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

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.