An audit does not start with an auditor. It starts with a letter, and the clock on it started the day it was printed.
One of our clients opened an envelope this June with a question about 2024 inside it. The IRS had their W‑2 count, could see they looked like an applicable large employer, and had no Forms 1094‑C or 1095‑C on file for that year. Thirty days to answer. No phone call, no visit, nobody in a conference room. That is what a benefits audit usually looks like — a letter from a unit you have never heard of, about a plan year you had stopped thinking about.
Nobody picks you out of a hat.
Almost every one of these begins in one of six places, and five of them are visible from outside your company.
A Number That Does Not Match
The IRS holds your W‑2 count. If it says you were large enough to owe ACA reporting and no 1094‑C arrived, a letter generates. A machine noticed, not a person — which is why the letter can arrive two years later.
An Employee Calls the Government
The Labor Department closed 222,246 informal inquiries in fiscal 2025 and recovered $468.7 million without opening a formal investigation. Most of those began with one person who could not get a document or a claim paid.
A Form 5500 That Never Arrived
Filings are public. A plan that should have one and does not is visible to anyone looking, including the agency whose database it is.
An Answer on the Form Itself
The 5500 asks questions. A blank where there should be a number, a Schedule A that does not match the plan described, a funding answer that changed without explanation — each is a thread worth pulling.
A Request You Did Not Answer
A participant who asks in writing for plan documents is owed them in 30 days. Missing that is both a penalty and, often, the complaint that starts everything else.
A Referral
The agencies share. An IRS finding can produce a Labor Department letter, and a carrier or administrator filing that disagrees with yours gets noticed by whichever one reads it first. A HIPAA complaint to Health and Human Services can start the same conversation from a third direction.
An Employee’s Own Tax Return
The premium tax credit is claimed on a 1040, and that filing is the record the IRS matches against your codes. Your reporting is compared to your employees’ reporting, which is why a proposal can name people you had forgotten were on the payroll.
A Change of Entity
An acquisition, a new EIN, a payroll conversion halfway through a year. Returns filed under the wrong number look to the IRS exactly like returns never filed, and the letter goes to whichever entity the W‑2s came from.
A COBRA Notice That Never Went
Thirty days for the employer to tell the administrator, fourteen for the administrator to send the election notice, forty‑four when they are the same party. A former employee with a date and no notice is a complaint that writes itself.
They arrive in a fixed order, and each one is more expensive than the last.
Knowing which letter you are holding tells you how much room you still have.
Letter 5699 — The Opening Question
“Our records show you may have been an applicable large employer and we have not received those returns.” Five boxes to check, 30 days, mailed back. This is the cheapest point in the whole sequence: filing the missing returns usually ends it here.
Letter 226‑J — A Proposed Bill
The employer shared responsibility payment the IRS believes you owe, computed from your own 1094‑C and 1095‑C against employees who claimed a premium tax credit. At least 90 days to respond for tax years from 2025 on, and 30 days for earlier years.
Form 14765 — The Employee List
It names your assessable full‑time employees month by month, with the codes you reported for each. Most of the argument lives on this page, and most of what is wrong on it is a coding error rather than a failure to offer coverage.
Letter 227 — The Acknowledgement
Five versions, ranging from “closed, nothing owed” to “here is what still stands.” You have 30 days from its date to ask the Independent Office of Appeals for a pre‑assessment conference.
Notice CP 220J — The Assessment
No longer a proposal. It arrives when nobody answered, or after Appeals has finished, and it is a demand for payment with interest running.
Six Years, and Only If You Filed
A six‑year limitations period now applies to mandate assessments on forms due after 31 December 2024, running from the later of the due date or the day you actually filed. File nothing and the clock never starts — and for earlier years the IRS position has been that none runs at all.
Where the 5699 Comes From
A campus operation, not a local examiner — the response unit that handles the employer mandate, working from filings rather than from anything it has seen at your office. There is a telephone number and an e‑fax number on it, and the written answer goes back to the address at the top.
The Five Boxes
You were an ALE and already filed — give the name, EIN and date. You were an ALE and the returns are enclosed. You were an ALE and will file by a date you name, explained if it is more than 90 days out. You were not an ALE, explained. Or other, with a statement attached.
Why Box Two Is Usually Unavailable
Electronic filing is required once you file ten or more information returns of any kind in the year, counted in the aggregate — W‑2s and 1099s count toward the ten. Almost every applicable large employer is over that line, so enclosing paper returns with the response is not an option.
The answer is two forms, and one of them is where the whole argument happens.
A proposed assessment is answered on paper, on the IRS’s own forms, by a date printed on the letter. This is what those forms actually ask for.
Form 14764 — The Response
Your name, EIN, the tax year and a contact person, then one choice: agree, or disagree in whole or in part. Disagreeing requires a signed statement setting out the basis and describing any change to what you reported, with documentation attached. Signed by an authorized representative, with title and date.
The Payment Boxes
The same form carries the payment election: full or partial payment through EFTPS, full or partial payment enclosed, or none. Choosing “no payment” while you dispute the amount is ordinary, not provocative — the form is built for it.
Form 14765 — The Employee Listing
Only the employees the IRS treats as assessable appear on it: a premium tax credit in at least one month, and no valid safe harbor on your return for that month. Each one shows by name and the last four of the Social Security number, across a twelve‑month grid.
How a Correction Is Actually Made
Every month on that grid has two rows. The top one is what you reported — the line 14 and line 16 codes as a pair, such as 1H/2A. The second row is blank, and that is where the corrected pair goes, month by month, with the explanation attached.
XF, XG and XH
Months marked with one of those are months where you claimed an affordability safe harbor and the IRS did not accept it. They are not typing errors. They point at exactly which safe harbor the agency thinks your own records do not support.
Do Not Re‑File the Forms
The letter says so in terms: no corrected 1094‑C, no corrected 1095‑Cs to carry the changes you are making. The correction lives on Form 14765 and nowhere else. Filing corrections separately creates a second record that disagrees with the first.
The Codes That Fix Most of It
2A not employed that month, 2B not full‑time, 2C enrolled in what was offered, 2D in a limited non‑assessment period, 2E multiemployer relief, and the three affordability safe harbors — 2F on W‑2 wages, 2G on the federal poverty line, 2H on rate of pay. A blank line 16 in a month when coverage really was offered is the single most common reason a proposal comes in too large.
Letter 227, Version by Version
J: your signed agreement was received and the amount will be assessed. K: reduced to zero, closed. L: revised, with a new listing and a new date to answer. M: unchanged, and you may still go to Appeals. N: Appeals has decided. O: the revision letter for tax‑exempt and government employers.
Appeals Has to Be Asked For
A pre‑assessment conference with the Independent Office of Appeals is requested in writing, by the date on the Letter 227. After a 227‑J or a 227‑N the case is closed and there is nothing left to appeal at that stage.
What it costs, at the amounts in force now.
Not Filing: $340 a Return
The copy the IRS is owed. $340 for each 1095‑C not filed, for returns due in 2026.
Not Furnishing: Another $340
The copy the employee is owed is a separate failure with its own penalty. Both halves land on the same person, so the real figure is $680 per employee.
The Annual Ceiling
$4,098,500 for employers above $5 million in average gross receipts, $1,366,000 at or below it — and that ceiling applies to each half separately.
Correct It Early and It Drops
$60 a return if corrected within 30 days of the due date, $130 if corrected by 1 August. Late and correct beats on time and wrong.
Intentional Disregard Has No Cap
The greater of $680 a return or 10% of the amount that should have been reported, and the annual maximum above does not apply at all.
The Mandate Itself
For 2026: $3,340 per full‑time employee (the first 30 excluded) where coverage was not offered to 95%, or $5,010 for each employee who took a subsidy instead. Earlier years are assessed at that year’s lower amounts — 2025 was $2,900 and $4,350.
The 5500 Has Two Regulators
$2,739 a day from the Labor Department with no ceiling, and $250 a day from the IRS to $150,000 per return. One missed filing, two penalties, and the delinquent filer program is what answers both at once.
A Wrong Number Is a Failure Too
The information‑return penalties reach returns filed late, filed on the wrong medium, or filed with a missing or incorrect taxpayer identification number. A filed‑but‑wrong return is not a filed return.
Interest, and Probably Not Deductible
Interest runs on an assessed balance until it is paid in full. Treat the payment itself as not deductible and confirm it with your CPA — the Code disallows deductions for taxes under the chapter this one sits in, though the IRS has never said so about this payment in terms.
The arithmetic behind the figure on the letter.
Nobody picks the number. It is assembled month by month out of your headcount, your codes and other people’s tax returns — which is why it can be argued with.
The (a) Penalty Is Monthly
One twelfth of the annual amount, for every full‑time employee minus 30, for each month the plan failed the 95% test. At 2026 amounts that is $278.33 a month per employee counted — for a 200‑person employer, about $47,000 for a single bad month.
One Subsidized Employee Is Enough
The (a) penalty does not scale with how many people went to the Marketplace. One full‑time employee with a premium tax credit in a month turns the whole month on, for the whole workforce minus 30.
The 30 Is Shared
Where companies are under common ownership and counted as one employer, the 30‑employee reduction is allocated across the members in proportion to their full‑time headcount. Each EIN does not get thirty of its own.
The (B) Penalty Is Capped
$5,010 for each employee who took a subsidy because your offer was unaffordable or fell short of minimum value — but never more than the (a) penalty would have been for that month. Offering something imperfect is always cheaper than offering nothing.
The Two Halves Stack
The penalty for not filing the return and the penalty for not furnishing the statement are separate failures with separate annual ceilings. Both attach to the same employee, which is how $340 becomes $680 a head.
The De Minimis Rule
A small number of returns with wrong information — the greater of ten, or half of one percent of everything you filed — count as correct if you fix them by 1 August of the filing year. It is a real exception, and it rewards finding your own errors.
Reasonable Cause Is Two Tests
A waiver needs both: significant mitigating factors or events outside your control, and proof you acted responsibly before and after — which ordinarily means correcting within 30 days of discovering the problem. Mitigating factors on their own are expressly not enough.
Notice 972CG Is a Different Letter
It proposes the information‑return penalties for forms filed late, on the wrong medium, or with a missing or wrong taxpayer number. 45 days to respond — 60 for a foreign filer — and a reasonable‑cause request must name the provision, set out the facts, be signed by the person required to file, and carry a declaration under penalties of perjury.
Silence Is Treated as Agreement
No response to a proposed assessment and the IRS assesses the amount in the letter as though you had signed for it, issues the acknowledgement letter, and moves to notice and demand. Nothing about not answering preserves an argument.
The DOL asks differently, and it asks for everything at once.
The IRS asks about a filing. The Labor Department asks whether the plan is being run the way ERISA says it must be, and it starts by asking for the file.
What the Letter Asks For
The plan document and the summary plan description, every summary of material modifications, the last several 5500s and summary annual reports, the SBC, the required notices with evidence of delivery, contracts with the administrator and the network, the fidelity bond, the claims and appeals procedure, and the mental health parity comparative analysis.
Thirty Days, Then $195 a Day
Material the Secretary of Labor requests and does not receive within 30 days runs $195 a day, to a maximum of $1,956 per request. Small on its own; it signals how the rest of the investigation will go.
A Participant’s Request Costs More
Documents asked for in writing by a participant are due in 30 days, and a court can award that person up to $110 a day for the delay. The penalty is paid to the employee, not the government.
The SPD Is Where Most Health Plans Fail
A benefits guide is not a summary plan description and neither is a carrier’s certificate of coverage. The exemption that spares small plans from the 5500 does not touch the SPD — the regulation says so in terms.
What a Year of This Looks Like
In fiscal 2025 the agency closed 878 civil investigations. 556 of them — 63% — ended in money recovered or a correction, totaling $714.4 million. An investigation that opens usually finds something.
The 2026 Posture
An April 2026 field bulletin tells investigators to aim at egregious conduct rather than novel legal theories, and to close routine investigations within 18 months, complex ones within 30. It changes the temperature. It does not change the paperwork you owe.
COBRA Is in Scope
Thirty days for the employer to notify the administrator, fourteen for the election notice, forty‑four where they are the same party, sixty days for the beneficiary to elect and forty‑five to make the first payment. Every one of those is a date the file gets checked against.
The Claims Clock
72 hours on an urgent claim, 15 days pre‑service, 30 post‑service, 180 days for the participant to appeal and 30 or 60 to decide it. A plan that does not follow its own procedure is treated as having none, and the participant goes straight to court.
Fully Insured Is Not Out of Scope
The carrier pays the claims. The plan is still yours, and reporting, disclosure, COBRA and the Part 7 mandates sit with the plan — which is exactly what the letter asks about. Being fully insured narrows the questions; it does not remove them.
From the first letter to the closing one, this is how it runs.
The Labor Department publishes its own enforcement manual, so none of this has to be guessed at.
It Opens as a Case File
A regional office opens it when it holds information suggesting a violation, or because the national office directed it. The file has to record why it was opened and which sections of ERISA are in question. You are not told the source, and the agency does not have to tell you.
Ten Business Days, Not Thirty
The sample opening letter for a health plan asks for the documents in ten business days. The 30‑day figure everyone quotes is the penalty clock, not the deadline in the envelope, and the two are often confused to an employer’s cost.
A Good First Response Can End It
The manual is candid about this: producing the documents up front can reduce the time spent with your people and “may eliminate the need for an on‑site visit entirely.” The first box you send is the cheapest lever you will have.
The Parity Analysis Has Its Own Clock
The comparative analysis for non‑quantitative treatment limitations must be handed over within ten business days of a request — and if what you send is judged insufficient, another ten business days to cure it. Most employers have never seen theirs.
What Part 7 Sweeps In
HIPAA portability and nondiscrimination, mental health parity, the Newborns’ and Mothers’ Act, the Women’s Health and Cancer Rights Act, GINA, the ACA market reforms, the No Surprises Act, the gag clause attestation and the price comparison tool. One letter, all of it.
They Read Claims, Not Just Documents
An operational review of claims data and individual claim files: how denials were handled, whether your appeals procedure was actually followed, and whether the fees the plan paid were reasonable for what was delivered.
The Bond Question
Anyone handling plan funds must be bonded at 10% of the funds handled the previous year, to a $500,000 ceiling. Self‑funded plans and anything holding money withheld from pay are where this bites, and the investigator’s report has to state whether it was met.
Two Ways It Closes
A no‑action letter where the findings are minor and the plan lost nothing, or a voluntary compliance letter listing the violations and asking for correction, usually inside a year. Where voluntary compliance fails, the region refers the case to the Solicitor of Labor.
If You Do Not Produce It
ERISA gives the Secretary subpoena power, and an ignored subpoena goes to federal district court for enforcement. Worse, a recovery obtained by settlement with the Secretary or by judgment in the Secretary’s own suit carries a mandatory penalty of 20% on top of it.
The file is the defense. Most employers find out which parts are missing at the worst moment.
Two separate retention rules apply to a benefit plan, and the shorter one is the one everybody quotes.
Six Years for the Annual Report
Records that verify, explain or clarify the Form 5500 must be kept at least six years from the filing date — and where an exemption meant no filing was required, six years from the date it would have been due.
Indefinitely for Benefits
A separate obligation, and the one nobody plans for: records for each employee sufficient to determine the benefits due or that may become due. No year count is attached to it, because the question can be asked whenever a benefit is claimed.
The ACA File
Offer records, measurement‑period output, the returns exactly as transmitted and the acknowledgement that came back. The limitations period runs from the later of the due date and the date you filed, so the file has to outlive the clock.
Proof of Delivery, Not Proof of Drafting
The question asked is whether the notice reached the employee, not whether it existed. Keep the method, the dates and the distribution lists — a PDF in a folder proves that somebody wrote it and nothing else.
Most of It Is in Someone Else’s System
Payroll platforms, benefits administration, the COBRA vendor. Get an export on a schedule you control, and get a complete one before you leave any of them — access ends when the contract does.
The Year You Changed Vendors
The single most common gap in the whole file. Conversions, migrations and acquisitions are where offer data goes missing, and those are reliably the years the letters ask about.
What to do in the week the letter arrives.
Two mistakes cost the most: ignoring it, and paying it. Both are avoidable in the first seven days.
Date the Clock, Not the Envelope
The window runs from the date printed on the letter, not the day it reached your desk, and the mail takes some of it — 30 days on a Letter 5699, at least 90 on a mandate letter for 2025 or later. More time is often granted for the asking, but it has to be asked for, in writing, before the date passes.
Read Your Own Return Before You Read Theirs
Pull the 1094‑C and 1095‑Cs as filed, the offer records, the measurement‑period math and the enrollment file. A proposed assessment is built entirely from what you reported, so the error is usually in your codes, and that is a much better argument than a plea.
Answer on Their Forms, in Writing
A signed response form, a statement of your position, and the employee list corrected line by line where you disagree. Nothing said on a phone call becomes part of the record.
Fix the Gap While You Are Already In It
A 5500 that was never filed can go in under the delinquent filer program at $10 a day, capped at $750 per filing for a small plan and $2,000 for a large one — $1,500 and $4,000 for all years together — against $2,739 a day with no ceiling if the DOL gets there first. The program closes the moment they write to you.
Stop Deleting Things
A records hold on email, enrollment files and payroll exports the day the letter arrives. The bad version of this story always begins with a purge that was already on the calendar — and the retention schedule you were following is not a defense once you have notice.
Decide Who Signs
Only certain people can act for you in front of the IRS. If a CPA or an attorney is going to answer, the authorization has to be on file before they can, and that is a form and a signature you would rather not be chasing in week four.
Ask Your Vendors on Day One
The offer data, the measurement‑period output and the delivery evidence usually live in a payroll company or a benefits platform rather than in your building. Their service levels were not written with a 30‑day letter in mind, so the request goes out first, not last.
Write the Chronology Once
Who was offered what, when, and on what evidence. Everything else — the corrected codes, the statement, the exhibits — is assembled out of that one document, and it is also what tells you quickly whether you are arguing or paying.
We assemble the file, reconstruct what was never filed, and rebuild the codes month by month so the response argues from records rather than recollection. Where a reply needs a CPA or an ERISA attorney to sign it, they are available through us and we bring them in.
What employers ask in the first hour after the mail arrives.
Usually in this order, and usually before anyone has read the letter twice.
Is Letter 5699 an audit?
No. It is an inquiry produced by a data match, and it is the least expensive point in the entire sequence. Ignoring it is what produces Letter 226‑J, which is the expensive one.
They are asking about 2024. Can they really go back that far?
For 2024 forms and later a six‑year limitations period applies — but it starts at the later of the due date and the date you filed, so an employer who never filed has no clock running in its favor at all. For earlier years the IRS position has been that none runs. An unfiled year stays open in a way an unpaid tax year does not.
Does answering make them look harder at us?
The opposite. These letters are generated in sequence, and not answering is precisely what generates the next one. An employer who responds with records on the due date usually closes the file at the stage it opened.
We are fully insured. Doesn’t the carrier handle this?
The carrier reports enrollment on its own form. Your 1094‑C and 1095‑Cs, your 5500 where one is owed, your summary plan description and your notices are the employer’s obligations and are signed by the employer.
Our payroll company files the 1095‑Cs. Who is liable?
You are. The penalty follows the employer whose name is on the return; whatever recourse you have against the vendor is a contract matter, and it happens after you have answered the IRS.
We never filed a 5500 for the health plan. File now, or wait and see?
File, through the delinquent filer program, and do it before any letter arrives. Eligibility ends the moment the Labor Department notifies you in writing, and the difference between the two routes is a few hundred dollars against $2,739 a day.
The list of employees they sent us is wrong.
That is what the employee listing form is for. It gets corrected line by line, with the right code and the reason for it — a valid offer they did not take, a month they were not full‑time, an affordability safe harbor that applies. Corrections at that level are routine.
Can we just pay it and be done?
You can, and sometimes that is the right call. Check the arithmetic first: the number was built from codes you supplied, and if those were wrong the proposal is wrong in the same direction.
Do we need a lawyer?
For a 5699 with clean records, usually not. For a proposed assessment with real dollars on it, or a Labor Department document request, yes — and the CPAs and ERISA attorneys available through us are the ones we bring in.
How long will a DOL investigation take?
The agency’s own 2026 guidance targets 18 months for a routine investigation and 30 for a complex one. Your first document response is still due in 30 days, and how complete it is has a great deal to do with which of those two you get.
General information about federal benefit plan audits and penalties, not legal or tax advice. Plan‑specific questions belong with ERISA counsel or your CPA, and we will bring them in.
Send us your renewal.
We’ll tell you whether it looks competitive, where we see opportunity, and the five questions we’d put to your carrier. No cost, and no obligation to move anything.
The renewal letter
Your current plan summary
Contribution split by tier
Enrolled counts by tier
Four documents — two more if your group is 50 or more. Nothing else; every extra one is a reason to postpone.
An independent employee benefits consulting firm. We look at the entire benefits program — cost, plan performance, risk and administration.
Bloomfield Hills, MI 48304
248.370.8853
Colorado Springs, CO 80921
719.425.2649
Houston, TX 77084
281.404.5670