Affordable Care Act compliance is often treated as an annual reporting project.
It is more accurately a year-round data-management responsibility.
The information an employer eventually reports on Forms 1094-C and 1095-C is created through everyday hiring, payroll, scheduling, benefits, leave, termination, and employee-status decisions. When those records are inaccurate or disconnected, year-end reporting becomes a correction exercise rather than a confirmation process.
That is why ACA compliance for employers should be reviewed before Q4.
Applicable large employers need reliable information about workforce size, employee hours, full-time status, coverage offers, employee contributions, dependents, enrollment, and payroll deductions. Growing employers also need to determine whether their workforce size will make them an applicable large employer in the following calendar year.
The threshold is based on more than a simple December headcount.
An employer is generally considered an applicable large employer, or ALE, for a calendar year when it averaged at least 50 full-time employees, including full-time-equivalent employees, during the preceding calendar year. Related employers under common ownership may need to aggregate their workforces when determining ALE status.
Q4 is therefore not the time to begin reconstructing the first nine months of workforce data.
It is the time to confirm that payroll, benefits, HR, and reporting records are aligned before the year closes.
Why Benefits Compliance Matters For Employers
The ACA employer shared responsibility provisions apply to ALEs.
An ALE may potentially owe an employer shared responsibility payment when it fails to offer minimum essential coverage to at least 95% of its full-time employees and their dependents, or when offered coverage is unaffordable or does not provide minimum value and at least one full-time employee receives a Marketplace premium tax credit.
For ACA purposes, a full-time employee is generally an employee averaging at least 30 hours of service per week or 130 hours of service in a calendar month. Employers may use the monthly measurement method or, where appropriate, the look-back measurement method to determine full-time status.
Those rules make payroll and timekeeping central to benefits compliance.
An employee whose schedule changes may cross the full-time threshold. A variable-hour employee may complete a measurement period. A transfer between affiliated entities may affect which ALE member reports the employee for a particular month. A leave event may influence hours-of-service calculations and coverage administration.
The benefits team cannot determine ACA compliance accurately when workforce data remains isolated inside payroll, scheduling, or individual manager records.
Affordability also changes annually.
For plan years beginning in 2026, the ACA affordability percentage is 9.96%. For plan years beginning in 2027, the IRS has increased the required contribution percentage to 10.22%. The percentage is relevant when evaluating whether an employee’s required contribution for the lowest-cost self-only coverage providing minimum value is affordable.
Because employers generally do not know an employee’s household income, ALEs may use one of three regulatory affordability safe harbors: Form W-2 wages, rate of pay, or the federal poverty line. A safe harbor must be applied consistently to the employees within the selected reasonable category.
The affordability increase does not mean every employer should automatically shift more cost to employees.
Employers should model the contribution under the safe harbor they intend to use, confirm which plan is the lowest-cost option providing minimum value, and review how wellness incentives, flex credits, opt-out payments, or HRAs affect the employee-required contribution.
Minimum value is a separate test. An employer-sponsored plan generally provides minimum value when it covers at least 60% of expected total allowed benefit costs and provides substantial coverage for inpatient hospitalization and physician services.
How ESI handles the issue
ESI’s employee benefits and ACA services connect benefit administration with payroll, HR records, eligibility, employee communication, and compliance support. ESI positions its ACA Solutions service as a centralized resource for navigating changing ACA requirements.
Learn more about ESI’s employee benefits services.
Common Employee Benefits Gaps To Review
A common ACA gap is waiting too long to determine ALE status.
A growing business may have fewer than 50 full-time employees but still reach the threshold after part-time hours are converted into full-time equivalents. Businesses under common ownership may also be treated as an aggregated group when determining whether the group is an ALE, even when each individual entity employs fewer than 50 people.
Each separate ALE member generally remains responsible for filing its own Forms 1094-C and 1095-C under its own employer identification number. An aggregated group does not file one combined authoritative transmittal for every related company.
Another gap is assuming benefit eligibility and ACA full-time status are always identical.
An employer may offer benefits under eligibility rules that are more generous than the ACA requires. That does not remove the need to calculate and report full-time status correctly for employer shared responsibility purposes.
The opposite problem can also occur. An internal benefits rule may classify an employee as ineligible even though ACA measurement data indicate the employee should be treated as full time during a stability period.
Variable-hour and seasonal workforces require particular attention because schedules may fluctuate significantly. Employers should know which measurement method applies, when measurement and stability periods begin and end, and how new hires, transfers, rehires, and employment breaks are handled.
Coverage-offer data can also become unreliable when HR and payroll are not synchronized.
An employee may be coded as full time in payroll but part time in the benefits system. A coverage offer may be sent, but the system may not preserve evidence of when it was made. A newly eligible employee may miss the enrollment window because a manager submitted the status change late.
ACA compliance requires more than proving that a health plan existed.
Employers need records showing which full-time employees received an effective opportunity to enroll, when coverage was offered, what the employee contribution was, and whether dependent coverage was available.
Benefits compliance also extends beyond the ACA.
The EEOC states that employee benefits may not be administered unlawfully based on race, color, religion, sex, national origin, age, disability, or genetic information. Employers can remain responsible for discriminatory benefit practices even when benefits are purchased from or administered by an outside organization.
ACA compliance should therefore be coordinated with the employer’s broader benefits eligibility and nondiscrimination review.
How ESI handles the issue
ESI supports employee benefits administration, eligibility tracking, payroll integration, compliance resources, and employee communication. Its benefits-administration materials specifically identify ACA and ERISA compliance as part of the service framework.
This can help employers identify inconsistencies before they become reporting errors or employee coverage problems.
Review ESI’s employee benefits compliance action plan.
Payroll, Benefits, And Compliance Questions To Ask
Before Q4, the employer should determine whether the systems producing ACA data agree with one another.
Payroll should reflect accurate hours, compensation, employment dates, and entity assignments. The benefits platform should reflect correct eligibility, coverage offers, elections, dependents, employee contributions, and termination dates. HR records should explain employment-status changes and applicable measurement periods.
The employer should also confirm which plan and contribution level will be tested for 2027 affordability.
For plan years beginning in 2027, the affordability percentage is 10.22%. Employers considering the federal poverty line, rate-of-pay, or W-2 safe harbor should model the required employee contribution before finalizing rates and open enrollment communication.
Potential employer shared responsibility exposure has also increased.
For calendar year 2026, the indexed annual statutory amounts used to calculate the two types of employer shared responsibility payments are $3,340 and $5,010. For 2027, those indexed amounts rise to $3,780 and $5,670. Actual liability depends on the employer’s facts and is generally calculated monthly; employers should not calculate or submit a payment unless contacted by the IRS.
A focused pre-Q4 review should answer the following questions:
Review area | What the employer should confirm |
ALE status | Prior-year monthly workforce counts include full-time employees, full-time equivalents, and applicable related entities. |
Full-time status | Hours are accurate and the monthly or look-back measurement method is being applied consistently. |
Coverage offers | At least 95% of full-time employees and their ACA dependents received an effective opportunity to enroll, where required. |
Affordability | The lowest-cost self-only minimum-value option satisfies the selected safe harbor for the applicable plan year. |
Minimum value | The plan has been confirmed to provide the required minimum value. |
Employee data | Names, Social Security numbers, employment dates, and entity assignments are accurate. |
Benefits data | Offer dates, enrollment months, dependents, contributions, and coverage terminations reconcile with payroll. |
Reporting | The employer knows which entity files each Form 1094-C and Form 1095-C and who owns the reporting process. |
Corrections | A procedure exists for resolving rejected files, incorrect codes, missing data, and employee disputes. |
IRS correspondence | Responsibility is assigned for reviewing and responding to Letter 226J or related IRS notices. |
Information reporting deserves particular attention.
ALE members generally use Forms 1094-C and 1095-C to report coverage-offer information. Self-insured ALEs also report covered individuals in Part III of Form 1095-C. Employers with self-insured coverage that are not ALEs generally use Forms 1094-B and 1095-B instead.
The IRS generally requires Forms 1094-C and 1095-C to be filed by February 28 when filed on paper or March 31 when filed electronically, adjusted when the date falls on a weekend or legal holiday. Employers filing 10 or more information returns in aggregate are generally required to file electronically unless they receive a hardship waiver.
Employers should confirm the final calendar-year 2026 filing instructions once the IRS releases them rather than relying only on the previous year’s forms.
A reporting change employers should not overlook
The Paperwork Burden Reduction Act created an alternative method of furnishing certain Forms 1095-C to individuals.
Instead of automatically sending every statement, an eligible ALE may post a clear, conspicuous, and accessible notice that employees can request a copy. When requested, the statement must generally be furnished by the later of January 31 following the reporting year or 30 days after the request. This alternative method does not remove the requirement to file applicable returns with the IRS.
Employers using the alternative method should confirm that the notice, request process, responsible contact, delivery method, and retention procedures meet current requirements.
How ESI handles the issue
ESI can help coordinate payroll, employee-status data, benefits eligibility, affordability planning, enrollment information, and ACA reporting support.
The purpose is to identify inconsistencies while there is still time to correct source data rather than correcting dozens of individual forms after year-end.
Where PEO Support Can Simplify The Process
ACA compliance crosses several departments.
Payroll maintains hours and compensation. HR tracks employment status. Benefits teams administer eligibility and coverage offers. Finance determines employer contributions. Technology systems produce enrollment and reporting files.
When those functions operate separately, the employer becomes responsible for reconciling the entire process.
A PEO can help connect those responsibilities through an integrated model covering payroll, human resources, employee benefits, compliance support, and workforce technology.
That integration may reduce manual data movement and create clearer responsibility for identifying employees approaching eligibility, updating coverage deductions, tracking status changes, and preparing ACA information returns.
The PEO relationship does not make the client’s ACA responsibilities disappear.
The client service agreement should identify how responsibilities are allocated, what data the client must provide, which reporting functions the PEO supports, and which entity remains responsible for particular filings or decisions. NAPEO’s co-employment research emphasizes that the client retains operational control while responsibilities such as benefits and payroll administration may be allocated contractually.
The IRS also requires each ALE member to file under its own EIN even when it belongs to an aggregated ALE group. Employers should therefore understand how their PEO relationship interacts with their entity structure and reporting obligations.
PEO support can nevertheless provide significant administrative value.
NAPEO’s 2024 survey found that half of small and midsized business decision-makers were concerned about compliance, while 36% reported that compliance concerns negatively affected their ability to acquire needed talent. The same study found that 95% of PEO users believed employees were satisfied with their benefits packages, compared with 86% of non-users.
These figures do not prove that a PEO guarantees compliance or employee satisfaction. They illustrate why businesses seek more structured benefits and compliance support.
How ESI handles the issue
ESI combines benefits administration with payroll, HR support, HCM technology, and ACA-focused resources. ESI maintains Texas operations in San Antonio, Dallas/DFW, Houston, Austin, and other markets while supporting employers nationally.
For Texas businesses, review ESI’s Texas PEO services.
Frequently Asked Questions for Growing Businesses
What is ACA compliance for employers?
ACA compliance for employers involves determining whether the organization is an applicable large employer, identifying full-time employees, offering required coverage where applicable, evaluating affordability and minimum value, maintaining accurate benefits data, and completing required information reporting.
Requirements differ based on employer size, entity structure, health-plan funding, workforce patterns, and the coverage offered.
Why does ACA compliance matter for employers?
ACA compliance matters because inaccurate workforce counts, missed coverage offers, unaffordable employee contributions, incomplete reporting, or inconsistent employee data may expose an applicable large employer to employer shared responsibility payments or information-reporting penalties.
Compliance problems may also create employee coverage disputes, payroll corrections, administrative costs, and time-consuming IRS correspondence.
How can a PEO help with ACA compliance for employers?
A PEO may help connect payroll, employee hours, benefits eligibility, coverage offers, employee contributions, HR records, and ACA reporting support.
The exact responsibilities depend on the client service agreement, the employer’s entity structure, and the health-plan arrangement. Employers should confirm which party performs each task and which entity remains legally responsible.
How does an employer know whether it is an applicable large employer?
An employer is generally an ALE for a calendar year when it averaged at least 50 full-time employees, including full-time-equivalent employees, during the prior calendar year.
Related entities may need to combine employees when determining ALE status, even when each entity independently has fewer than 50 employees.
What is the ACA affordability percentage for 2027?
For plan years beginning in 2027, the required contribution percentage is 10.22%. Employers should apply the percentage through the appropriate affordability analysis or safe harbor and confirm their calculations with qualified benefits or tax advisers.
What are the ACA affordability safe harbors?
The three employer affordability safe harbors are the Form W-2 wages safe harbor, rate-of-pay safe harbor, and federal poverty line safe harbor.
An employer may use different safe harbors for reasonable employee categories when the selected method is applied uniformly and consistently within each category.
Does a PEO become responsible for every ACA requirement?
Not automatically.
A PEO may administer benefits, payroll, employee data, and reporting support, but responsibilities depend on the client service agreement and applicable law. The business should obtain a clear responsibility matrix identifying which party supplies data, monitors eligibility, makes offers, files forms, corrects errors, and responds to government notices.
Do employers still need to send Form 1095-C automatically?
Current federal guidance allows qualifying ALEs to use an alternative furnishing method for calendar years after 2023. The employer must post the required notice and provide the statement promptly when an employee requests it.
The change affects individual furnishing; it does not generally eliminate the employer’s IRS filing obligation.
How ESI Helps Businesses Build A Clearer Next Step
ESI helps employers review the workforce, payroll, benefits, and reporting data behind ACA compliance.
The process can begin with ALE status, full-time measurement, coverage eligibility, employee contributions, affordability, dependent offers, and entity structure. ESI can then help employers identify where payroll and benefits records do not align, clarify administrative responsibilities, and prepare for year-end reporting.
For employers planning 2027 benefits, the review should also test employee contributions against the new 10.22% affordability percentage before rates and open enrollment materials are finalized.
The goal is not simply to produce ACA forms after the calendar year ends.
It is to maintain reliable information throughout the year so reporting confirms what happened rather than attempting to reconstruct it.
Email hr@eesipeo.com to discuss an ACA and employee benefits review.
