What is IRS Letter 226-J?
Letter 226-J is the IRS's opening move in the Employer Shared Responsibility Payment (ESRP) process — a proposed payment under IRC §4980H, not a final bill. Here's what's inside it, how much time you have, and what happens at each stage.
What the letter is
Letter 226-J is the initial letter the IRS issues to applicable large employers (ALEs) — employers that averaged at least 50 full-time employees, including full-time equivalents, during the preceding calendar year — to notify them they may be liable for an Employer Shared Responsibility Payment.
The IRS builds its proposal from two data sources: the Forms 1094-C and 1095-C you filed, and the individual income tax returns of your full-time employees — specifically whether any of them were allowed a premium tax credit (PTC) for Marketplace coverage.
Source: IRS — Understanding Your Letter 226-J; IRS ESRP Q&A.
What's inside the envelope
- A brief explanation of §4980H and why the IRS thinks a payment is due.
- An ESRP summary table itemizing the proposed payment by month, indicating for each month whether the liability is asserted under §4980H(a) or §4980H(b) — or neither.
- Form 14764 (ESRP Response) — the form you complete to indicate agreement or disagreement.
- Form 14765 (Employee PTC Listing) — the month-by-month list of employees the IRS considers assessable, with the Line 14/16 codes from each employee's Form 1095-C.
The 14765 is where responses are won or lost: it's the IRS's factual claim about which employee-months are assessable, and every month on it can be checked. See 14765 reconciliation, explained.
The response deadline
The Employer Reporting Improvement Act (P.L. 118-168, signed December 23, 2024) requires the IRS to give ALEs at least 90 days to respond to Letter 226-J.
If you don't respond by the response date, the IRS assesses the proposed amount and issues Notice CP 220J — notice and demand for payment. The time to reconcile the 14765 is before that happens.
Sources: P.L. 118-168 (congress.gov); IRS ESRP Q&A.
The two payment tracks: (a) vs (b)
The summary table in your letter labels each month (a), (b), or neither. The distinction matters because the math differs:
- §4980H(a) — the ALE offered coverage to fewer than 95% of its full-time employees (and dependents), and at least one full-time employee received a PTC. Exception: if the ALE offered coverage to all but five or fewer full-time employees, the (a) payment doesn't apply. Statutory base: (full-time employees − 30) × $2,000 per year, computed monthly.
- §4980H(b) — the ALE offered coverage to at least 95% of full-time employees, but at least one full-time employee still received a PTC (not offered coverage individually, or the offer was unaffordable / lacked minimum value). Statutory base: (employees who received a PTC) × $3,000 per year, computed monthly — capped at the (a)-equivalent amount.
Both dollar figures are adjusted annually for inflation. Full-time equivalents count toward ALE status but not toward the payment calculation.
Source: IRS ESRP Q&A — liability and payment computation.
What happens after you respond
The IRS answers with one of the Letter 227 variants:
- 227-J — you signed an agreement; ESRP assessed; case closed.
- 227-K — ESRP reduced to zero; case closed.
- 227-L — revised ESRP with an updated 14765; agree, or request a meeting with the manager and/or Appeals.
- 227-M — ESRP unchanged; agree, or request a meeting with the manager and/or Appeals.
- 227-N — Appeals decision; case closed.
- 227-O — revised ESRP for tax-exempt and government entities.
After 227-L or 227-M, you may request a pre-assessment conference with the IRS Office of Appeals in writing by the response date on that letter.
Source: IRS — Understanding Your Letter 227.
This guide is general information, not legal or tax advice. Statutes and IRS pages change — verify against the sources linked above.