The Affordable Care Act (ACA) requires Applicable Large Employers (ALEs)—those with 50 or more full-time employees or full-time equivalents—to report details about the health coverage they offer. Employers do this through IRS Forms 1094-C and 1095-C, using ACA reporting codes to explain the type of coverage offered, who received it, and whether it met affordability requirements.
Applying these codes correctly is critical for maintaining compliance and avoiding costly IRS penalties. Below is an overview of how ACA reporting codes function and how employers should use them on Form 1095-C.
What ACA reporting codes do
ACA codes provide the IRS with key information to determine whether an employer satisfied the shared responsibility provisions outlined in Internal Revenue Code Section 4980H.
In short, they help show whether an ALE offered full-time employees minimum essential coverage (MEC) that was affordable and met minimum value (MV) standards.
ACA reporting uses two main code series:
- Code Series 1 (Line 14 of Form 1095-C): Describes the type of coverage offered
- Code Series 2 (Line 16 of Form 1095-C): Explains the employee’s status and whether the employer qualifies for any safe harbors or transition relief
Together, these codes help the IRS determine if penalties apply under the ACA’s Employer Mandate.
Code Series 1 – Line 14
What it includes
Line 14 codes specify whether the employer made an offer of coverage, what type of coverage it was, and which months the offer applied. These codes clarify whether the offer met MEC and MV requirements and whether it extended to just the employee or also to dependents and spouses.
How employers must report
Employers must report a Line 14 code for every month an employee was considered eligible for benefits—even if the employee was terminated or didn’t work certain months. This monthly reporting gives the IRS a full picture of the employee’s coverage status.
What counts as an “offer”
To count as a valid offer, the coverage must be available for all calendar days in a given month. However, if an employee terminates mid-month and the employer would have continued coverage through the end of the month, that month still qualifies as covered.
Notes on affordability
Affordability is based only on the cost of employee-only coverage. The IRS doesn’t factor in costs for covering dependents or spouses when calculating whether the offer meets affordability standards under §4980H and IRS Notice 2015-87.
Code Series 2 – Line 16
What it includes
Line 16 codes provide additional context about the employee’s status and the employer’s compliance efforts. These codes indicate:
- Whether the employee was full-time or part-time
- Whether the employee accepted or waived coverage
- Whether the employer qualified for transition relief (e.g., for non-calendar-year plans or union arrangements)
Used correctly, these codes help employers demonstrate good-faith compliance and avoid penalties.
Affordability safe harbors
To prove that an offer was affordable, employers can use one of three IRS-approved safe harbor methods:
- W-2 Method: Based on the employee’s W-2 Box 1 wages
- Rate of Pay Method: Based on hourly wages × 130 hours/month
- Federal Poverty Level (FPL) Method: Based on the federal poverty line for an individual
These safe harbors allow employers to show that coverage was affordable—even if the employee declined it.
Why accurate ACA reporting matters
Mistakes in ACA coding can lead to IRS penalty notices like Letter 226J, which often require time and resources to dispute. Ensuring accuracy is key.
Many employers now rely on automated tools to simplify ACA compliance. These systems help:
- Aggregate data across payroll and benefits platforms
- Audit employee eligibility and affordability thresholds
- Electronically file Forms 1094-C and 1095-C with the IRS
Using the right tools not only reduces the risk of penalties but also allows HR teams to focus on supporting their workforce more effectively.
The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any subject matter. The reader should not act or refrain from acting on the basis of any content included in this article without seeking tax, legal, or other professional advice. The contents of this article contain general information and may not reflect current legal developments or address the reader’s situation. ebm disclaims all liability for actions the reader takes or fails to take based on any content within this article.
