Employer Penalty: Are you relying on “good faith effort”?

20 May, 2022

Every year, more and more employers find themselves facing stiff penalties from the IRS for their failure to comply with the reporting requirements of the Affordable Care Act, penalties they thought they could avoid by hiding behind the shield of the “good faith effort” relief.

If you made your best-faith effort to properly and timely furnish and file Forms 1094 and 1095 in previous years, you may well have some protection from penalties for minor reporting errors with this relief, which was designed to give employers who made a good effort a bit of grace if the forms were incomplete or inaccurate. But if you, like some employers we’ve met, failed to furnish or timely file at all, you might find yourself holding an IRS penalty letter with no good faith effort relief to protect you.

We recently worked with an employer in just that situation – they received Letter 226J from the IRS indicating they owed an Employer Shared Responsibility Payment (ESRP). The surprised employer appealed the assessment, only to have their penalty, which totals more than $100,000 for a single year of failing to file the forms, reaffirmed by the IRS. Even a thorough accounting of the efforts they made to remedy the failure and prevent future mistakes failed to sway the IRS, who said none of the contributing circumstances met the requirements of the good faith effort relief.

The culprit? A simple combination of employee turnover, ambiguous departmental responsibilities, and business priority.

You should note that while this employer was penalized in a year where good faith effort relief was offered, reporting requirements have only become more stringent. The IRS no long offers good faith effort relief for inaccurate or incomplete forms, and it is likely we will see an increase in the kind of enforcement this employer faced.

Are you facing an ESRP letter? Do you know when and how to respond, and what kind of documentation the IRS expects you to provide? We’re here to help. Reach out today to learn more about how we can assist you in responding to a penalty assessment letter.

This information is intended to be educational. It is general in nature and should not be considered financial, legal or tax advice. Consult an attorney or a tax professional regarding your specific situation. This blog is up to date as of May 2022 and has not been updated for changes in the law, administration or current events.


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