Receiving an ACA penalty letter can be alarming, especially when the proposed liability reaches six or seven figures and the IRS expects a response within a matter of weeks.

But the amount in the first letter is not necessarily final.

For an Applicable Large Employer, the IRS’s proposed assessment is generally based on information from Forms 1094-C and 1095-C, along with premium tax credit information reported through employees’ individual tax returns. If the original ACA filings contained inaccurate codes, incomplete data, or information that did not reflect what actually happened, the resulting penalty calculation may also be inaccurate.

An employer may be able to reduce or eliminate the proposed penalty by showing that an employee was not full-time for the month at issue, that qualifying coverage was offered but reported incorrectly, that coverage met an affordability safe harbor, or that another exception applied.

The key is to act quickly and respond with evidence. A strong ACA penalty response does not simply tell the IRS that its conclusion is wrong. It reconstructs the relevant reporting year, addresses each disputed employee and month, explains the correct treatment, and connects that explanation to reliable supporting records.

What should you do when you receive an ACA penalty letter?

When an ACA-related IRS letter arrives, the employer should:

1. Identify the exact letter or notice and record its response deadline.
2. Assign one person to coordinate the response across HR, benefits, payroll, finance, legal, and outside partners.
3. Determine how the proposed penalty or compliance issue was calculated.
4. Compare the notice with the Forms 1094-C and 1095-C originally filed.
5. Review every disputed employee and month using payroll, eligibility, enrollment, and coverage records.
6. Identify incorrect reporting codes, employee classifications, affordability results, or missing evidence.
7. Complete the required IRS forms and prepare a clear written explanation.
8. Submit the response as instructed, retain proof of delivery, and review all IRS follow-up promptly.

Do not assume that paying immediately is the safest course. Do not ignore the letter in the hope that the issue will resolve itself, either.

Letter 226J is the IRS’s initial notice that an employer may owe an Employer Shared Responsibility Payment. It presents a proposed assessment and gives the employer an opportunity to agree or respond with a written disagreement before the payment is assessed.

Can an ACA penalty be reduced or removed?

Yes. An ACA penalty may be reduced or removed when the employer can demonstrate that the IRS’s proposed amount is based on incorrect or incomplete information.

The IRS may believe that an employee did not receive an offer of coverage because the employer reported the wrong code on Form 1095-C. It may treat someone as an assessable full-time employee even though the person was in an initial measurement period or another limited non-assessment period. The agency may also be unable to determine from the filed form that an affordability safe harbor applied.

Some notices do not involve employer shared responsibility at all. They may concern missing, late, or inaccurate ACA information returns. Those penalties require a different response and may involve filing records, corrected forms, electronic transmission requirements, or reasonable-cause arguments.

The outcome depends on the notice, reporting year, underlying facts, and quality of the employer’s evidence. The IRS’s Letter 227 series includes Letter 227-K, which confirms that a proposed Employer Shared Responsibility Payment has been reduced to zero. Other versions may confirm a revised amount, acknowledge agreement, request further action, or explain appeal rights.

Complete elimination is therefore possible, but it is not automatic. Employers must show why the proposed assessment does not match the facts or the applicable ACA rules.

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Selerix has mitigated over $650 million in IRS penalties since 2017. We can help.

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Identify the ACA penalty notice you received

“ACA penalty letter” can refer to several different IRS communications. Before investigating the underlying data, identify the exact letter or notice. The correct response process depends on what the IRS is asserting and where the case stands.

IRS notice	What it generally relates to	What the employer should review
Letter 226J	A proposed Employer Shared Responsibility Payment under Internal Revenue Code Section 4980H	Forms 1094-C and 1095-C, employees listed on Form 14765, full-time status, offers of coverage, affordability, safe harbors, reporting codes, and the monthly calculation
Letter 5699	IRS records indicate that an organization may have been an ALE but did not file required Forms 1094-C and 1095-C	ALE status, controlled-group relationships, filing history, EINs, AIR transmission records, and whether the filing requirement applied
Notice 972CG	Proposed information-return penalties, including certain late, incorrect, or improperly filed returns	Filing dates, electronic transmission records, TIN errors, corrections, extensions, and reasonable-cause evidence
Letter 5005-A	An IRS examination or penalty determination involving failure to file or furnish required ACA information returns	Examination documents, filing and furnishing records, employer status, corrections, prior correspondence, and appeal instructions
Letter 227 series	The IRS’s response after reviewing an employer’s Letter 226J submission	Whether the IRS accepted the response, revised the assessment, reduced it to zero, requested more action, or provided appeal rights

Letter 5699 is used when IRS records indicate that an organization may have been an ALE but did not file the required Forms 1094-C and 1095-C. Notice 972CG generally proposes information-return penalties for problems such as late filing, incorrect or missing information, or failure to file electronically when required.

Not sure what your letter means?
Read Selerix’s guide to ACA penalty letters for more detail on the major notice types and the issues they raise.

12 ACA penalty reduction strategies after receiving a notice

The following process focuses primarily on Letter 226J because it is the notice most directly associated with a proposed ACA employer shared responsibility penalty. Many of the same investigative principles also apply to other ACA notices.

1. Confirm the notice details and response date

Begin with the basic information on the letter. Confirm that it was issued to the correct legal entity and EIN and that the reporting year matches the records being reviewed. Note the notice date, proposed amount, response address, IRS contact information, and every form or schedule enclosed. Most importantly, record the response deadline exactly as printed.

Letter 226J asks an ALE to respond by the date shown in the letter, which is generally within 30 days. The letter normally includes an Employer Shared Responsibility Payment Summary Table, Form 14764, and Form 14765.

The deadline can be difficult to meet because the employer may need to reconstruct payroll, enrollment, coverage, and reporting decisions dating back several years. Route the letter immediately to everyone who may hold relevant information. That often includes HR, benefits, payroll, finance, legal, tax, the benefits broker, and the ACA reporting provider.

Name a single response owner. Without a single coordinator, different teams may investigate the same issue separately, use inconsistent data, or assume that another department is communicating with the IRS.

When additional time appears necessary, follow the instructions in the notice and promptly contact the named IRS representative. Do not assume that the deadline is suspended merely because an internal investigation is underway.

2. Understand how the proposed penalty was calculated

Before attempting to reduce the amount, determine what the IRS believes happened.

• A Letter 226J summary generally shows proposed liability by month and identifies whether the calculation falls under Section 4980H(a) or Section 4980H(b).
• A proposed Section 4980H(a) payment usually means the IRS believes the employer failed to offer minimum essential coverage to the required percentage of full-time employees and their dependents during a particular month. Because this calculation can apply across the employer’s full-time population, the potential amount may be substantial.
• Section 4980H(b) is generally employee-specific. It may apply when a full-time employee received a premium tax credit, and the employer did not offer that employee affordable, minimum-value coverage—or when the filed information did not show the IRS that a valid offer, safe harbor, or other exception applied.

An employer may face different proposed treatments in different months. Review the monthly calculation rather than focusing only on the total at the top of the letter.

This first analysis tells the investigation team where to focus. A potential 4980H(a) issue may require a review of the employer’s overall offer percentage and full-time population. A 4980H(b) issue may turn on the records and codes associated with a smaller set of employees.

For more context, see Selerix’s guide to common Letter 226J triggers.

3. Compare the notice with Forms 1094-C and 1095-C

Obtain the exact ACA returns that were filed for the reporting year. Do not rely only on what the current benefits or compliance system shows today.

The employer should compare the notice with every relevant Form 1094-C, the authoritative transmittal, and the Forms 1095-C issued for the employees identified by the IRS. Review the employer’s monthly full-time counts, offer-of-coverage indicators, Aggregated ALE Group information, and the codes reported on Lines 14 through 16.

The IRS uses Forms 1094-C and 1095-C to evaluate whether an ALE may owe an Employer Shared Responsibility Payment. Those forms are considered together with information indicating that an employee received a premium tax credit.

The question is not only whether the employer complied. It is what the filed forms communicated to the IRS.

A record may have been corrected internally without a corresponding corrected return. A reporting platform may now show the proper eligibility status even though the transmitted Form 1095-C contained a blank or incorrect code. An employee may also have been reported under the wrong ALE member after transferring between entities.

Review Selerix’s explanation of ACA reporting codes when evaluating how Lines 14, 15, and 16 may have affected the proposed assessment.

4. Verify whether each listed employee was actually full-time

Do not assume that every person on the IRS list was an assessable full-time employee for every month shown. Reconstruct each employee’s status using the measurement method the employer had adopted for the reporting year. That may require payroll records, hours-of-service data, paid leave records, hire and termination dates, rehire history, measurement periods, administrative periods, stability periods, and records of transfers between jobs or entities.

Under the employer shared responsibility provisions, an employee is generally considered full-time at an average of at least 30 hours of service per week or 130 hours during a calendar month. The analysis may use the monthly measurement method or, when applicable, the look-back measurement method.

Internal labels do not settle the question. An employee classified as “part-time” in the HRIS could still qualify as full-time under the ACA. Conversely, an individual listed by the IRS may have been in an initial measurement period, a limited non-assessment period, or another situation that changes the employer’s liability.

A defensible response should explain the method and show the calculation. Simply stating that the employee was part-time is unlikely to be enough.

Selerix’s FAQ on calculating employee hours under the ACA provides additional background.

5. Check whether coverage was offered but reported incorrectly

The employer must investigate both the reporting and the underlying offer.

Look for contemporaneous records showing when the employee became eligible, when the offer was made, which plans were available, what the employee would have paid, and whether the employee enrolled or waived coverage. System timestamps, enrollment notices, election confirmations, waiver records, benefit guides, rate sheets, carrier records, and employee communications can all help establish the facts.

Evidence that the employee actually received an enrollment opportunity is much stronger than a later statement that coverage should have been offered under the plan rules.

The response should explain the correct ACA treatment and show why the originally reported code did not accurately reflect what occurred.

6. Recalculate affordability and safe-harbor eligibility

An employee’s receipt of a premium tax credit does not necessarily mean the employer owes a Section 4980H(b) payment.

The ACA’s affordability determination for an employee’s premium tax credit is based on household income, which employers generally do not know. Employers may instead rely on permitted affordability safe harbors, including Form W-2 wages, rate of pay, and the federal poverty line.

The IRS recognizes that these different methods can result in an employee receiving a premium tax credit even though the employer satisfies an affordability safe harbor and does not owe an Employer Shared Responsibility Payment for that employee.

Recalculate affordability using the indexed percentage and rules for the year covered by the notice. Do not use the current-year percentage.

The analysis should reflect the employee’s required contribution for the lowest-cost self-only option that provides the minimum value and the safe harbor the employer applied. It may also need to account for changes in pay, wellness incentives, employer flex credits, opt-out arrangements, partial months, or different contribution structures across employee classes.

A useful response does not merely assert that the plan was affordable. It shows the calculation, identifies the source data, and explains the applicable safe harbor.

7. Review the employees listed on Form 14765

Form 14765 is one of the most important documents in a Letter 226J review. It identifies the employees the IRS treated as assessable and shows the Line 14 and Line 16 codes originally reported for the relevant months.

Create a working table that brings the IRS position and the employer’s evidence together. The working table should address every employee and every month listed. It can also identify unresolved records, assign research to the appropriate team, and prevent the written narrative from contradicting the forms. That clarity is essential to producing a credible response.

8. Separate reporting errors from actual coverage failures

Not every proposed penalty arises from the same kind of mistake.

In some cases, coverage was offered correctly and only the reporting was wrong. In others, a source-data error caused the employer to report the wrong employee status or coverage date. There may also be months when coverage genuinely was not offered on time.

Treating all of these situations as one broad “coding problem” can weaken the response.

A reporting error should be addressed by identifying the original code, explaining the accurate code or treatment, and supplying proof of the underlying facts. An actual coverage failure requires a different analysis, including whether any limited non-assessment period or other relief applies. A penalty for late or inaccurate information returns under Sections 6721 or 6722 is also distinct from liability under Section 4980H.

Be precise and candid. An employer does not need to dispute every employee or month to successfully challenge the overall amount. Acknowledging a limited valid issue while thoroughly documenting why the remaining assessment is unsupported may make the response more persuasive.

9. Gather evidence supporting each disputed item

An ACA penalty response is only as strong as the records behind it.

The evidence should show what happened during the reporting year, not simply what the employer believes should have happened. Depending on the issue, that may require payroll and timekeeping reports, eligibility calculations, enrollment records, waiver forms, contribution schedules, affordability worksheets, plan documents, carrier files, COBRA records, system audit logs, or AIR filing confirmations.

Organize the exhibits so that an IRS reviewer can follow the argument without having to search through hundreds of unrelated pages.

Evidence should be tied to the specific employee, month, and disputed conclusion whenever possible. 

10. Complete the required IRS response forms

Follow the instructions provided with the notice rather than relying exclusively on a generic template.

The written response should explain the employer’s position clearly enough that the IRS can connect the narrative to the employee-month analysis. It should identify what the employer disputes, why the proposed treatment is incorrect, what the correct treatment should be, and which records support that conclusion.

Avoid sending a cover letter that simply states that the forms contained mistakes and encloses a large set of records. The response should do the analytical work for the reviewer.

Selerix’s IRS penalty letter playbook offers additional guidance on organizing an effective response.

11. Submit the response correctly and retain proof

Follow the delivery instructions printed on the notice. The correct address, fax number, or other submission method may be specific to the case.

Before sending, reconcile the response forms, narrative, and exhibits one final time. Confirm that everything is signed and dated, employee information is handled securely, attachments are legible, and the written explanation matches the corrections shown in the employee analysis.

Create a complete copy of exactly what was submitted.

The employer should also retain reliable proof that the IRS received the response on time. Depending on the permitted submission method, this might include certified-mail documentation, approved delivery-service tracking, or a fax confirmation.

Maintain the original letter, final response, supporting exhibits, delivery record, and notes from any phone conversations with the IRS in one central case file.

12. Review the IRS follow-up and appeal when appropriate

After reviewing the employer’s response, the IRS generally communicates its conclusion through the Letter 227 series.

The specific version does matter here. Letter 227-K indicates that the proposed Employer Shared Responsibility Payment has been reduced to zero. Letter 227-J acknowledges the employer’s agreement and states that the ESRP will be assessed. Other Letter 227 versions may revise the proposed amount, acknowledge additional information, or explain the employer’s next steps.

Compare the IRS’s response with the employer’s submission carefully. A lower amount does not necessarily mean every correction was accepted. Determine which employees and months remain in dispute and whether the IRS explains why certain arguments were rejected.

When the employer still disagrees, the Letter 227 instructions may provide the opportunity to request a pre-assessment conference with the IRS Independent Office of Appeals. Appeals has specific procedures for Employer Shared Responsibility Payment cases.

An appeal should identify the remaining disputed findings, explain the factual and legal basis for disagreement, and reference the supporting evidence. Employers should consider involving experienced legal, tax, or ACA compliance advisors before the appeal deadline passes.

If the payment is ultimately assessed, the IRS will issue a subsequent notice reflecting the amount due. At that stage, the employer’s options and procedural posture differ from those available during the proposed assessment process.

Common mistakes that weaken an ACA penalty response

• Missing the deadline. A potentially strong defense may become much harder to pursue when the employer fails to respond or appeal on time. Start the investigation immediately, even if some records still need to be located.
• Arguing from the total instead of the employee-month detail. Letter 226J is built from monthly data and specific employee records. A general statement that the employer offered coverage does not resolve the individual discrepancies behind the assessment.
• Relying on internal job labels. Calling an employee part-time, temporary, or seasonal does not establish ACA status. The response must reflect the applicable hours-of-service and measurement rules.
• Using current data instead of historical records. A benefits system may have been corrected after filing. The response must distinguish what was originally reported, what the records showed during the reporting year, and what the proper ACA treatment should have been.
• Making conclusions without evidence. Statements that coverage was affordable, an employee was ineligible, or an offer was made need calculations and records behind them.
• Submitting corrected forms without coordinating the response. Corrected Forms 1094-C and 1095-C may be appropriate, but filing them does not automatically replace the need to respond to the notice. Corrections should be coordinated with the explanation being provided to the IRS.
• Overloading the reviewer with unorganized documents. Evidence is most effective when it is indexed, labeled, and connected directly to the relevant employee and month.
• Ignoring the Letter 227 response. The IRS’s follow-up may create a new deadline for additional action or an appeal. A reduction should not be mistaken for full resolution until the remaining calculation has been reviewed.

When should an employer seek professional ACA penalty support?

Professional support becomes particularly valuable when the proposed amount is significant, the notice covers multiple years or legal entities, or the employer lacks the historical data needed to recreate the filing.

Outside assistance may also be appropriate when a proposed Section 4980H(a) payment is involved, because the calculation can extend beyond a small number of employees. Complex controlled groups, acquisitions, variable-hour populations, union workforces, inconsistent payroll systems, and uncertain affordability calculations can also make the response difficult to manage internally.

The need is not limited to technical knowledge of ACA. A strong response may require data reconstruction, coding analysis, document organization, calculations, written advocacy, and coordination with tax or legal counsel.

Employers should also consider support when the original reporting provider is no longer available, an initial response has already been rejected, or the organization is deciding whether to request an Appeals conference.

An experienced ACA penalty partner can help determine whether the proposed amount is supportable, isolate the employees and months driving it, identify potential reporting corrections or defenses, and prepare a coherent response package.

How to reduce the risk of another ACA penalty notice

Once the immediate response is complete, use the investigation to identify why the notice occurred. Focus on a concise set of year-round controls:

• Reconcile HR, payroll, benefits, carrier, and ACA reporting data regularly.
• Track full-time status, hours, measurement periods, and coverage offers consistently.
• Test affordability using the correct annual threshold and documented safe harbor.
• Validate Forms 1094-C and 1095-C before filing, especially Lines 14 through 16.
• Confirm that federal and applicable state filings are accepted under the correct EIN.
• Retain eligibility, coverage-offer, waiver, affordability, filing, and correction records.

For more guidance, see Selerix’s resources on ACA year-end reporting and ACA reporting compliance solutions.

Take action before the proposed penalty progresses

An ACA penalty notice is serious, but the proposed amount may not reflect the complete story.

The employer’s best opportunity to reduce or eliminate the assessment begins with a timely, disciplined review. Understand what the IRS believes happened. Reconstruct the relevant employee and coverage records. Separate reporting mistakes from true coverage failures. Then present the correct facts in a response that is clear, specific, and supported by evidence.

Selerix helps employers investigate ACA penalty notices, reconstruct historical reporting, identify potential errors and defenses, and prepare organized responses supported by the underlying data.

Received an ACA penalty letter? Talk to a Selerix ACA expert before the proposed assessment moves forward.

Frequently asked questions about ACA penalty reduction

Is an ACA penalty letter a final bill?

Letter 226J is not a final bill. It is the initial letter informing an Applicable Large Employer that it may owe an Employer Shared Responsibility Payment. The proposed amount is based on the employer’s Forms 1094-C and 1095-C and premium tax credit information associated with its employees. The employer can agree or submit a written disagreement before the IRS assesses the payment. 

Can an ACA penalty be removed completely?

Yes. The IRS may reduce a proposed Employer Shared Responsibility Payment to zero when the employer’s response establishes that the proposed liability does not apply. Letter 227-K is used to acknowledge that the information submitted reduced the proposed ESRP to zero.

In other cases, the employer may obtain only a partial reduction because some employee-months remain accessible.

How long do employers have to respond to an ACA penalty letter?

Employers must respond by the date printed on the notice. For Letter 226J, that date is generally within 30 days, but the actual deadline shown in the letter controls. The IRS Internal Revenue Manual confirms that Letter 226J requests a written response by the stated date and includes instructions for employers that agree or disagree with the proposed amount.

Because reconstructing historical data can take considerable time, employers should begin the review immediately.

Should an employer file corrected Forms 1094-C and 1095-C after receiving Letter 226J?

Not automatically. The employer should first determine whether the original returns were inaccurate, what the correct reporting should have been, and how any correction will coordinate with the Letter 226J response. Submitting corrected returns does not remove the obligation to answer the letter by its deadline.

The response should clearly distinguish among the original reporting, the underlying facts, and the proposed correction. Employers should follow the notice instructions and obtain advice appropriate to their particular circumstances.

What happens after an employer responds to Letter 226J?

The IRS reviews the employer’s submission and generally replies with a Letter 227. Depending on the findings, the IRS may reduce the proposed payment to zero, revise the amount, acknowledge the employer’s agreement, or explain additional action and appeal rights.

When the employer continues to disagree, it may be able to request a pre-assessment conference with the IRS Independent Office of Appeals by following the instructions and deadline in the Letter 227 response.

This article provides general information and is not legal or tax advice. Employers should consult qualified legal, tax, or ACA compliance professionals regarding their specific notice and circumstances.

Don’t let a proposed ACA penalty become a final assessment. Talk to a Selerix ACA expert to review the notice, identify errors, and build a response before the deadline.