- What Letter 226-J Is vs. Letter 5699
- How the IRS Calculates the ESRP
- 4980H(a) vs. 4980H(b): The Two Penalty Paths
- How to Read the ESRP Summary Table
- Why Employers Often Overpay
- What Employers Can Actually Dispute
- The Letter 227 Family
- Prior-Year Exposure and the Six-Year Rule
- Letter 226-J Is Won in the Data
- Key Takeaways
What IRS Letter 226-J Is — and How It Differs From Letter 5699
If your organization has previously received IRS Letter 5699, you already know what it feels like to get unexpected ACA correspondence. But Letter 226-J is a different animal entirely.
Letter 5699 is a filing compliance inquiry — the IRS asking whether your organization filed the required 1094-C and 1095-C returns. Letter 226-J is what comes after. It is the IRS's initial letter proposing a potential Employer Shared Responsibility Payment under IRC Section 4980H. By the time Letter 226-J arrives, the IRS has already cross-referenced your ACA filings against individual employee tax returns, identified full-time employees who received a premium tax credit, and run its penalty calculation.
Letter 226-J is a proposed assessment, not a final bill. The IRS is telling you what it believes you owe and giving you an opportunity to agree, disagree, or correct the record. That opportunity is the most important window in the entire enforcement process — and it is time-limited.
For more on how Letter 5699 and Letter 226-J fit into the broader enforcement sequence, see our IRS Letter 5699 article and our ACA Audit Readiness article.
The proposed ESRP is the IRS's opening position based on the data it has. A well-prepared, documented response can change that position. Once the IRS moves past this stage to formal assessment and collection, your options narrow significantly.
How the IRS Calculates the ESRP
The proposed ESRP in Letter 226-J is not an estimate. It is a mechanical calculation — month by month, employee by employee — based on two data sources: your own ACA filings (Forms 1094-C and 1095-C), and premium tax credit data from your employees' individual income tax returns. When the IRS finds a full-time employee who received a PTC and whose 1095-C either shows no offer of coverage or shows coverage that was unaffordable or didn't provide minimum value, that employee-month becomes a potential ESRP liability.
The IRS is building the 226-J penalty from the data your organization already gave it — which means the strongest disputes begin by going back to that same data and finding where the IRS's read is wrong.
The Two Penalty Paths: 4980H(a) vs. 4980H(b)
4980H(a) — The "Sledgehammer" Penalty
The 4980H(a) penalty is triggered when an ALE fails to offer minimum essential coverage to at least 95% of its full-time employees and their dependents for a given month, and at least one full-time employee receives a premium tax credit. The formula: full-time employee count for the month, minus the allocated 30-employee reduction, multiplied by the applicable monthly rate.
4980H(b) — The "Tack Hammer" Penalty
The 4980H(b) penalty applies when an employer offered minimum essential coverage to at least 95% of its full-time workforce, but one or more full-time employees received a PTC anyway — because the coverage offered was unaffordable, did not provide minimum value, or was not actually offered to that employee. Unlike 4980H(a), the tack hammer applies only to the specific employees who received a PTC and for whom no safe harbor or other relief applies.
The Cap Most Employers Miss
For any given month, the 4980H(b) penalty cannot exceed what the 4980H(a) penalty would have been for that same month had the employer failed the 95% offer test. Checking this cap is one of the most overlooked review points in any 226-J response.
| Tax Year | 4980H(a) Annual | 4980H(a) Monthly | 4980H(b) Annual | 4980H(b) Monthly |
|---|---|---|---|---|
| 2023 | $2,880 | $240.00 | $4,320 | $360.00 |
| 2024 | $2,970 | $247.50 | $4,460 | $371.67 |
| 2025 | $2,900 | $241.67 | $4,350 | $362.50 |
| 2026 | $3,340 | $278.33 | $5,010 | $417.50 |
Sources: Rev. Proc. 2024-14 (2025 amounts); Rev. Proc. 2025-26 (2026 amounts)
The rate that applies is the rate for the tax year shown on the letter — not the current year's rate. Verify the indexed amounts before calculating any dispute scenario.
How to Read the ESRP Summary Table
Every Letter 226-J arrives with an ESRP Summary Table — a month-by-month grid that is the IRS's actual calculation worksheet.
Column (a) — MEC offer indicator: Whether your Form 1094-C reported that you offered minimum essential coverage to at least 95% of your full-time employees for each month. A "No" entry triggers 4980H(a) exposure.
Column (b) — Full-time employee count: The IRS uses the count you reported on Form 1094-C, Part III, Column (b).
Columns (d) and (e) — Assessable full-time employees with PTC: The count of your full-time employees who received a PTC and for whom no safe harbor or relief applies. These employees are listed on Form 14765 and are the core of the dispute.
Column (f) — Applicable provision: Whether 4980H(a) or 4980H(b) applies for the month. Never both.
Reporting gaps and headcount errors in your own filings can inflate the proposed assessment. The IRS does not recalculate — it uses what was reported.
Why Employers Often Overpay Letter 226-J Assessments
Employers overpay for predictable reasons: they accept the IRS's full-time employee count without verifying it against ACA measurement methodology; they fail to identify Form 1095-C coding errors on Lines 14, 15, and 16; they respond without documentation; and they treat Letter 226-J like a billing notice rather than a rebuttable calculation.
Our article on 1095-C Lines 14, 15, and 16 and our ACA Filing Errors article explain the specific coding patterns that most commonly inflate 226-J assessments.
What Employers Can Actually Dispute
Employee Was Not Full-Time. If an employee on Form 14765 was not actually a full-time employee under ACA measurement methodology for the month at issue, that employee-month should not generate ESRP liability.
Limited Non-Assessment Period Applies. New hires in their initial measurement period, employees in their waiting period, and other employees in defined limited non-assessment periods are not subject to 4980H(b) liability during those periods.
Affordability Safe Harbor Applies. The three safe harbors — W-2, rate of pay, and federal poverty line — each provide a documented basis for removing 4980H(b) liability if properly applied and documented. Our ACA Affordability Safe Harbors article covers the calculation and documentation requirements for each.
Form 1095-C Coding Was Wrong. Line 14, 15, and 16 coding errors drive a substantial share of incorrect 226-J assessments.
Form 1094-C Headcount Was Overstated. If the full-time employee count in Column (b) is higher than your actual ACA full-time headcount, the 4980H(a) calculation is inflated from the start.
Per the IRS's own instructions, all corrections to the 226-J should be made through Form 14765 and a signed disagreement statement. Filing corrected forms separately can complicate the case.
The Letter 227 Family: What Happens After You Respond
| Letter | Meaning | What's Next |
|---|---|---|
| 227-J | IRS acknowledged your agreement with the proposed ESRP | Case closed. Payment is due. |
| 227-K | IRS reviewed your response and reduced the ESRP to zero | Case closed. No payment owed. |
| 227-L | IRS reviewed your response and revised the ESRP downward | You may agree, or request a meeting with the IRS manager and/or Appeals. |
| 227-M | IRS reviewed your response and the ESRP is unchanged | You may agree, or request a meeting with the IRS manager and/or Appeals. |
| 227-N | Appeals issued its decision on the ESRP | Case closed based on Appeals outcome. |
If you receive Letter 227-L or 227-M and still disagree, calendar the response date printed on the letter immediately.
Prior-Year Exposure Remains Long-Tailed, But Newer Years Have a Six-Year Rule
The Employer Reporting Improvement Act (Public Law 118-168), enacted December 23, 2024, added a six-year assessment period for assessable payments under IRC Section 4980H, beginning on the due date for filing the Section 6056 return. This new rule applies to returns due after December 31, 2024.
For older ESRP years, the normal three-year tax assessment statute does not protect employers. In a 2020 Chief Counsel memorandum, the IRS concluded that filing Forms 1094-C and 1095-C did not start the statute of limitations for ESRP assessments. Record retention should be aligned to the ESRP assessment window.
If your organization has known ACA compliance gaps from prior filing years, the absence of a penalty notice is not a clean bill of health.
Why Letter 226-J Is Won in the Data, Not in the Cover Letter
The most common mistake employers make when responding to Letter 226-J is leading with a broad objection. What moves the IRS is a revised Form 14765 with specific corrected codes for specific employees in specific months, supported by contemporaneous documentation that substantiates each correction.
226-J disputes are won employee by employee and month by month. The employers who achieve meaningful reductions do so by systematically working through every employee on Form 14765, identifying the specific reason each employee-month should not be assessable, applying the correct Line 14 and Line 16 codes, and attaching evidence that an IRS examiner can verify independently.
Download the PenaltyShield 226-J Response Guide
Everything you need to build a defensible response to Letter 226-J — the first 48-hour workflow, a column-by-column ESRP Summary Table breakdown, Form 14765 instructions, the complete dispute argument matrix, documentation checklists, and response templates.
Key Takeaways
- Letter 226-J is the IRS's initial letter proposing a potential ESRP — not a final bill. The proposed amount is the IRS's opening position and it is rebuttable.
- Letter 226-J and Letter 5699 serve different purposes. Letter 5699 asks whether you filed. Letter 226-J proposes a penalty based on what you filed and what your employees reported on their individual tax returns.
- The ESRP is calculated month by month under IRC Section 4980H. Each month is a separate taxable period.
- 4980H(a) — the sledgehammer — applies when the 95% MEC offer threshold is missed and hits the entire full-time workforce minus 30 employees.
- 4980H(b) — the tack hammer — applies when coverage was offered but unaffordable or not minimum value and hits only the affected employee-months.
- ESRP penalty amounts are indexed annually. Always verify the rate for the specific tax year shown on your letter.
- Many employers overpay because they respond poorly — accepting IRS assumptions, missing coding errors, and responding without documentation.
- The strongest dispute arguments: employee was not full-time, limited non-assessment period applies, affordability safe harbor applies, Form 1095-C coding was wrong, Form 1094-C headcount was overstated.
- After you respond, the IRS issues a Letter 227. The variant you receive — 227-J through 227-N — tells you exactly where you stand and what options remain.
- For post-2024 proposed assessments, the IRS must allow at least 90 days to respond under the Employer Reporting Improvement Act.
- Letter 226-J is won employee by employee, month by month — in the data, not in the cover letter.
If your organization has received IRS Letter 226-J, the IRS has already run the first calculation using the records available to it. The question now is whether that calculation survives scrutiny.
PenaltyShield provides fully managed ACA penalty defense for applicable large employers. We review the IRS's assumptions, reconstruct your actual compliance position, and build a documented, employee-by-employee response — before a proposed assessment becomes a final one.