ACA penalty letters can be easy to misunderstand.

For one thing, they have different purposes. Some ask why an employer did not file required information returns. Some propose penalties for late, missing, or inaccurate reporting. Others might notify an Applicable Large Employer that the IRS believes it may owe an Employer Shared Responsibility Payment, or ESRP penalty.

And not every letter is looking for payment.

Letter 226-J, for example, is an initial proposed ESRP assessment. It gives the employer an opportunity to review the IRS’s calculation and respond before a payment is assessed. A CP220J, by contrast, is issued after the IRS has assessed the Employer Shared Responsibility Payment and shows the resulting balance due.

If you’ve received a penalty letter, you’ll want to start with understanding where a letter fits in the IRS process. The employer’s deadline, required documents, available defenses, and next step all depend on the exact correspondence received.

This guide explains the ACA penalty letters employers may encounter, the rules behind them, current penalty amounts, and how to respond.

What is an ACA penalty letter?

An ACA penalty letter is a common term for IRS correspondence involving Affordable Care Act employer reporting or Employer Shared Responsibility requirements. It may concern missing returns, reporting errors, a proposed ESRP penalty, the outcome of an employer’s response, or an assessed balance. The letter number shows which issue and response process apply.

ACA correspondence may also include missing-return inquiries, proposed information-reporting penalties, proposed Employer Shared Responsibility Payments, acknowledgment letters, closing letters, and assessment notices.

At a glance

• Letter 226-J: The IRS’s initial proposal of an Employer Shared Responsibility Payment under Section 4980H.
• Letter 5005-A: Information-return penalty correspondence generally issued after an IRS examination involving failure to file or furnish required ACA forms.
• Notice 972CG: A proposed civil penalty for certain information returns that were filed late, filed incorrectly, or not filed in the required manner.

While a Letter 226-J concerns potential liability under the ACA employer mandate, Letter 5005-A and Notice 972CG generally concern information-reporting obligations. Those are separate penalty tracks, even when they involve the same Forms 1094-C and 1095-C.

Who can receive an ACA penalty letter?

Applicable Large Employers (ALEs) are the organizations most directly exposed to Employer Shared Responsibility Payments under Section 4980H.

An employer is generally an ALE for any calendar year when it had an average of at least 50 full-time employees, including full-time-equivalent employees, during the preceding calendar year. Related entities under common ownership may need to be combined when making that determination. Employers unsure of their status can use Selerix’s resource to calculate ALE status.

Full-time employees and full-time equivalents have different roles under the law.

Full-time equivalents are included when determining whether an organization crosses the 50-employee ALE threshold. They are not treated as full-time employees for the purpose of calculating an Employer Shared Responsibility Payment. The payment calculation generally uses an ALE member’s actual full-time employee population, subject to the applicable rules and reduction.

Smaller employers can also receive ACA-related correspondence.

An employer with a self-insured medical plan may have coverage-reporting obligations under Section 6055 even when it is not an ALE subject to Section 4980H. A smaller self-insured employer is not automatically subject to the employer mandate merely because it sponsors a self-funded plan.

ACA letters may therefore reach ALEs, self-insured employers, government entities, tax-exempt organizations, and other reporting entities, depending on the requirement involved.

Which ACA rules and penalties are behind these letters?

Most ACA employer letters arise from one of three related but distinct areas.

• Section 4980H contains the Employer Shared Responsibility provisions. These rules can create Penalty A or Penalty B liability for an ALE member.
  
• Sections 6055 and 6056 establish ACA information-reporting obligations. Section 6055 covers reporting by providers of minimum essential coverage, including self-insured employers. Section 6056 requires ALE members to report information about full-time employees and offers of coverage.
  
• Sections 6721 and 6722 create penalties for failures involving information returns and employee statements. Section 6721 applies to filing correct information returns with the IRS. Section 6722 applies to furnishing correct statements to recipients. Certain reasonable-cause relief may be available under Section 6724.

Let’s take a minute to break these down, along with the various penalties:. 

Section 4980H(a): Penalty A

Penalty A may apply for a month when an ALE member fails to offer minimum essential coverage to at least 95% of its full-time employees and their dependent children, and at least one full-time employee receives a premium tax credit for Marketplace coverage.

For 2026, the annualized Penalty A amount is $3,340 per full-time employee, calculated monthly and generally applied after the statutory 30-employee reduction is allocated among related ALE members.

Because Penalty A can be based on a large portion of the employer’s full-time population — not only the employee who received the premium tax credit — it can produce a substantial proposed assessment.

Section 4980H(b): Penalty B

Penalty B may apply when an ALE member avoids Penalty A but one or more full-time employees receive a premium tax credit because the coverage offered to them was unaffordable, did not provide minimum value, or was not offered for the relevant month.

For 2026, the annualized Penalty B amount is $5,010 for each affected full-time employee, calculated monthly. The total Penalty B assessment for a month is capped at the Penalty A amount that would otherwise apply for that month.

An employer cannot owe both Penalty A and Penalty B for the same ALE member for the same month.

Sections 6721 and 6722: ACA information-reporting penalties

Sections 6721 and 6722 concern the filing and furnishing process rather than whether the employer offered compliant coverage.

For failures relating to information returns required to be filed in 2026, the general inflation-adjusted penalty schedule ranges from $60 to $340 per return, depending on when the failure is corrected. Intentional disregard can result in a penalty of at least $680 per return, without the standard annual maximum. Section 6722 generally applies a parallel structure to failures involving statements furnished to employees.

Penalty	Main trigger	2026 amount or basis	Commonly connected correspondence
Section 4980H(a), Penalty A	Failure to offer minimum essential coverage to at least 95% of full-time employees and their dependent children, with at least one full-time employee receiving a premium tax credit	$3,340 annualized per applicable full-time employee (less the 30-employee reduction), calculated monthly and subject to the statutory reduction	Letter 226-J → Letter 227 series → CP220J. Letter 5040-J may be used for follow-up when an employer does not respond to a proposed ESRP assessment.
Section 4980H(b), Penalty B	A full-time employee receives a premium tax credit because qualifying affordable, minimum-value coverage was not offered to that employee	$5,010 annualized per affected full-time employee, calculated monthly and capped by potential Penalty A liability	Letter 226-J, Letter 227 series, CP220J
Section 6721	Failure to file correct ACA information returns with the IRS on time or in the required manner	Generally $60, $130, or $340 per return based on correction timing; $680 or more for intentional disregard	Notice 972CG is the most common. Letter 5005-A used in certain information return penalty situations.
Section 6722	Failure to furnish correct ACA statements to employees on time	Generally follows the same inflation-adjusted structure as Section 6721	Letter 5005-A and related examination correspondence

Last updated for 2026.

ACA penalty letters and notices: What each one means

The IRS uses different letters for different compliance tracks and stages. The following table provides a practical overview before we examine each one more closely.

Letter or notice	What triggered it	Penalty track	Proposed, final, or informational?	Response required?	Main forms or attachments
Letter 5699	IRS records suggest an employer may have been an ALE but did not file Forms 1094-C and 1095-C	Information reporting	Preliminary inquiry	Yes, by the date shown	Response selections and filing information
Letter 5698	No adequate response to Letter 5699	Information reporting – (Sections 6055/6056)	Follow-up warning/inquiry	Yes	Instructions regarding filing or correcting Forms 1094-C/1095-C
Letter 5005-A	Examination concludes that failure-to-file or failure-to-furnish penalties may apply	Information reporting (Sections 6721 and/or 6722)	Penalty examination determination	Generally yes; follow instructions	Form 886-A and penalty explanation
Notice 972CG	Information returns were late, incorrect, incomplete, or improperly filed	Section 6721	Proposed civil penalty	Yes, to dispute or request relief	Penalty summary or explanation
Letter 5840	IRS concludes a Section 6056 non-filer inquiry	Information reporting	Closing correspondence	No	Closing explanation
Letter 6145	Additional review or follow-up activity is required for an ACA-related case	ESRP-related follow-up correspondence	Request for additional information or case processing follow-up	Follow the instructions in the letter	Case-specific attachments
Letter 226-J	IRS data indicates possible Penalty A or Penalty B liability	Section 4980H	Proposed assessment	Yes, within at least 90 days	Form 14764, Form 14765, ESRP summary
Letter 5040-J	Employer did not respond to Letter 226-J	Section 4980H	Follow-up/ second notice	Yes, generally within 15 days	Copy of Letter 226-J and attachments
Letter 227 series	IRS reviewed an employer’s Letter 226-J response or appeal	Section 4980H	Outcome or next-step determination letter	Depends on version	Updated calculations, Form 14765, or appeal information
CP220J	The Employer Shared Responsibility Payment has been assessed	Section 4980H	Assessment and demand for payment	Payment, dispute, or other account action may be required	ESRP summary, balance and payment instructions

Employers should rely on the actual response date and instructions printed on the correspondence. A general description of a letter does not override the deadline in the specific case.

Letter 5699 and Letter 5698: Missing ACA information returns

Letter 5699 is the IRS’s initial inquiry when its records indicate that an organization may have been an ALE but did not file required Forms 1094-C and 1095-C.

The employer is generally asked to explain whether it filed under another EIN, should have filed but did not, was not an ALE, or had another reason the filing requirement did not apply. When an employer should have filed, the response may need to explain when delinquent returns will be submitted.

This is not yet a Letter 226-J assessment. It is primarily an information-reporting inquiry, although failing to address it can lead to reporting penalties and may also leave the IRS without information needed to evaluate employer mandate compliance.

When the employer does not respond, the IRS may issue Letter 5698. Continued nonresponse or failure to satisfy filing requirements may result in consideration of failure-to-file or failure-to-furnish penalties. The IRS may then prepare Letter 5005-A with Form 886-A explaining the proposed penalty conclusions.

The immediate task is to determine whether the organization was an ALE for the reporting year and whether returns were submitted under the correct legal name and EIN. Related companies, parent organizations, and third-party providers generally cannot satisfy an ALE member’s filing requirement by reporting under a different entity’s EIN.

ACA penalty Letter 5005-A: Information Return Penalty Cover Letter

ACA penalty Letter 5005-A is an Information Return Penalty Cover Letter used when the IRS examination process concludes that penalties may apply for failure to file or furnish required ACA information returns.

It is commonly accompanied by Form 886-A, Explanation of Items, which describes the facts reviewed, applicable law, and the IRS’s conclusion.

An employer receiving Letter 5005-A should review whether it was required to file, whether returns were submitted under the correct EIN, whether employee statements were furnished, and whether the IRS has overlooked electronic filing records or other documentation.

This letter may also raise questions about reasonable cause. Sections 6721 and 6722 are reporting penalties, and the IRS recognizes that Section 6724 relief may apply when the filer can establish reasonable cause rather than willful neglect.

A response should address the specific conclusion in Form 886-A rather than simply asserting that the organization complied with the ACA.

Letter 5005-A vs. Letter 226-J

	Letter 5005-A	Letter 226-J
Primary issue	Failure to file or furnish correct ACA information returns	Potential Employer Shared Responsibility liability
Main penalty provisions	Sections 6721 and 6722	Section 4980H
Core question	Were required forms filed and furnished correctly and on time?	Did the ALE offer compliant coverage to its full-time employees and dependents?
Key evidence	Filing records, furnishing records, EINs, AIR confirmations, reasonable-cause support	Employee status, coverage offers, affordability, Forms 1094-C and 1095-C, Form 14765

An employer could potentially face both types of issues. Correctly filing ACA forms does not prove that compliant coverage was offered, and offering compliant coverage does not excuse a failure to file required information returns.

Notice 972CG: Proposed civil penalty for information returns

Notice 972CG is the Notice of Proposed Civil Penalty used for certain information-return failures under Section 6721.

The notice may identify returns filed late, filed with missing or incorrect information, or filed on paper when electronic filing was required. IRS Publication 1586 explains the proposed-penalty process and the role of reasonable-cause responses.

It is important to call this document Notice 972CG, not Letter 972CG.

The employer should compare the notice with its transmission history and accepted filings. It should also determine whether corrected returns were submitted within a period that qualifies for a reduced penalty tier.

When disputing the proposal, the response should address each listed failure and provide documentation. When requesting reasonable-cause relief, the employer should explain the circumstances that prevented compliance, the steps it took to avoid the failure, and how it corrected the problem.

Letter 5840 and Letter 6145: Closing and follow-up outcomes

Letter 5840 is the outcome employers hope to receive after resolving a Section 6056 non-filer inquiry.

The IRS may issue it when the employer demonstrates that returns were filed under the correct EIN or establishes that it was not an ALE required to file. The letter closes the inquiry with no further action.

Letter 6145 is follow-up correspondence used in an ESRP-related review. Because its content is case-specific, employers should read the letter and attachments carefully rather than assuming it serves the same function as a Letter 227.

Neither letter should be evaluated by number alone. The employer must determine which compliance track is involved, what the IRS accepted, and whether another response date applies.

Letter 226-J: Proposed Employer Shared Responsibility Payment

Letter 226-J is the IRS’s initial letter notifying an ALE that it may owe an Employer Shared Responsibility Payment under Section 4980H.

The proposed ESRP is based on Forms 1094-C and 1095-C filed by the employer and premium tax credit information from employees’ individual tax returns. The letter is not a bill.

A Letter 226-J package generally includes Form 14764, Employer Shared Responsibility Payment Response; Form 14765, Employee Premium Tax Credit Listing; and a summary of the proposed monthly calculation.

Form 14765 is particularly important because it identifies the assessable full-time employees and shows the Line 14 and Line 16 codes the employer reported for each relevant month.

The Employer Reporting Improvement Act now requires the IRS to give an ALE at least 90 days from the initial proposed-assessment letter to respond before taking further action. The extension applies to assessments proposed in taxable years beginning after the law’s enactment. Employers should still follow the exact response date printed on their Letter 226-J.

The employer may agree, partially disagree, or fully disagree. A disagreement should identify the employee-month corrections and include a signed explanation with supporting records.

For a closer examination of Letter 226-J triggers, see Selerix’s dedicated guide.

Letter 5040-J: Second notice after no response

Letter 5040-J is the preliminary ESRP second notice used when an ALE does not respond to Letter 226-J.

It generally includes a copy of the original Letter 226-J and attachments and allows approximately 15 days to respond. If the ALE still does not respond, the case may proceed toward assessment.

This shorter period is one reason employers should not treat the initial 90-day response window casually. Waiting until the Letter 5040-J stage leaves much less time to reconstruct historical hours, eligibility, affordability, and coverage data.

Letters 227-J through 227-O: The IRS response to an ESRP case

After reviewing an employer’s Letter 226-J response, the IRS generally issues one of six Letter 227 versions.

Letter	Definition	Response required?
227-J	Acknowledges the employer’s agreement and states that the ESRP will be assessed	No
227-K	Confirms that the proposed ESRP has been reduced to zero and the case will close	No
227-L	Shows that the proposed ESRP was revised based on the employer’s response	Yes, if the employer disagrees or requests further review
227-M	Shows that the employer’s response did not change the proposed ESRP	Yes, if the employer disagrees or wants Appeals review
227-N	Communicates the IRS determination following review by the Independent Office of Appeals	Generally no; the ESRP case is closed
227-O	Revised ESRP letter used for Tax Exempt and Government Entities customers	Follow the instructions provided

Letters 227-L and 227-M may include an updated Form 14765 and revised calculation. An employer that still disagrees can generally request a meeting with the examiner’s manager or a pre-assessment conference with the IRS Independent Office of Appeals by the date in the letter, commonly within 30 days.

CP220J and other assessment notices

CP220J is issued after the Employer Shared Responsibility Payment has been assessed.

It includes a summary of the payment, reflects credits or payments applied, and shows the remaining balance due. If an ALE does not respond to Letter 226-J or the relevant Letter 227, the IRS may assess the proposed amount and issue CP220J as its notice and demand for payment.

At this stage, the correspondence is no longer simply a proposed assessment.

The employer should compare CP220J with the final determination, confirm that payments and credits were applied correctly, and follow the notice instructions. Depending on the circumstances, the organization may need tax or legal advice about payment, account correction, collection procedures, or potential post-assessment options.

What should employers do after receiving an ACA penalty letter?

1. Identify the correspondence. Locate the letter or notice number and determine whether the matter involves missing returns, information-reporting penalties, a proposed ESRP, follow-up review, or an assessed balance.
   
2. Protect the response deadline. Record the exact date printed on the correspondence and assign a single case owner. Letter 226-J now provides at least 90 days, but later letters may allow substantially less time.
   
3. Confirm the entity and reporting year. Verify the legal name, EIN, tax year, proposed amount, and whether the IRS may have confused related employers or filings submitted under another EIN.
   
4. Review the complete package. Read the explanation, calculation tables, employee listings, and response instructions, not just the first-page total.
   
5. Reconstruct what was filed. Retrieve the actual Forms 1094-C and 1095-C, AIR acceptance records, corrections, and employee statements for the relevant year. Resources on how to prepare accurate Forms 1094-C and 1095-C and interpret Form 1095-C codes can help.
   
6. Compare the filing with operational records. Review hours, employee status, measurement periods, coverage offers, plan costs, enrollment records, waivers, payroll deductions, carrier files, and affordability calculations.
   
7. Separate the issues. Determine whether each item reflects a reporting error, a filing failure, an incorrect employee classification, an actual coverage failure, or an IRS mismatch.
   
8. Prepare an evidence-based response. Complete the forms enclosed with the letter and connect every disputed conclusion to a clear explanation and supporting documentation.
   
9. Submit exactly as instructed. Use the stated address or approved submission method. Retain a complete copy and proof of timely delivery.
   
10. Review the IRS outcome. Do not assume a reduced amount resolves every issue. Compare the follow-up letter with the employer’s response and preserve appeal rights when appropriate.

Can an ACA penalty be corrected, reduced, or appealed?

Yes. A proposed ACA penalty can sometimes be corrected, reduced, or eliminated when the employer shows that the IRS relied on incomplete or inaccurate information.

For Letter 226-J, that may mean proving that a listed employee was not an assessable full-time employee, that coverage was offered but coded incorrectly, or that an affordability safe harbor applied. Letter 227-K specifically confirms when the proposed ESRP has been reduced to zero.

For information-reporting penalties, the employer may be able to establish that returns were filed, that the IRS associated them with the wrong EIN, that timely corrections qualify for a reduced penalty tier, or that reasonable cause supports relief.

Employers that disagree with Letter 227-L or Letter 227-M may request a pre-assessment Appeals conference by following the letter’s instructions. A response or protest should explain the disputed facts, the applicable ACA treatment, and the evidence supporting the employer’s position.

Corrected Forms 1094-C and 1095-C may be part of the solution, but they do not automatically replace a response to the notice. Corrections should be coordinated with the employer’s overall response so the filings, forms, and written explanation tell a consistent story.

What commonly triggers ACA penalty letters?

Employer-status and workforce errors

An organization may fail to recognize that it became an ALE, calculate its controlled group incorrectly, or confuse full-time employees with full-time equivalents.

Other problems arise when employee hours, breaks in service, rehires, initial measurement periods, or stability periods are administered inconsistently. Employers with variable-hour populations should review the rules for calculating employee hours under the ACA.

Coverage and affordability failures

A Letter 226-J may result when the IRS believes an employer failed the 95% offer threshold or when a full-time employee received a premium tax credit because offered coverage was unavailable, unaffordable, or did not provide minimum value.

Affordability thresholds change annually. Employers evaluating current plans should review the 2026 ACA affordability threshold, while any penalty response must use the threshold and rules that applied during the reporting year in question.

Reporting and data errors

The coverage may have been compliant while the reporting was not.

Common examples include incorrect Lines 14 through 16, missing months, inaccurate employee contribution amounts, incorrect COBRA coding, duplicate records, filings under the wrong EIN, and rejected electronic submissions that were never corrected.

ACA data often comes from multiple HR, payroll, benefits, and carrier systems. A mismatch between those systems can eventually become an IRS mismatch.

Premium tax credit mismatches

Letter 226-J is based partly on premium tax credit information associated with employees’ individual income tax returns.

A premium tax credit does not automatically prove employer liability. The employer may have offered qualifying coverage, satisfied an affordability safe harbor, or reported the employee incorrectly. The IRS allows the ALE to address those facts through Form 14765 and its written response.

The Employer Reporting Improvement Act also establishes a six-year assessment period for Section 4980H payments, beginning on the due date of the Section 6056 return or, if later, the date it was filed. The statutory effective-date language should be reviewed before applying that period to a particular historical reporting year.

Make ACA reporting easier to defend before a letter arrives

The best ACA record is one that can still explain itself clearly years later.

Selerix connects workforce data, eligibility tracking, affordability analysis, reporting, and experienced compliance support so employers can identify inconsistencies before they become difficult IRS cases. A dependable ACA reporting compliance solution also preserves the records needed to respond when questions arise.

Frequently asked questions about ACA penalty letters

Is ACA penalty Letter 5005-A the same as Letter 226-J?

No. Letter 5005-A generally concerns information-return penalties connected to failures to file or furnish required ACA forms. Letter 226-J proposes an Employer Shared Responsibility Payment under Section 4980H. An employer may have reporting exposure, employer mandate exposure, or both, but the letters involve different rules and response strategies.

Is an ACA penalty letter always a final bill?

No. Letter 226-J is an initial proposed ESRP assessment, and Notice 972CG proposes an information-return penalty. Letter 227 communicates the outcome of the IRS’s ESRP review. CP220J is issued after an Employer Shared Responsibility Payment has been assessed and shows the resulting account balance.

How long does an employer have to respond to Letter 226-J?

Under the Employer Reporting Improvement Act, the IRS must allow an ALE at least 90 days from the initial letter proposing an Employer Shared Responsibility Payment to respond. Employers should use the exact response date shown in their letter. Subsequent correspondence, including Letter 5040-J and certain Letter 227 versions, may have shorter deadlines.

Can an employer owe both Penalty A and Penalty B for the same month?

No. An ALE member is not assessed both Section 4980H(a) and Section 4980H(b) liability for the same month. In addition, the total Penalty B amount for a month cannot exceed the Penalty A amount that would have applied to that ALE member for the month.

How far back can the IRS assess an ESRP penalty?

The Employer Reporting Improvement Act establishes a six-year assessment period for Section 4980H payments, measured from the due date of the applicable Section 6056 return or, if later, the date it was filed. Because the law contains effective-date provisions, employers should not assume the six-year rule applies identically to every historical reporting year without reviewing the specific case.

This article provides general information and is not legal or tax advice. Employers should consult qualified legal, tax, or ACA compliance professionals regarding a particular IRS notice or assessment.

Received an ACA penalty letter, or concerned that your reporting may create one? Talk to a Selerix ACA expert for help.