Avoiding ACA Penalties: Common Mistakes Employers Make
As Affordable Care Act (ACA) enforcement continues to tighten, employers face growing risk if their reporting, coverage offers, or documentation fall short. The IRS continues to issue penalty letters, some reaching hundreds of thousands of dollars, for employers who miss deadlines, file inaccurate forms, or fail to meet ACA’s coverage requirements.
At HR Service, Inc., our team of ACA specialists works with companies nationwide to simplify compliance, eliminate confusion, and help employers avoid costly penalties. Whether you handle ACA reporting in-house or through a provider, understanding the most common mistakes can help you stay ahead of the curve this filing season.
Misclassifying Full-Time Employees
One of the most frequent and expensive ACA mistakes is incorrectly determining who qualifies as a full-time employee.
Under ACA rules, any employee averaging 30 or more hours per week (or 130 hours per month) must be offered minimum essential coverage that is affordable and provides minimum value. Employers often misclassify variable-hour or seasonal workers, which can lead to missed offers of coverage and trigger Employer Shared Responsibility Payment (ESRP) penalties under IRC Section 4980H.
The best practice to eliminate this is to implement a consistent process and practice for tracking and measuring employee hours throughout the year. Use the IRS’s look-back measurement method for variable-hour employees and review classifications regularly with HR and payroll teams to ensure accuracy.
Missing or Incorrect ACA Filings
Filing Forms 1094-C and 1095-C correctly and on time is crucial. Even small data errors (like incorrect Social Security numbers, names, or coverage months) can lead to rejected filings or penalty letters.
Following the passage of the Paperwork Burden Reduction Act of 2024, applicable employers are no longer required to automatically distribute Forms 1095-C to employees for the 2025 tax year (forms distributed in 2026). Instead, employers may satisfy this obligation by posting a clear and accessible notice on their website stating that employees can request their form. While this change reduces administrative burden, timely and accurate filings remain essential. Employers still need to consider states with individual mandate laws and abide by the state-specific requirements.
Here are the common areas to review:
🟧 Verify employee and dependent information against payroll and benefit systems before filing.
🟧 Double-check affordability codes and coverage indicators for accuracy.
🟧 Mark your calendar for key deadlines: February 28, 2026 for paper filing (employers with 10 or fewer tax forms) and March 31, 2026 for electronic filing.
Cybersecurity Considerations During ACA Filing
As employers gather and submit sensitive employee data, including Social Security numbers, wage details, and coverage information, cybersecurity becomes just as critical as ACA accuracy. Strengthening cybersecurity practices during ACA season helps prevent data breaches, protect employee identities, and ensure secure, error-free filings. Incorporating strong security protocols reduces risk and supports both compliance and data integrity. To learn more about Cybersecurity in human resources and its importance, read our latest blog: Cybersecurity Awareness Month: Strengthening HR And Benefits Data Protection | HR Service, Inc.
Not Offering Coverage to the Required Percentage of Full-Time Employees
Applicable Large Employers (ALEs), those with 50 or more full-time and full-time equivalent employees, must offer affordable health coverage to at least 95% of their full-time workforce and their dependents.
Failing to meet this threshold, even by a small margin, can trigger significant penalties if even one full-time employee receives a premium tax credit through the Marketplace.
To proactively address this, regularly audit your benefit eligibility lists and ensure new hires are offered coverage within the required timeframe. If you’ve had turnover or staffing fluctuations, review whether your eligibility tracking systems are updated and accurate.
Inaccurate Affordability Calculations
ACA defines “affordable” coverage based on an employee’s household income. Because employers typically don’t know household income, the IRS provides three safe harbors:
🟧 W-2 wages
🟧 Rate of pay
🟧 Federal poverty line (FPL)
Using the safe harbor calculations incorrectly or miscalculating contributions can inadvertently make coverage unaffordable, leading to penalty exposure.
Employers need to revisit affordability calculations each year, especially when premiums or wages change. For 2025, the affordability percentage is 8.39%, meaning an employee’s required contribution for self-only coverage cannot exceed 8.39% of their income (as measured by your chosen safe harbor). You can access the Safe Harbor Calculator offered by HR Service Inc., here: Safe Harbor Calculator
Overlooking Controlled Group Rules
Businesses with multiple related entities often miss how controlled group rules apply under ACA. The IRS may aggregate your entities when determining ALE status or assessing compliance, meaning a group of smaller companies could collectively meet the 50-employee threshold and be subject to ACA requirements.
Work with HR and legal advisors to analyze ownership structures and confirm whether your organization qualifies as a controlled group. Misunderstanding these rules is one of the top reasons small to mid-sized employers receive unexpected penalty letters.
Ignoring or Delaying IRS Penalty Notices
Even diligent employers can occasionally receive Letter 226J (proposing an Employer Shared Responsibility Payment) or Letter 5699 (indicating missing filings). The biggest mistake? Ignoring them or responding too late.
The IRS provides a limited time to dispute penalties, and missing that window can result in automatic assessments, even if the penalty was issued in error.
Review and respond to all IRS notices promptly. Maintain organized documentation of your ACA filings, offer letters, and coverage records to support your case if needed. Partnering with an experienced ACA team can help interpret IRS letters, file timely appeals, and correct records efficiently.
How HR Service, Inc. Helps Employers Stay ACA Compliant
Our ACA Specialists take the guesswork out of ACA requirements and reporting. HR Service, Inc. supports employers with:
🟧 Accurate 1094-C and 1095-C preparation and filing
🟧 Full data validation to prevent errors and rejected filings
🟧 Employee classification audits
🟧 Affordability testing support using the IRS safe harbors
🟧 ACA compliance guidance for controlled groups
🟧 Response support for IRS Letters 226J and 5699
🟧 Secure data handling and cybersecurity best practices
We handle the entire ACA process so employers can stay compliant, avoid penalties, and reduce administrative stress, while keeping employee data protected throughout the reporting cycle. To schedule a call with one of our experts, visit: Schedule A Call With HR Service, Inc. | HR Service, Inc.
Stay Ahead of ACA Penalties in 2025
ACA enforcement continues to ramp up, and penalties are costly, but entirely avoidable with the right support. If your HR or finance team is managing ACA compliance in-house, now is the perfect time to review your processes and ensure everything is accurate before year-end.
Let our experts handle the details so you can have peace of mind and keep your company penalty-free.
Contact HR Service, Inc. today to learn how our ACA reporting and compliance services can help your organization stay compliant, protect your data, and avoid unnecessary costs.