What Is ACA Reporting for Payroll Requirements?

ACA reporting is a framework established under the Affordable Care Act (ACA) that requires certain employers to provide information to the Internal Revenue Service (IRS) and their employees regarding the health coverage they offer. The primary purpose of this reporting is to enforce the employer shared responsibility provisions, often referred to as the employer mandate, and to help verify compliance with the individual mandate provisions. This process ensures that comprehensive data on health coverage offerings and enrollment is collected and submitted annually. Payroll operations play a significant role in gathering and maintaining the specific employee and coverage data necessary for accurate ACA reporting.

Determining Applicable Large Employer Status

An organization’s obligation to conduct ACA reporting begins with determining if it qualifies as an Applicable Large Employer (ALE). An employer is considered an ALE for a calendar year if, during the preceding calendar year, they employed an average of at least 50 full-time employees, including full-time equivalent employees (FTEs). A full-time employee is defined as an employee who works, on average, at least 30 hours per week or 130 hours per month. This threshold is calculated by adding the total number of full-time employees and FTEs for each month of the prior calendar year, then dividing by 12.

To calculate FTEs, employers must sum the hours worked by all part-time employees in a month and divide that total by 120. For instance, if part-time employees collectively worked 1,200 hours in a month, this would equate to 10 FTEs for that month. The hours of service for both full-time and part-time employees include paid leave, such as vacation, holiday, illness, or jury duty. Accurately tracking these hours through payroll systems is fundamental to this determination.

The calculation of ALE status also involves considering entities that are part of a “controlled group.” Under these rules, all entities with common ownership or that are otherwise related are treated as a single employer for the purpose of determining ALE status. This means that if multiple related companies collectively meet the 50 full-time and FTE employee threshold, all entities within that controlled group are considered ALEs, regardless of their individual employee counts. Payroll systems must be configured to aggregate employee data across all related entities to ensure proper ALE determination.

Key Information for ACA Reporting

Employers classified as Applicable Large Employers must gather specific data points for each employee to fulfill their ACA reporting obligations. This information forms the basis for completing Forms 1095-C, which are provided to employees, and Form 1094-C, which serves as a transmittal form to the IRS. Two concepts in this reporting are Minimum Essential Coverage (MEC) and Minimum Value (MV) plans. MEC refers to health coverage that meets the basic requirements of the Affordable Care Act, while an MV plan is one where the plan pays at least 60% of the total allowed cost of benefits and includes substantial coverage of inpatient hospital services and physician services.

A significant piece of information required is the “offer of coverage,” detailing whether an ALE offered MEC to its full-time employees and their dependents. The reporting requires specifying the type of coverage offered, if any, and the months for which it was available. For employees who were offered coverage, the “employee’s share of the lowest-cost monthly premium for self-only coverage” must also be reported.

This amount represents the portion of the premium that the employee would pay for the cheapest plan providing MEC and MV, regardless of whether the employee actually enrolled in that plan. Various codes are used on Form 1095-C to convey specific details about the offer of coverage and enrollment status. Line 14 codes indicate whether MEC was offered to the employee, their spouse, and dependents, and for which months. Line 15 reports the employee’s required contribution for the lowest-cost self-only MEC. Line 16 codes provide additional information, such as reasons why coverage was not offered, or which affordability safe harbor was met if the coverage was offered and deemed affordable. These safe harbors include the federal poverty line safe harbor, the rate of pay safe harbor, and the W-2 safe harbor, which help employers demonstrate that their coverage offer was affordable.

Payroll systems collect and maintain the necessary data for this reporting. This includes tracking employee status (full-time, part-time), hours worked, health benefit elections, and employee contributions to premiums. Accurate and consistent data entry within payroll directly impacts the ability to generate correct ACA reports. The system must be capable of distinguishing between different types of coverage offers and calculating the employee’s share of the premium for the lowest-cost option, even if the employee selected a more expensive plan.

Filing and Distributing ACA Forms

Once all the necessary information has been accurately compiled, Applicable Large Employers must proceed with filing and distributing their ACA forms. The first step involves distributing Form 1095-C statements to eligible employees. These statements provide employees with details about the health coverage offered to them during the prior calendar year. Employers are required to furnish these statements to employees by January 31st of the year following the reporting year. These forms can be delivered electronically if the employee has consented to receive them in that manner, or via mail to their last known address.

Following the distribution to employees, ALEs must submit copies of all Forms 1095-C along with a Form 1094-C, the transmittal form, to the IRS. Form 1094-C provides summary information about the employer and the total number of Forms 1095-C being submitted. The deadline for submitting these forms to the IRS is February 28th if filing on paper, or March 31st if filing electronically. The IRS mandates electronic filing for employers submitting 250 or more Forms 1095-C.

Electronic filing is conducted through the IRS’s Affordable Care Act Information Returns (AIR) system. Employers must obtain a Transmitter Control Code (TCC) to submit forms electronically, a process that can take several weeks. If errors are discovered on previously filed forms, employers are required to submit corrected Forms 1095-C and, if necessary, an updated Form 1094-C. This correction process involves indicating that the submission is an amended return and providing the accurate information.

Filing and distributing these forms requires adherence to deadlines and IRS requirements to avoid penalties. Maintaining organized records of all offers of coverage, employee elections, and affordability data is important. Employers often leverage their payroll or human resources information systems to generate these forms and ensure timely and accurate submission to both employees and the IRS.