The Affordable Care Act (ACA) requires applicable large employers (ALEs) to offer affordable, minimumvalue health coverage to their full-time employees (and dependents) or potentially pay a penalty to the IRS. These penalties are commonly referred to as “pay-or-play” penalties.

The IRS issues Letter 226-J to an ALE if it determines that, for at least one month in the year, one or more of the ALE’s full-time employees enrolled in health coverage through an ACA Exchange and received a premium tax credit. The IRS’ determinations of whether an ALE may be liable for a penalty and the amount of the proposed penalty are based on information from Forms 1094-C and 1095-C filed by the ALE and the individual income tax returns filed by the ALE’s employees.

Letter 226-J is only an initial notification that an ALE may be liable for a pay-or-play penalty and not a tax bill; however, ALEs that receive these letters should take them seriously and start preparing a response to help minimize their penalty exposure.

This checklist outlines the key steps ALEs should take to respond to a pay-or-play penalty assessment (Letter 226-J).