Last Updated: May 2026
If your organization is an Applicable Large Employer (ALE), Letter 226-J is the IRS notice you most want to understand before it ever arrives. It is the agency's formal proposal that your organization owes a penalty under the ACA's Employer Shared Responsibility provisions, and the dollar amounts can be substantial.
The good news is that Letter 226-J is a proposed assessment, not a final bill. Employers have the right to disagree, document their position, and defend their compliance record. The challenge is that mounting that defense takes the right records, the right strategy, and a methodical response process.
This guide walks through what Letter 226-J means, how to respond, and how to protect your organization year-round.
What is IRS Letter 226-J?
IRS Letter 226-J is the official notice the IRS sends to ALEs when the agency believes the organization owes an Employer Shared Responsibility Payment (ESRP) under Internal Revenue Code Section 4980H. The letter proposes a specific dollar amount and explains the reasoning behind it.
For the IRS's own guidance on the letter, see the IRS's "Understanding Your Letter 226-J" page.
A few things to understand right away:
- Letter 226-J is a proposal, not a final assessment
- It applies only to ALEs, meaning organizations with 50 or more full-time and full-time equivalent employees
- It is triggered when the IRS believes the employer either failed to offer Minimum Essential Coverage to enough full-time employees or offered coverage that was not affordable or did not meet Minimum Value
- Employers have the right to disagree, and many proposed assessments are reduced or eliminated through the response process
Letter 226-J is a proposed assessment, not a final bill. Employers have the right to disagree, document, and defend.
Why an ALE receives Letter 226-J
| 4980H(a) | 4980H(b) | |
|---|---|---|
| Nickname | Sledgehammer | Tack hammer |
| What triggers it | Failed to offer MEC to 95% of full-time employees and dependents | Coverage offered, but not affordable or fails Minimum Value |
| Who it applies to | Entire full-time workforce minus 30 | Only specific employees who received a PTC |
| Common prerequisite | At least one full-time employee receives a Premium Tax Credit | At least one full-time employee receives a Premium Tax Credit |
| Penalty cap | None beyond per-employee formula | Capped at the amount that would have been owed under 4980H(a) |
Letter 226-J is triggered when at least one full-time employee receives a Premium Tax Credit (PTC) from the federal Marketplace or a state exchange, and the IRS believes the employer's offer of coverage failed one of the two key tests under Section 4980H.
The two penalty types operate differently:
4980H(a), often called the "sledgehammer" penalty, applies when an ALE fails to offer MEC to at least 95% of full-time employees and their dependents. When triggered, it applies across the entire full-time workforce, with a 30-employee buffer subtracted from the count.
4980H(b), often called the "tack hammer" penalty, applies when coverage was offered to 95% or more of full-time employees but was either not affordable under one of the IRS-approved safe harbors or did not provide Minimum Value. It applies only to the specific employees who received a PTC, and it is capped at the amount that would have been owed under 4980H(a).
For current 4980H(a) and 4980H(b) penalty dollar amounts and the specifics of each year's enforcement cycle, see our latest update on IRS Letter issuance.
Can an ALE be assessed both a 4980H(a) and 4980H(b) penalty?
This is one of the most common questions employers have when reviewing Letter 226-J, and the short answer is yes, but with an important nuance.
IRS penalties are calculated month by month. An ALE can receive a 4980H(a) penalty for some months of the year and a 4980H(b) penalty for other months in that same year, depending on the specific compliance circumstances each month. What an ALE will never receive is both a 4980H(a) and a 4980H(b) penalty for the same month. The two penalty types are mutually exclusive within any given month.
This is why Form 14765 lists each affected employee with month-by-month indicator codes. The monthly view is how the IRS actually calculates liability, and it's where careful review of your coding can identify the difference between a month that should have been coded under (a), under (b), or not penalized at all.
What's inside Letter 226-J
A typical Letter 226-J contains:
- The proposed ESRP amount with a monthly breakdown showing how the IRS arrived at the total
- An ESRP Summary Table indicating whether the penalty is being proposed under 4980H(a) or 4980H(b)
- Form 14764 (ESRP Response Form), the document used to formally agree or disagree with the proposed assessment
- Form 14765 (Employee Premium Tax Credit Listing), which lists the specific employees who received PTCs and triggered the assessment, along with the IRS's coding for each month
- Instructions explaining what actions the IRS will take depending on whether the employer agrees, disagrees, or fails to respond
Form 14765 is where most of the actual defense work happens. Each employee on the list has month-by-month indicator codes, and reviewing those codes against your actual records is how coding errors and data discrepancies get identified.
The 90-day response window
Employers have 90 days from the date on the letter to respond to Letter 226-J. This response window was extended from 30 days following the Employer Reporting Improvement Act, and applies to letters issued for assessments proposed in tax years beginning after 2024.
The extended window matters because mounting a credible response takes real work: pulling payroll records for the year in question, re-running measurement period analyses, validating IRS coding against actual offers of coverage, and documenting safe harbor calculations. Ninety days is enough time to do this thoroughly. Thirty would have been a serious challenge.
That said, the longer window is not an excuse for complacency. Interest accrues on any ESRP that is ultimately upheld, and the work involved often takes the full 90 days even with a head start.
The 90-day response window applies to Letter 226-J only. Letter 5699 still requires a response in 30 days.
How to respond to Letter 226-J
The response process is methodical, and rushing any step weakens your defense. Here is the workflow that works:
- Review the ESRP Summary Table to understand whether the proposed penalty is under 4980H(a) or 4980H(b) and what the monthly liability breakdown looks like
- Review Form 14765 to identify the specific employees who triggered the assessment and the IRS's indicator codes for each month
- Pull supporting data including payroll records, time and attendance data, plan documents, and offers of coverage for the year in question
- Re-run eligibility for every employee listed on Form 14765 using the appropriate measurement method
- Identify coding errors such as missing Line 14 codes, incorrect Line 16 safe harbor codes, unrecorded waivers, or employees flagged as full-time during a Limited Non-Assessment Period
- Complete Form 14764 to formally agree or disagree with the assessment
- Mark corrections directly on Form 14765 in the column provided for corrected codes
- Attach all supporting documentation including plan documents, waiver records, and measurement period analyses
- Submit via certified mail with tracking, and keep copies of everything
Reminder: According to IRS instructions, an ALE should not electronically refile 1094-C or 1095-C forms to the AIR system after receiving a 226-J letter. Instead, ALEs should use Form 14765 to record corrections.
Most 226-J penalties trace back to coding errors and data discrepancies rather than actual non-compliance. The right defense starts with the right records.
After you respond: the Letter 227 series
Once the IRS reviews your response, it issues an acknowledgment letter in the Letter 227 series. Each variant means something different:
- Letter 227-J: You agreed to the proposed ESRP and submitted payment. Case closed.
- Letter 227-K: No penalty owed. The IRS reviewed your response and closed the case in your favor.
- Letter 227-L: Acknowledges your response and indicates further questions or revised proposed assessment.
- Letter 227-M: Your response was reviewed but the IRS still believes a penalty applies. Further action required.
- Letter 227-N: Communicates the outcome of an appeals decision.
- Letter 227-O: Full or partial agreement reached after appeals.
Each variant explains the next step required from the employer, if any. Knowing what each one means in advance helps you respond appropriately when one arrives.
What happens if Letter 226-J is ignored
If an employer fails to respond within 90 days, the IRS issues Notice CP220J, which formally demands payment of the proposed ESRP. The notice includes:
- The total amount due
- A payment deadline
- Available payment options, including installment plans
- Notice that interest will continue to accrue until the full amount is paid
ESRP balances are subject to standard IRS lien and levy procedures. Employers who cannot pay the full amount can apply for a payment plan, but doing so requires accepting the proposed liability rather than disputing it.
The 6-year statute of limitations
The Employer Reporting Improvement Act established a six-year statute of limitations on ESRP penalties for the first time. Prior to this change, the IRS took the position that there was no time limit on assessing 4980H penalties.
A few important points about the statute of limitations:
- The six-year clock starts on the later of the Form 1094-C/1095-C due date or the actual filing date
- It applies to coverage failures occurring after December 31, 2024
- Coverage failures from earlier years remain subject to the IRS's prior open-ended position
- Record retention should extend to at least seven years to ensure documentation is available throughout the limitations period
Most 226-J penalties trace back to coding errors and data discrepancies, not actual non-compliance. The right defense starts with the right records.
How to avoid Letter 226-J
The strongest defense against Letter 226-J is the work you do before one ever arrives:
- Continuous monitoring of full-time status and offers of coverage, month by month
- Affordability safe harbor selection documented annually, with W-2, Rate of Pay, or Federal Poverty Line calculations supporting each employee's coding
- Accurate Line 14 and Line 16 coding on every 1095-C, validated against actual employee circumstances
- Prompt resolution of AIR system rejections rather than treating submission as completion
- Documented measurement period analyses for variable-hour employees
- Audit-ready records maintained continuously rather than reconstructed at year-end
Be Audit-Ready with ACA Reporting Software by Points North
ACA Reporter is built around the records and coding accuracy that 226-J defense depends on. The platform applies measurement period logic to variable-hour workers, documents offers of coverage by employee and month, calculates and documents affordability safe harbors, generates accurate 1094-C and 1095-C forms, and transmits them through the IRS AIR system with confirmation.
When a Letter 226-J does arrive, the documentation needed to reconcile Form 14765 is already in place. Coding errors get identified quickly, and the response becomes a matter of pulling reports rather than reconstructing months or years of compliance history.
Already received a 226-J? Talk to a Points North specialist by filling out a form below.
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