On May 25, 2018, the IRS released helpful guidance on the various types of 227 letters, which are acknowledgement letters sent to close an employer shared responsibility payment (ESRP) inquiry (see the Nov. 14, 2017, and March 6, 2018, editions of Compliance Corner for more information on that process) or provide the next steps to the applicable large employer (ALE) regarding the proposed ESRP. To clarify, at this stage the IRS uses the information the ALE provided in response to the initial Letter 226-J to review their ESRP. The Letter 227 version that the ALE receives will explain the outcome of that review and the next steps to take to fully resolve the ESRP.
There are five different 227 letters:
- Letter 227-J acknowledges receipt of the signed agreement Form 14764 (ALE's response to a proposed ESRP) and that the ESRP will be assessed. After issuance of this letter, the case will be closed. The IRS says no response is required.
- Letter 227-K acknowledges receipt of the information provided and shows the ESRP has been reduced to zero. After issuance of this letter, the case will be closed. The IRS says no response is required.
- Letter 227-L acknowledges receipt of the information provided and shows the ESRP has been revised. The letter includes an updated Form 14765 (list of employees receiving premium tax credit (PTC)) and revised calculation table. The ALE can agree or request a meeting with the manager and/or request an appeal.
- Letter 227-M acknowledges receipt of information provided and shows that the ESRP didn't change. The letter provides an updated Form 14765 (PTC listing) and revised calculation table. The ALE can agree or request a meeting with the manager and/or request an appeal.
- Letter 227-N acknowledges the decision reached in appeals and shows the ESRP based on the appeals review. After issuance of this letter, the case will be closed. The IRS says no response is required.
The ALE should carefully read the letter for the next steps available and information on how the case will be resolved. If appropriate, the ALE should complete the response Form 14764, indicating their agreement or disagreement. If the ALE disagrees with the proposed ESRP, they must provide an explanation of why they disagree and/or indicate changes needed on Form 14765. The ALE should return all documents as instructed in the letter by the response date. If they agree with the proposed ESRP, they should follow the instructions to sign the response form and return it with full payment in the envelope provided by the IRS. In a situation similar to other assessed taxes, the ESRP will be subject to an IRS lien and the IRS may levy enforcement actions.
Considering what we've seen in regards to these ESRP assessments, there are some compliance responsibilities ALEs should keep in mind for future filings. ALEs should make sure that offers of coverage are documented every year during open enrollment and that signed waiver forms are collected from any FTEs who decline the group health coverage. Additionally, employers should keep important records, such as payroll records, variable-hour tracking calculations, signed enrollment forms and copies of enrollment materials showing employee costs and coverage options.
Finally, ALEs should carefully consider and select a vendor, if appropriate, to populate and file Forms 1094-C and 1095-C. They also shouldn't assume the vendor will correctly populate the forms without any employer oversight. Generally, this means the ALE should ensure all IRS instructions for completing the forms are properly followed, that the indicator codes used in Lines 14 and 16 are correct before filing any 1095-C forms with the IRS and that filing and employee distribution are completed by the IRS deadlines each year. While a vendor may assist an employer with its reporting requirements, the responsibility and liability for such compliance remain with the employer.
Please ask your NFP client service team for a copy of our ESRP Process white paper for more information.
Understanding Your Letter 227 »