The United States’ Affordable Care Act (ACA) requires applicable large employers (ALEs) to make a sufficient offer of coverage to their full-time employees (and dependents) in order to avoid Pay or Play penalties.
Pay or Play penalties take two forms. The part (a) penalty can be triggered if an ALE fails to offer coverage to substantially all of its full-time employees (95%). The part (b) penalty can be triggered if an ALE’s offer of coverage is unaffordable or is not at least a 60% actuarial value plan and an employee declines that offer and purchases subsidized Exchange coverage.
An ALE’s liability for Pay or Play penalties (and penalty amounts) is based largely on information reported to the IRS on Forms 1094-C and 1095-C. If the IRS determines a penalty is potentially due it issues Letter 226J to the ALE. An ALE must respond within 30 days of the date of the Letter 226J. The IRS then acknowledges an ALE’s response to with one of five versions of Letter 227. Until recently, employers did not have access to sample 227 Letters and there was no guidance on what purpose each of the five versions serve. On May 24, 2018, the IRS released new guidance on the Letter 227 series. Specifically, 227 Letters are acknowledgement letters sent to either close a penalty inquiry or provide next steps to the ALE.
Many thanks to our US Partner Alliant Employee Benefits for providing this article.