What happens when your home care agency is audited for ACA compliance by the IRS?

An alternate title for this piece might be: The blog no agency owner wants to read and every agency owner needs to read.

According to data from Trusaic and reported by HomeCareMag and Home Health Care News, approximately 1 in 4 companies has been or will be audited by the IRS for potential non-compliance with the Affordable Care Act (ACA), also known as Obamacare. Healthcare and social assistance, which includes home care agencies, is one of the industries the IRS specifically identifies as elevated risk.

IRS enforcement of the ACA's employer mandate has been ramping up steadily. The agency has invested heavily in automated data-matching systems that cross-reference employer 1094-C and 1095-C filings with employee tax returns. Every time one of your employees files their personal taxes and reports that they received a marketplace subsidy, a flag is triggered in IRS systems. As a result, the IRS doesn't have to manually review your records to know something might be wrong; the discrepancy surfaces automatically.

The nature of home care agencies' workforces put them at particular risk because they tend to have large hourly workforces with variable schedules, high turnover, and complex data across multiple systems.

Here's a quick guide to understanding, avoiding, and (if necessary) passing these audits.

What does the audit process look like?

The dreaded Letter 226-J arrives

This is the IRS's initial determination letter. It arrives by certified mail and states that you owe an Employer Shared Responsibility Payment — often hundreds of thousands of dollars. The number is calculated based on 1094/1095-C data you filed (or didn't file) cross-referenced against Marketplace subsidy claims from employees. You typically have 30 days from the date the letter was mailed to respond.

You scramble to find your documentation

To dispute the IRS's assessment, you need to demonstrate that you offered minimum essential coverage to at least 95% of full-time employees, that coverage was affordable, and that you correctly identified who qualified as full-time. In home care, this is where things get complicated fast.

(It's worth mentioning that you're inviting even deeper trouble if you're classifying caregivers as 1099 contractors instead of W-2 employees.)

You file a Response to Letter 226-J

Your response (using IRS Form 14764) must include a corrected or confirmed employee offer and coverage summary, and any documentation supporting your position. If you agree with the IRS's findings, you can submit payment. If you disagree, you'll need solid records: enrollment offers, affordability calculations, hours logs, and proof of delivery to employees.

The IRS issues a Letter 227

Based on your response, the IRS sends a Letter 227; this either closes the case, adjusts the penalty, or maintains it. If you disagree with the outcome, this is the point at which you can request a pre-assessment conference with the IRS Office of Appeals — you have 30 days from the date of Letter 227 to do so. Legal and accounting fees compound the original liability. Agencies that reach this stage typically pay — whether it's the penalty, the legal costs to fight it, or both.

Notice and Demand for Payment

If you don't dispute Letter 227, or if the appeals process doesn't resolve the matter in your favor, the IRS issues Notice CP 220J — a formal demand for payment. At this point the assessment is final; interest accrues on unpaid amounts from the date of assessment.

The home care-specific risk: It's critical to understand that the IRS doesn't simply count all your full-time employees; in determining whether you're an Applicable Large Employer subject to ACA mandates, they calculate a number called Full-Time Equivalency (FTE) which accounts for part-time employees as well.

And because caregivers often work variable hours across multiple clients, determining who qualifies as a "full-time employee" under the ACA's look-back measurement method is genuinely complex. If you haven't been applying a measurement period correctly — or at all — the IRS may categorize employees as full-time who you've never tracked or offered coverage to.

What is the IRS looking for?

The IRS cross-references three data sources: your 1094-C and 1095-C filings, W-2 data, and Marketplace applications where employees claimed premium tax credits. When an employee receives a subsidy and your records don't show they were offered affordable coverage, the systems automatically flags the case.

Some of the common failure points the IRS identifies in home care agencies:

Misclassified or untracked hours‍

Employees whose hours fluctuate are often never formally assessed for full-time status. If they average 30+ hours per week over a measurement period, they qualify — and you're liable for not offering coverage.

Coverage that isn't actually "affordable"

‍ACA affordability isn't just about offering a plan; the employee's share of the premium must fall below a specific percentage of household income. A plan that seems reasonably priced may still fail the affordability test, making your offer legally insufficient.

Incorrect or incomplete 1095-C filings

‍Line-by-line errors on 1095-Cs — wrong codes, missing months, or failure to file for all applicable employees — are among the most common triggers for ESRP assessments, even when coverage was actually offered.

The "95% rule" math doesn't work out

‍If even one or two full-time employees were accidentally excluded from your offer — new hires, rehires, or variable-hour workers who crossed the threshold mid-year — you can fall below the 95% threshold. The penalty then applies to your entire workforce, not just the excluded employees.

How much are the IRS fines for ACA non-compliance and how are they determined?

The ACA's employer mandate penalties under IRC Section 4980H come in two forms. You can face one or the other — but not both for the same employee in the same month.

Part A (4980H(a)) — Failure to offer coverage. If you don't offer minimum essential coverage to at least 95% of your full-time employees and a single one of them obtains a subsidized marketplace plan, Part A applies to your entire workforce. The penalty is calculated as: (total full-time employees − 30) × the annual rate. The "minus 30" is a small buffer — everyone above it counts, whether or not they personally went to the marketplace.

Example: An agency with 80 full-time employees offers no coverage. One employee goes to the marketplace. Part A penalty: $3,340 × 50 = $167,000 per year.

Part B (4980H(b)) — Coverage offered, but inadequate. If you offer coverage but it doesn't meet minimum value (covering at least 60% of costs) or isn't affordable (employee premium exceeds 9.96% of household income in 2026), Part B applies — but only to the specific employees who obtained subsidized marketplace coverage as a result. The total Part B penalty is capped at what Part A would have been.

Example: Same agency, but it does offer a plan — just one with a $350/month premium that's unaffordable for caregivers earning $15/hour. Fifteen employees go to the marketplace. Part B penalty: $5,010 × 15 = $75,150 per year. The agency offered coverage. It still owes.

Reporting penalties are a separate category entirely. Errors on 1094-C and 1095-C filings — wrong codes, missing data, late submission — carry penalties of $330 per return regardless of whether you actually offered compliant coverage. For a 75-person agency with filing errors, that's $24,750 in penalties for paperwork alone.

What can you do right now?

The best outcome is not surviving an audit; it's not getting one in the first place, or at least having clean records if one arrives.

A few things worth doing immediately:

Know your ALE status with certainty. Run the full FTE calculation, including all part-time and variable-hour workers. Don't assume.

Audit your current coverage offering. Does it meet minimum essential coverage standards? Minimum value? Is it affordable for your lowest-wage employees under the IRS formula?

Check your 1094-C and 1095-C filings from recent years. Common errors include incorrect coverage offer codes, wrong employee counts, and missing data for employees whose hours crossed the full-time threshold mid-year.

Estimate your potential exposure. The Vitable ACA Penalty Calculator can give you a sense of the financial risk if your current offering isn't fully compliant.

Get compliant before the letter arrives. An IRS Letter 226J is not the beginning of a conversation. It's a proposed bill. The right time to fix an ACA compliance problem is not after the IRS has already identified it.

A Note on Getting Help

Vitable Health offers ACA-compliant Minimum Essential Coverage (MEC) and direct primary care plans built specifically for home care agencies. They're designed to satisfy the employer mandate while offering caregivers meaningful healthcare benefits at a cost that works for both sides. Vitable's plans protect agencies against Employer Shared Responsibility penalties under both 4980H(a) and 4980H(b), and include primary care, prescriptions, and mental health access with no out-of-pocket costs for employees.

Learn how Vitable Health helps home care agencies get — and stay — ACA compliant →

This article is provided for general informational purposes only and does not constitute legal, tax, or financial advice. ACA compliance and IRS audit procedures are complex and depend on your agency's specific facts and circumstances. The penalties, timelines, and procedural steps described above are based on current IRS guidance and published sources, but may be subject to change. Before making compliance decisions or responding to any IRS communication, please consult with a qualified attorney, licensed accountant, or other professional advisor who can evaluate your specific situation.