The Affordable Care Act (ACA) has set forth complex requirements for employers to ensure that their workers have access to affordable healthcare. Navigating the ACA’s reporting and compliance obligations can be daunting, but with the right understanding and preparation, achieving ACA success is possible.  

This guide will walk you through the essential elements of ACA compliance, including employee recordkeeping, understanding penalties, IRS reporting requirements, and leveraging tools like ICHRA (Individual Coverage Health Reimbursement Arrangements). Whether you are a seasoned HR professional or just starting to manage ACA compliance for your company, this guide will provide the insights you need to stay on track and avoid costly mistakes. 

The Importance of Maintaining Accurate Employee Records 

One of the most crucial steps toward ACA compliance is maintaining accurate employee records. The IRS requires employers to track various employee details, including work status (full-time or part-time), hours worked, wages, and the health insurance coverage offered to each employee. Without accurate records, it is nearly impossible to demonstrate ACA compliance. 

ACA Requirements 

Under the ACA, certain large employers, known as Applicable Large Employers (ALEs), are required to offer health insurance to their full-time employees (and, in some cases, their dependents) or face penalties. These requirements include: 

1. ALEs must offer coverage to at least 95% of eligible employees 
   The ACA mandates that ALEs offer coverage to at least 95% of their full-time employees. This ensures that a majority of workers have access to health insurance. The term “full-time employee” is defined as someone working 30 or more hours per week, or 130 hours in a calendar month. 

2. The employee share of the qualifying lowest-cost, self-only plan must not exceed 8.39% of their household income 
   The ACA requires that the employee’s portion of the premium for the lowest-cost, self-only health insurance plan offered by the employer should not exceed a certain percentage of their household income (currently 8.39% for the year 2024). If the premium exceeds this threshold, the coverage is considered unaffordable, and the employer may be subject to a penalty. 

What If I Get a Penalty Letter? 

Receiving a penalty letter from the IRS can be overwhelming, but it’s important to stay calm and follow a systematic approach to resolving the situation. 

Don’t Panic 

The first step is to resist the urge to panic. Mistakes and misunderstandings can happen, and penalty notices are not always final. Many times, penalties are assessed because of reporting errors or missing information, which can be corrected. 

Don’t Procrastinate 

Once you receive a penalty letter, don’t delay in addressing it. Procrastination can lead to missed deadlines, which may cause further penalties or legal issues. There is typically a window of time in which you can appeal the decision or provide corrected data. 

Reach Out to Your Payroll Provider 

If you work with a payroll provider, the first thing you should do is reach out to them. Payroll providers often assist with ACA compliance and can help you understand the source of the penalty. They may also have insights into your data reporting and help identify where things went wrong. 

Access the Records 

Gather all relevant documents that may help clarify the situation. This includes: 

• Waivers from employees who declined coverage 

• Open enrollment data showing which employees were offered health coverage 

• Wage data and hours worked for full-time employees 

• Any other records that demonstrate your efforts to comply with ACA regulations 

Write a Response Prior to Deadline 

If you find that the penalty is due to incorrect information or missing records, you can usually respond to the IRS and provide corrections or explanations. Ensure you meet the IRS deadline for filing your response to avoid any further penalties. 

Wait for the Ruling 

Once your response is submitted, the IRS will review your case and issue a ruling. This process can take some time, so be patient. If the ruling is in your favor, the penalty may be reduced or waived altogether. 

IRS Reporting Requirements 

To stay compliant with the ACA, employers must meet certain reporting obligations under two specific IRS codes: Code 6056 and Code 6055. 

What Does Code 6056 Require? 

Code 6056 requires employers to report information about the health coverage they offer to their employees. ALEs must complete and file Form 1095-C for each full-time employee. This form provides detailed information about: 

• The type of coverage offered 

• The cost of coverage 

• The months during which coverage was offered 

• Whether the coverage met ACA standards for affordability and minimum value 

The information reported on Form 1095-C is used to determine whether an employee is eligible for a subsidy through the health insurance marketplace, which can affect the employer’s exposure to penalties. 

What Does Code 6055 Require? 

Code 6055 relates to reporting the coverage provided to employees. Employers offering self-insured health plans (whether they are an ALE or not) must file Form 1095-B, which details the health coverage provided to employees and their dependents. This form is required for employers who self-insure to report coverage under the ACA. 

Affordability Safe Harbors 

To avoid penalties for unaffordable health insurance, employers can use one of the following affordability safe harbors to demonstrate that they have met the ACA’s affordability requirements: 

1. W-2 Safe Harbor 
   This method allows employers to determine affordability based on the employee’s W-2 wages. If the employee’s share of the premium for the lowest-cost self-only coverage does not exceed 8.39% of their W-2 wages, the coverage is considered affordable. 

2. Rate of Pay Safe Harbor 
   This safe harbor uses the employee’s hourly wage or salary rate to determine affordability. For hourly employees, you can calculate affordability based on their hourly rate multiplied by 130 hours per month. For salaried employees, you use their monthly salary. 

3. Federal Poverty Level (FPL) Safe Harbor 
   Under this method, an employee’s share of the premium is considered affordable if it does not exceed 8.39% of the federal poverty level for a single individual. 

By using one or more of these safe harbors, employers can avoid the ACA’s penalties for unaffordable coverage. 

ACA and ICHRA 

The Individual Coverage Health Reimbursement Arrangement (ICHRA) is a relatively new option that employers can use to meet ACA compliance. Introduced on January 1, 2020, the ICHRA allows employers to provide employees with a pre-tax allowance to be used toward purchasing individual health insurance on the marketplace or through other sources. 

The ICHRA is designed to help employers offer a flexible, tax-advantaged alternative to traditional group health insurance plans while still meeting ACA’s coverage and affordability requirements. 

Affordability: Based on Lowest-Cost Silver Level Plan on the Exchange 

To ensure that the ICHRA is affordable under the ACA, the amount an employer offers must meet the affordability criteria based on the cost of the lowest-cost silver level plan available on the health insurance exchange. Employers must ensure that the ICHRA allowance is sufficient to cover the employee’s share of the premium for this plan. 

Tips for Achieving ACA Success 

• Ask ICHRA Providers About Compliance Help: If you’re using an ICHRA to offer healthcare, make sure to ask your ICHRA provider about how they assist with ACA compliance. They should help you understand the reporting requirements and ensure that the plan structure meets affordability guidelines. 

• Work With Your Payroll Provider: Payroll providers are instrumental in ACA compliance. Work closely with them to ensure that employee data is correctly tracked and reported, and to explore different options for completing ACA forms accurately. For peace of mind when it comes to managing payroll, consider MP’s all-in-one payroll software. With the renowned platform, HR professionals are powered to deliver fast, easy, and error-free payroll.  

• Allow Extra Time for Form Approval and Filing: Completing and filing Forms 1095-C and 1095-B can take time. Start early to ensure you meet deadlines and allow sufficient time for review and corrections. 

• Utilize the Work Location Safe Harbor: If applicable, the work location safe harbor can help you avoid penalties for employees who may have been offered coverage but live in areas with high healthcare premiums. This safe harbor helps adjust for regional cost variations. 

Conclusion 

Navigating ACA compliance can feel overwhelming, but with proper planning and attention to detail, employers can avoid penalties and meet their obligations. The key is to maintain accurate records, stay informed about IRS reporting requirements, use the available safe harbors, and leverage modern solutions like ICHRA to meet the needs of both employees and employers. By taking proactive steps, you can achieve ACA success and ensure that your organization remains compliant year after year. 

For a complete walkthrough on ACA reporting and form changes, be sure to check out the free, on-demand webinar from our team at MP, which will help you understand the latest updates and changes for ACA compliance. 

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