If your organization receives an IRS Letter 226-J, it means the IRS thinks you owe a payment. It's not a bill. It's a proposal, and it's built entirely from data you've already filed with the IRS.
What happens next isn't about how well you know the ACA. It's about whether you can produce two things the letter never asks for by name: proof that employees declined coverage, and hours data that holds up under scrutiny.
What is IRS Letter 226-J?
The short answer
Letter 226-J is the IRS's first notice that it may assess an Employer Shared Responsibility Payment (ESRP) against an Applicable Large Employer (ALE) under the Affordable Care Act (ACA). It's not a bill. It's a preliminary calculation, based on the employer's own Forms 1094-C and 1095-C and the premium tax credits its employees claimed, that determines the organization may be liable for an ESRP payment.
Why does the IRS send Letter 226-J?
This letter shows up when the IRS's ACA data-matching flags a mismatch: a full-time employee received a premium tax credit for marketplace coverage in a month when the employer's own Form 1095-C indicates coverage wasn't offered, wasn't affordable, or didn't meet minimum value. That's the entire trigger.
The IRS isn't investigating intent or circumstance at this stage. It's comparing two data sets it already has on file and proposing a number.
What do Form 14764 and Form 14765 require?
Letter 226-J comes with two forms.
- Form 14764 is the response form. It records whether the employer agrees or disagrees, and which payment option applies if they agree.
- Form 14765 lists the specific employees and months tied to the proposed penalty.
Disagreeing takes more than checking a box. The instructions call for a full written explanation, corrected coding on Form 14765 where it applies, and supporting documentation for every change.
That's where the real work lives. It's also where the two most common gaps show up.
The two records most payroll systems can't produce
Proof of declined coverage
An employee who declines coverage during open enrollment is exercising a choice, but the ACA's offer requirement is only satisfied if the employer can prove the offer happened and the decline was genuinely the employee's own choice. Most benefits systems record that an offer was made. Fewer record why it was turned down.
Rehired employees complicate this further: declined coverage logged during a prior employment stint doesn't automatically carry forward, so measurement-period math has to restart cleanly.
Clean measurement-period hours
For employers with variable-hour or seasonal workforces, ACA full-time status is often calculated using a look-back measurement period: average hours worked across a defined stretch, not a single pay period. That calculation only holds up if the hours behind it are complete and consistent.
Many employers keep hours-worked data in a separate time-tracking or applicant-tracking system, not the one running payroll. Reconciling the two after an eligibility question has already come up is where time and accuracy both suffer.
$5,010
The 2026 penalty under Section 4980H(b), applying per employee when coverage doesn't meet ACA affordability or value rules and that employee gets subsidized marketplace coverage instead — up from $4,350 in 2025. Source: IRS Rev. Proc. 2025-26
How to respond before the deadline
The response date is printed on the letter, generally 30 days out. From there:
- Read the letter and both forms in full. They explain how the proposed number was calculated.
- Review how the full-time and total employee counts in Part III of your original Form 1094-C were determined. The proposed number is built from those counts, so an error there carries through to the letter.
- Complete Form 14764, indicating agreement or disagreement.
- If disagreeing, include a full written explanation, any corrected codes on Form 14765, and supporting documentation.
- Return everything by the date printed on the letter.
- Call the number on the letter to request more time, if needed.
What happens after you respond
The IRS reviews the response and replies with a Letter 227 acknowledgment stating its determination. That acknowledgment explains the employer's rights, including the right to request a conference with the IRS's Independent Office of Appeals.
Building the record before the letter arrives
By the time Letter 226-J shows up, the months in question are already closed. The offer either happened or it didn't. The hours either add up or they don't. The only thing still in an employer's control at that point is whether the proof exists.
Greenshades' ACA compliance tools track full-time status against measurement periods and keep eligibility and coverage decisions attached to the employee record they belong to. When a question like this comes up, the answer isn't a research project.
See how Greenshades keeps ACA eligibility and measurement-period hours in one place.
See how Greenshades can help your team stay ahead of compliance changes.
Request A DemoNote: This information is for informational purposes only and does not constitute formal tax, legal, or compliance advice. Always consult with qualified tax advisors, legal counsel, and your organization's internal teams for guidance specific to your situation. Additional regulations may apply. For the most accurate and up-to-date information, refer to official government resources and regulatory agencies.
