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April 30, 2026

5 Practical Strategies for Avoiding ACA Pay-or-Play Penalties

The Affordable Care Act’s (ACA) employer mandate is straightforward in theory, but can be complex in execution. The bottom line: applicable large employers (ALEs) must offer affordable, minimum-value (MV) health coverage to full-time employees (and their dependents) or risk exposure to IRS penalties. This mandate is also known as the “pay-or-play rules.” 

In practice, avoiding penalties requires more than just offering coverage. It demands consistent processes, accurate data, and a proactive strategy.

Where Employers Face Risk

An ALE may be subject to a pay-or-play penalty if even one full-time employee receives a premium tax credit through a Health Insurance Marketplace (Exchange) and the employer either: 

  • Fails to offer health plan coverage to at least 95% of full-time employees and their dependents,
  • Offers coverage that excludes a specific eligible employee, or
  • Provides coverage that is unaffordable or does not meet MV standards.  

Five Practical Strategies to Strengthen ACA Compliance

1. Get Full-Time Status Right—Every Month 

Accurately identifying and tracking full-time employees is foundational to a strong ACA strategy. Under ACA rules, a full-time employee is anyone averaging at least 30 hours per week or 130 hours per month. Even if ALEs have a different internal definition of what is considered full-time, they must offer coverage to employees meeting the IRS’ definition to avoid pay-or-play penalties. 

Employers must track coverage on a monthly basis. Two ways to accomplish this are the: 

  • Look-back measurement method for variable or seasonal workforces, providing predictability across defined periods.
  • Monthly measurement method for more stable, consistently scheduled teams.

The key takeaway: Inconsistent tracking can lead directly to missed offers of coverage and, ultimately, potential penalties. 

2. Reevaluate Plan Affordability Each Year

Affordability is not static according to the ACA. It’s tied to an annually adjusted percentage of employee income.

  • 2025: 9.02%  
  • 2026: 9.96% 
  • 2027: TBA

Coverage is considered affordable if the employee’s contribution for self-only coverage stays below this threshold.  

The key takeaway: Because this percentage changes annually, employers should reassess plan contributions before each plan year to ensure compliance.

3. Utilize Safe Harbors Strategically

Because employers don’t typically have access to employees’ household income, the IRS provides three affordability safe harbors that can be utilized to calculate affordability:

  • Form W-2 safe harbor (based on adjusted annual wages),  
  • Rate of pay safe harbor (based on hourly rate x 130 hours per month), or 
  • Federal poverty level (FPL) safe harbor (based on a fixed national benchmark).  

Each option balances predictability and cost differently. For example: 

  • W-2 offers flexibility but less predictability,  
  • Rate of pay provides consistency for hourly workforces,  
  • FPL is the most predictable but often requires higher employer contributions.

The key takeaway: Certain safe harbors may be more appropriate than others depending on an ALE’s workforce composition. Choosing the right approach and applying it consistently is a key ACA compliance decision.

4. ACA Reporting is a Compliance Priority

ACA reporting is not just administrative work; it directly informs the IRS’s penalty determinations and could be the difference in your organization paying a hefty penalty or not. 

Each year, ALEs must file to the IRS:

  • Form 1094-C (transmittal), and  
  • Form 1095-C (employee-level reporting), generally by March 31 each year.

Errors or inconsistencies in reporting, particularly in Form 1095-C coding, can lead to incorrect penalty assessments.  

The key takeaway: Accurate reporting requires coordination across HR, payroll, and benefits teams. It’s a year-round commitment to compliance for your organization.

5. Respond Promptly to IRS Letter 226-J

If the IRS believes a penalty may apply to an ALE (i.e. it’s determined for at least one month, one or more of the ALE’s full-time employees received a premium tax credit), it will issue Letter 226-J. This is not a bill, but it is an initial notification with a critical window to respond.  

In response to Letter 226-J, employers typically have about 90 days to:

  • Review the IRS’s findings,  
  • Compare them to filed Forms 1094-C and 1095-C, and  
  • Agree or dispute the proposed penalty.

Failing to respond can result in automatic assessment of the penalty. 

The key takeaway: Taking timely action essential if your organization receives Letter 226-J from the IRS. If the ALE does not respond by the response deadline, the IRS will send a notice and demand for the penalty that was proposed and assessed.

Bringing it All Together

Avoiding ACA pay-or-play penalties isn’t about a single decision, it’s about sustained ACA strategy and execution across tracking, plan design, reporting, and response processes. 

Employers who take a proactive, structured approach that is grounded in accurate data and consistent practices are far better positioned to stay compliant and minimize risk.

Looking for help with ACA compliance? GKG’s got you covered.