified when handled with the proper level of urgency and care. Done this way, it really can be safe to get back in the water!

Baker Tilly Vantagen's benefits administration practice supports ACA compliance and both current and prior year 1094 and 1095 reporting support as engrained elements of benefits enrollment, as well as on a project or standalone basis.

If you have received a penalty notice or if you need strategic or consultative support in this area, connect with us.