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The Hidden Costs of Inaccurate ACA Reporting: What Your Vendor Is Not Telling You

April 15, 2026

Every year, thousands of Applicable Large Employers (ALEs) across the country hand off their ACA reporting obligations to a payroll vendor, a benefits administrator, or a general-purpose HR technology platform and trust that the job is being done correctly. Many of them are right. However, a shocking number of them are still wrong and they will not find out until a Letter 226J lands in their mailbox proposing six or seven figures in Employer Shared Responsibility Payment (ESRP) penalties.

I have spent the last decade at the intersection of ACA law and ACA technology. As a practicing attorney who has represented employers in ESRP appeals across dozens of industries and as the Chief Legal Officer of Accord Systems — a company built from the ground up to solve the ACA compliance problem — I have seen both sides of this issue in granular detail. The conclusion I have reached is straightforward: the accuracy of the Forms 1094-C and 1095-C matters enormously, and most employers have far less visibility into what is being submitted to the IRS on their behalf than they realize.

This article is for employers who want to understand what accurate ACA reporting actually looks like — and for the brokers and advisors who serve them. Because the stakes are too high to leave this to chance.

The Forms 1094-C and 1095-C Are Not Administrative Formalities

There is a persistent misconception in the employer community that the Forms 1094-C and 1095-C are essentially informational — a bureaucratic checkbox that gets filed once a year and promptly forgotten. This understanding was perhaps defensible in the early years of ACA reporting, when the IRS was lenient in its enforcement and signaled that it was focused on building its data systems rather than assessing penalties.

That era is over. The IRS is now actively using the data contained in the Forms 1094-C and 1095-C to cross-reference employee premium tax credit claims and assess ESRP penalties. The forms are, in practice, the evidentiary foundation of the IRS’s penalty case against an employer. What an employer’s vendor enters on lines 14, 15, and 16 of each Form 1095-C tells the IRS a specific, coded story about every employee for every month of every year.

Lines 14, 15, and 16 of the Form 1095-C are not just boxes to be filled in. They are a 12-chapter narrative that the IRS reads when it decides whether to propose an ESRP penalty. An inaccurate narrative — even an unintentionally inaccurate one — can trigger penalties.

When that story contains errors — and in my experience, it frequently does — the employer bears the consequences. The vendor who submitted the incorrect forms frequently bears no legal exposure. Thus, the beginning of the employer’s nightmare of dealing with the IRS begins alone.

The Most Dangerous Errors in ACA Reporting

After reviewing Forms 1094-C and 1095-C submissions across hundreds of employers, I have identified a consistent set of errors that appear repeatedly and that are most likely to trigger ESRP penalty exposure. Each of these errors is preventable with the right systems and processes.

Error 1: Incorrect Classification of Full-Time Employees

The employer mandate requires ALEs to offer minimum essential coverage to at least 95 percent of their full-time employees (and their dependents). A full-time employee is one who averages at least 30 hours of service per week (or 130 hours per month). Employers who use the lookback measurement method to manage their variable-hour workforce must track hours over a defined measurement period, apply an administrative period, and then lock in an employee’s status for a stability period.

Many employers — and many of their vendors — are not doing this correctly. The most common failures I see are measurement periods that start on legally impermissible dates, stability periods that are applied inconsistently, and re-hire rules that are handled under the pre-ACA break-in-service framework rather than the ACA’s specific rules. Each of these errors can result in an employee who should have been offered coverage appearing on the Form 1095-C with a 1H on line 14, which is the code for no offer, and no protective code on line 16. If enough employees are coded this way, the employer falls below the 95 percent threshold and triggers the far more punishing 4980H(a) penalty.

Error 2: Failure to Check the Yes Box on Line 23 of the Form 1094-C

This error is simpler and more surprising than the others, but I have seen it cause significant damage. Part III of the Form 1094-C, column (a), asks employers to certify for each month whether they offered coverage to at least 95 percent of full-time employees. The IRS interprets the “No” box being checked or the boxes being left blank in column (a) as a concession that the 95 percent threshold was not met for that month, which means any employees who received a premium tax credit in that month can trigger a 4980H(a) exposure rather than a 4980H(b) exposure. The dollar difference is staggering. For a mid-size employer, checking the “No” box by mistake for a single month can increase penalty exposure by hundreds of thousands of dollars compared to the correct entry.

Error 3: Leaving Line 16 Blank When an Affordability Safe Harbor Applies

Line 16 of the Form 1095-C is where an employer communicates to the IRS that a recognized safe harbor or other condition applies to a given employee for a given month. The three affordability safe harbors — the W-2 safe harbor (code 2F), the federal poverty line safe harbor (code 2G), and the rate of pay safe harbor (code 2H) — are the employer’s primary tools for establishing that even if an employee received a premium tax credit, the employer’s offer of coverage was affordable and the 4980H(b) penalty therefore does not apply.

I have reviewed dozens of Letters 226J where the employer clearly offered affordable coverage but the vendor left line 16 blank or entered an inapplicable code. In those situations, the IRS has no coded indicator in the form that an affordability safe harbor was intended. The employer must then prove affordability through documentation in the appeals process — a process that is time-consuming, requires legal representation, and carries no guarantee of success even when the underlying facts support the employer’s position.

Error 4: Misapplication of the W-2 Affordability Safe Harbor

The W-2 affordability safe harbor is the most far-reaching affordability safe harbor and, consequently, it is frequently used by the employer. Unfortunately, this code is disallowed by the IRS if the data submitted in Box 1 of the Form W2 does not pass the rules of the Form W2 affordability safe harbor. The safe harbor requires that the employee’s share of the lowest-cost, self-only, minimum value plan not exceed a specified percentage of the employee’s box 1 W-2 wages calculated on a monthly basis. It appears the IRS has created an automated tool to disallow this safe harbor when the data justifies it even if the IRS is applying a harsher standard than the ACA allows.

Any employer attempting to utilize the Form W2 affordability safe harbor should run the calculations prior to submitting the Forms 1095-C. Frequently the line 15 data, which reflects the employee's share of the lowest-cost, self-only coverage, is inaccurate which throws off the entire calculation for the IRS. Therefore, it is critical that the employer or the vendor completing the Form 1095-C on behalf of the employer, accurately complete the line 15 amount. Regardless, as discussed thoroughly in our previous article, just because and employer falls short of a safe harbor, does not mean the employer owes a penalty under Internal Revenue Code section 4980H.

What Accurate ACA Reporting Actually Requires

Accurate ACA reporting is not simply a matter of pulling data from a payroll system and populating a form. It requires a sophisticated understanding of the intersection between employee benefits law, tax law, and data management. Specifically, accurate reporting requires all of the following:

  • A properly documented lookback measurement method (or monthly measurement method) with legally permissible period start dates and consistently applied stability periods.
  • Real-time tracking of hours of service for all employees so that employee eligibility determinations are made accurately and in advance of the required offer date.
  • An annual affordability analysis that identifies the applicable safe harbor for each employee and documents the dollar amounts or percentages that support the safe harbor claim.
  • A code validation system that checks every combination of line 14, 15, and 16 codes before submission to ensure logical consistency and flag impossible or high-risk combinations.
  • A process for verifying that Part III of the Form 1094-C accurately reflects the employer’s offers for each month — and that the Yes boxes are checked in every month where the 95 percent threshold was met.
  • A filing receipt and confirmation process that documents the date of transmission and the IRS’s acceptance of the return, so that any future dispute about timely filing can be resolved with contemporaneous evidence.

Most payroll vendors and HR platforms can generate Forms 1094-C and 1095-C. Very few can guarantee that those forms are accurate. The difference between generating a form and generating an accurate form is where ESRP exposure is created.

The Role of the Broker in ACA Reporting Accuracy

Benefits brokers occupy a unique position in the ACA compliance ecosystem. They are often the primary point of contact for employer clients on health plan matters, and they are frequently in a position to influence or at least evaluate the vendor choices their clients make. Yet broker conversations about ACA compliance tend to focus on plan design, contribution structures, and renewal rates — not on the accuracy of the forms being submitted to the IRS.

This is a gap that creates significant risk for broker-client relationships. When an employer client receives a Letter 226J for a year in which the broker was advising on the plan, the broker is almost invariably in the conversation — even if the error was the vendor’s. Brokers who proactively advise their employer clients on ACA reporting accuracy, who recommend vendors with demonstrated accuracy track records, and who flag potential exposure before penalties are assessed, provide a service that is genuinely differentiated in the marketplace.

I have had numerous conversations with brokers whose clients received penalty letters covering years where the broker had recommended the reporting vendor. In each case, the broker was motivated — often urgently — to find a better solution. The best time to make that recommendation is before the letter arrives, not after.

Evaluating Your Current ACA Reporting Vendor

If you are an employer or a broker advising an employer on ACA compliance, the following questions are worth asking about any current or prospective ACA reporting vendor:

  • Does the vendor check every line 14, 15, and 16 combination for logical consistency before submission, and does it flag high-risk or impossible combinations automatically?
  • Does the vendor provide a documented affordability analysis for each employee?
  • Can the vendor provide a copy of the IRS acceptance receipt for the Forms 1094-C and 1095-C submissions, including the date of transmission?
  • Has the vendor’s platform been audited by legal counsel with ACA expertise to ensure compliance with current IRS guidance and regulations?

These are not hypothetical questions. They are the questions that consistently arise when helping clients battle IRS letters whether it be a Letter 226J or a penalty for late filing. Invariably, the employer’s vendor has fallen short of the standard required to keep the employer out of trouble.

What Accord Systems Was Built to Do

Accord Systems was founded on a simple but consequential insight: there is a vast gulf between ACA reporting and accurate ACA reporting, and the cost of that gulf — measured in ESRP penalties, late filing penalties under IRC sections 6721 and 6722, and the legal fees required to fight them — is enormous.

Accord System’s platform is a unique collaboration of a decade of Affordable Care Act legal expertise and elite software engineering which granularly analyzes the requisite data, the affordable care act rules and regulations, and the IRS instructions to the Forms 1094-C and 1095-C. Every feature of our software reflects the legal analysis underlying accurate reporting — from the lookback measurement method engine that enforces legally permissible period dates, to the affordability calculator that documents safe harbor eligibility for each employee, to the code validator that checks every line 14, 15, and 16 combination before a single form leaves our system.

We also provide our clients with filing receipts, confirmation of IRS acceptance, and a documentation trail that is designed to support an employer’s defense if a penalty is ever proposed. Our clients have the benefit of an audit tool that is automated, systematized, and applied to every client’s forms before submission.

For brokers, we offer a partnership model that allows you to provide your employer clients with best-in-class ACA reporting infrastructure while strengthening your own advisory relationship. When your clients know their ACA reporting is accurate and their documentation is defensible, that confidence reflects on the quality of advice they are receiving from you.

Conclusion: The Cost of Inaccuracy Is Not Abstract

The ESRP penalties for a 200-person employer who falls below the 95 percent threshold for a single month can easily reach $200,000 or more. For a 500-person employer, the exposure in a contested Letter 226J can exceed $1,000,000. These are not hypothetical figures from a regulatory impact analysis. They are the penalty amounts I have seen proposed in Letters 226J reviewed in my private practice over the last decade as a result of inaccurate reporting. While I have had enormous success abating these penalties, the road to abatement is long, frustrating, and costly for clients. The best solution is always accurate reporting and avoidance of any unnecessary IRS penalty letter.

The cost of accurate ACA reporting — of using a platform that was built specifically for this purpose, with the legal expertise to get it right — is a small fraction of that exposure. The decision, when framed that way, is not a close call.

If you are evaluating your ACA reporting infrastructure, considering a change in vendors, or advising employer clients who have received penalty letters, we welcome the opportunity to discuss how Accord Systems approaches this problem differently. Please contact us if you have any questions.

About the Author — Ryan Moulder serves as General Counsel at Accord Systems, LLC. Ryan received his LL.M. from Georgetown University Law Center and his J.D. from Saint Louis University School of Law. He has distinguished himself as a leader in the Affordable Care Act arena and has written and spoken on a variety of ACA topics as it relates to compliance for companies.

Legal Consent: The information contained on this site is not, nor is it intended to be, legal advice. An attorney should be consulted for advice regarding your situation. Copyright © 2026 by Accord Systems, LLC. All rights reserved. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include this copyright statement.

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