ACA Pay-or-Play Provision: Reporting on Your Offer of Coverage
The Employer Shared Responsibility provision of the Affordable Care Act (ACA) requires applicable large employers (ALEs) to offer minimum essential health coverage to full-time employees, or face potential penalties. This is known as the “pay-or-play” provision.
This article focuses specifically on your obligation to file and furnish information returns under the pay-or-play provision. But first, it’s helpful to understand the general rule of the pay-or-play provision and your yearly compliance obligations.
General rule of the pay-or-play provision
The general rule of the pay-or-play provision is that ALEs must either:
- Offer minimum affordable health coverage to substantially all full-time employees or
- Pay a penalty if any full-time employee receives a premium tax credit for purchasing individual coverage on the health insurance marketplace
Yearly compliance considerations for ALEs
The pay-or-play provision runs on a four-year calendar cycle with years 2, 3 and 4 repeating until you lose your ALE status.
Year 1: Determine your ALE status.
You must determine your ALE status and your responsibility, if any, under the pay-or-play provision. Generally, you are an ALE if you averaged 50 or more full-time or full-time equivalent employees during Year 1.
If you are an ALE, the pay-or-play provision kicks in.
If you are not an ALE, you are not required to make an offer of coverage. However, if you have close to 50 full-time or full-time equivalent employees, closely monitor your employee counts. A small increase in hours of one employee can result in ALE status.
Year 2: Make an offer of coverage.
ALEs must offer affordable, minimum value coverage to at least 95% of benefit-eligible full-time employees by April 1 of Year 2 to avoid pay-or-play penalties. This three-month window gives you time to:
- Conduct a risk analysis
- Finalize your benefit options
- Set employee contribution amounts
- Determine which employees are full-time and benefit-eligible
- Conduct your open enrollment
- Make coverage effective April 1
Year 3: Report on your offer of coverage.
During the spring of Year 3, you are required to electronically file IRS Forms 1094-C and 1095-C. You must also provide Form 1095-C to individuals. These forms serve the following purposes:
- 1094-C: Provides basic employer information and details about ALE members within a controlled or affiliated services group.
- 1095-C: Demonstrates each full-time employee’s offer of coverage throughout Year 2.
Year 4 (or later): Defend against proposed penalties.
If an employee goes to the marketplace during Year 2, certifies that you did not offer affordable, minimum value coverage during their full-time months, and receives subsidized coverage, the IRS will likely issue a penalty. You will receive a penalty notice in Year 4 or Year 5 with a pay-or-play assessment and an explanation of the calculation.
The letter will offer an opportunity to respond and either pay or dispute all or part of the penalty. While there is no guarantee an employee won’t trigger a penalty, understanding the pay-or-play provision and making informed benefit decisions will significantly reduce your liability.
Filing and furnishing your forms
The pay-or-play mandate has two reporting requirements. Each year, ALEs and employers of all sizes who sponsor self-insured plans must:
- File Forms 1094 and 1095 with the IRS
- Furnish Form 1095 to covered individuals
Self-insured plan sponsors are those who sponsored level-funded, self-funded, or partially self-funded plans, or individual coverage health reimbursement arrangements, at any time during the preceding calendar year.
While ACA reporting has become a regular part of annual compliance each spring for many employers, recent regulatory and legislative changes aim to ease some administrative burdens and modernize reporting processes. The table below summarizes the original reporting requirements and the new or forthcoming reporting requirements.
Original ACA reporting requirements versus revised reporting requirements
| Requirement | Traditional Method | New Method |
|---|---|---|
| Electronic filing threshold | 250 forms of one type | 10 forms in aggregate |
| Dependent/spouse identification | Full Social Security number required, unless 3 documented attempts have been made | Use names and dates of birth for dependents and spouses |
| Penalty appeal period | 30 days to appeal penalties | 90 days to appeal penalties |
| Penalty statute of limitations | Unknown | 6-year statute of limitations |
| Furnishing Form 1095-C | Mailed unless you have obtained affirmative opt-in consent each year | Electronic distribution allowed for 1095-C (with consent) |
Electronic filing threshold
Regulatory action: 10-form aggregation rule
Before 2024, employers could mail forms to the IRS if they had fewer than 250 forms of a single type. But starting with 2023 tax forms, employers filing 10 or more returns in aggregate must file electronically. This is a significant change from the previous 250-form maximum. The aggregate rule includes Forms W-2, 1099, 1094-B, 1094-C, 1095-B and 1095-C.
Employer action: prepare
Filing Forms 1094 and 1095 electronically with the IRS takes time, a transmitter control code (TCC) and testing. You can read more about the technicalities and logistics on the IRS’ ACA information returns website. You may want to find a vendor or ask your payroll or benefits administration platform if they file electronically.
Congressional action: two bills to ease reporting
In late 2024, Congress passed two bipartisan bills aimed at reducing paperwork burdens and improving reporting flexibility under the ACA. These bills took effect for the 2025 filing season. Below, we explain the way things were and the way things are now.
Employer Reporting Improvement Act
- Identifying dependents
- Traditionally, employers captured covered spouses and dependents by their Social Security number (SSN). Only after making three documented attempts to get a valid SSN could the employer use the date of birth.
- Starting with 2024 tax forms, employers can submit dependents’ and spouses’ full names and dates of birth in place of SSNs. This reduces challenges associated with obtaining SSNs.
- Extended appeal period for penalties
- ALEs now have 90 days, instead of 30, to appeal a penalty under the ACA’s pay-or-play provision. This extension provides additional time to gather information and respond to IRS notices.
- Statute of limitations for IRS penalties
- The act imposes a six-year statute of limitations on the IRS for levying penalties. Employers will benefit from greater certainty regarding liability periods and follow traditional record-retention rules for tax forms.
Paperwork Burden Reduction Act
- Furnishing forms to covered individuals
- Employers can provide Forms 1095-C electronically with employee consent, mirroring the existing option for 1095-B forms. This change reduces printing and mailing costs for employers and aligns with modern communication practices. Affirmative consent must be given at least once with information on how to revoke consent and get a hard copy.
- See the sample consent form at the end of this article.
Important deadlines
Filing: The deadline to electronically file Forms 1094 and 1095 with the IRS is March 31, 2026. You may request a 30-day extension, which will be automatically granted.
Furnishing: You must furnish Form 1095 to covered individuals by March 2, 2026.
Practical next steps
To ensure compliance with the updated ACA reporting requirements:
- Verify electronic filing readiness: The electronic filing requirement applies to all ALEs, so finding a solution is vital. This takes time, and prices vary.
- Review reporting processes: Update processes to incorporate new flexibility around SSN alternatives and electronic distribution of Form 1095-C.
- Educate HR and payroll teams: Ensure internal teams are aware of the extended appeal period for penalties and the updated statute of limitations.
- Engage employees: If you’re planning to distribute Forms 1095-C electronically, obtain the necessary employee consent ahead of time. Consider including it in your onboarding process.
Looking ahead
These legislative updates demonstrate continued efforts to streamline ACA compliance for employers while protecting privacy and reducing paperwork. Take advantage of the new options to modernize your reporting processes and minimize your administrative burdens. For further guidance, consult your benefits advisor or legal counsel.
Sample consent form
Notice of Availability of Form 1095-C
To reduce environmental impact and improve convenience, [Employer Name] offers the option to receive your Form 1095-C electronically. By consenting to electronic delivery, you acknowledge the following:
- Your Form 1095-C will be provided in a secure electronic format.
- You may withdraw your consent at any time by contacting the [HR Department].
- If you do not provide consent, a paper copy will be mailed to you.
To consent:
- Option 1: Check the box below, complete this form and return it to [HR Department].
- Option 2: Include the statement provided below in your email request for Form 1095-C.
Option 1: consent checkbox
- I consent to receive my Form 1095-C electronically.
Option 2: Email statement for consent
If requesting to receive Form 1095 electronically, copy and paste the following into your email: “I consent to receive my Form 1095-C electronically.”
Revocation of Consent
You may revoke your consent at any time by notifying [Employer Name] in writing via email or mail, or in person. Upon revocation, a paper copy will be mailed to your address on file.
Thank you for your attention to this matter. Providing your consent for electronic delivery helps us reduce paperwork and ensures quicker access to your important tax documents.