Top ACA Compliance Penalties and How to Avoid Them
The Affordable Care Act (ACA) continues to be a major factor shaping employer-sponsored health coverage in the United States. For applicable large employers (ALEs), complying with ACA rules isn’t optional—it’s mandatory. Failure to comply can lead to steep penalties, costly IRS letters, and administrative headaches that distract from your core business.
Fortunately, with the right tools and expert support, ACA compliance can be straightforward. In this post, we’ll break down the top ACA compliance penalties, explain why they happen, and how you can avoid them—plus, how ACA-Track offers a trusted, easy-to-use solution that makes staying compliant less stressful.
What is ACA Compliance for Employers?
Employers with 50 or more full-time employees (including full-time equivalents) are classified as ALEs and must comply with ACA’s employer shared responsibility provisions (Section 4980H of the Internal Revenue Code). These employers are required to:
-
Offer “affordable” health coverage that provides “minimum value” to full-time employees and their dependents, or risk penalties.
-
Track employee hours carefully, especially for part-time and variable-hour workers, to determine who is eligible for coverage.
-
File accurate annual ACA reports (Forms 1094-C and 1095-C) with the IRS and furnish 1095-C statements to employees.
Noncompliance can trigger penalties and costly IRS notices.
Top ACA Compliance Penalties
1. Employer Shared Responsibility Payment (Section 4980H Penalty)
If you fail to offer affordable coverage providing minimum value to full-time employees, or if coverage is unaffordable for some employees who then get premium tax credits on the Marketplace, the IRS imposes penalties:
-
$2,000 per full-time employee per year, excluding the first 30 employees (for failing to offer coverage).
-
$3,000 per employee receiving a premium tax credit, capped at the same total as above (for offering coverage that is unaffordable or does not provide minimum value).
These penalties are assessed monthly and can quickly add up if you have many employees impacted.
2. Failure to File or Furnish ACA Forms Penalties
Employers must provide accurate and timely ACA forms:
-
Form 1095-C to each full-time employee, showing the offer of coverage or reason for not offering.
-
Form 1094-C to the IRS as a transmittal form summarizing coverage data.
Penalties for late or incorrect filings:
-
$50 per return if less than 30 days late (up to $194,500 max).
-
$110 per return if 31 days late until August 1 (up to $556,500 max).
-
$270 per return if filed after August 1 or not filed at all (up to $1,113,000 max).
-
Penalties double if forms are neither filed nor furnished.
Missing these deadlines or submitting incorrect forms can be expensive and damage your company’s reputation.
3. IRS Letter 226-J Penalty Notice
If the IRS detects noncompliance, it issues a Letter 226-J detailing:
-
The penalty amount owed.
-
The basis of the penalty (e.g., coverage not offered, unaffordability).
-
Employee premium tax credit listings.
-
Instructions for response and possible appeal.
Ignoring or delaying response to a 226-J letter can result in increased penalties and enforcement action.
Why Do These Penalties Happen?
Common reasons employers face ACA penalties include:
-
Inaccurate or incomplete tracking of employee hours, especially part-time and variable hour employees.
-
Failing to offer coverage to all eligible employees.
-
Offering coverage that is unaffordable or does not meet minimum value standards.
-
Late or incorrect ACA filings.
-
Poor data integration across payroll, HR, benefits, and finance systems.
How to Avoid ACA Penalties with ACA-Track
Avoiding penalties requires rigorous, ongoing monitoring and precise reporting. This is where ACA-Track comes in as a game-changer.
Why ACA-Track?
ACA-Track offers a comprehensive ACA compliance platform designed to simplify the complex requirements employers face:
-
Complete Hour Tracking: Tracks actual hours worked for 100% of employees, including part-time, variable hour, and substitute workers, from multiple data sources such as timekeeping systems, payroll, and manual entries.
-
Advanced Monitoring: Monitors eligibility thresholds and sends advance alerts before employees reach full-time status to ensure timely offers of coverage.
-
Error Reduction: Provides monthly line code audits on Form 1095-C to catch and fix reporting errors before submission.
-
Federal and State Reporting: Handles all aspects of 1094-C and 1095-C reporting, including electronic XML filing with the IRS.
-
User-Friendly Interface: Customizable dashboards, snapshot summaries preserving historical payroll data, and intuitive filters allow easy access and analysis.
-
Secure and Compliant: Cloud-based, encrypted data storage with SOC 2 Type 2 compliance ensures your employee data stays safe.
-
Dedicated Support: A Client Success Advisor helps tailor ACA compliance services to your business needs and guides you through the process.
Best Practices to Avoid ACA Compliance Penalties
-
Track Employee Hours Accurately and Consistently
Without accurate documentation, you risk penalties if employees claim they worked full-time but you cannot prove otherwise. ACA-Track’s data integration from multiple systems ensures no hour goes untracked. -
Offer Coverage on Time to Eligible Employees
Use measurement and stability periods correctly to identify who is eligible and ensure offers meet ACA’s affordability and minimum value standards. -
File ACA Forms Promptly and Accurately
Avoid late filings by using ACA-Track’s automated reporting features that prepare and electronically file IRS-compliant XML files. -
Respond Quickly to IRS Penalty Notices
If you receive a 226-J letter, consult your ACA compliance provider immediately. ACA-Track’s reporting and documentation capabilities help prepare your response with the correct data and evidence. -
Ensure Cross-Department Collaboration
ACA compliance data lives across HR, payroll, finance, and benefits departments. Establish clear responsibilities and workflows, supported by centralized ACA software like ACA-Track.
Final Thoughts
ACA compliance is complex and costly to get wrong, but it doesn’t have to be overwhelming. Many employers have found success and peace of mind partnering with ACA-Track — a trusted ACA compliance solution that provides end-to-end tracking, monitoring, reporting, and expert support tailored to your business size and needs.
By leveraging ACA-Track’s powerful tools, your company can avoid the costly penalties outlined above and focus on what matters most—running your business smoothly and supporting your workforce effectively.
Learn more and get started with ACA compliance the smart way: ACA-Track
