ACA Reporting Under Co-Employment

Written by Peolet Editorial · Reviewed by Peolet Editorial · Last verified 2026-10-25

The sentence that matters

Section 4980H liability follows the common law employer. Reporting follows the employer too, and reporting can be delegated. Liability cannot.

Everything else in this article is a consequence of that distinction, and it is the distinction most commonly blurred during a PEO sale — not usually by misrepresentation, but by the perfectly true statement "we handle your ACA reporting" being heard by a buyer as "we take on your ACA risk". Those are different sentences.

What the ACA actually requires of an employer

Two obligations, both triggered by being an applicable large employer.

The offer obligation, in section 4980H of the Internal Revenue Code. An applicable large employer that does not offer minimum essential coverage to substantially all of its full-time employees and their dependents, or offers coverage that is not affordable or does not provide minimum value, can be assessed a payment if a full-time employee receives a premium tax credit on an exchange. The IRS maintains questions and answers on the employer shared responsibility provisions at irs.gov/affordable-care-act/employers/questions-and-answers-on-employer-shared-responsibility-provisions-under-the-affordable-care-act, and the statute is at law.cornell.edu/uscode/text/26/4980H.

The reporting obligation, in sections 6055 and 6056, discharged through Forms 1094-C and 1095-C. The forms and instructions are published at irs.gov/forms-pubs/about-form-1094-c and irs.gov/forms-pubs/about-form-1095-c. Read the instructions for the filing year in question; the forms have changed repeatedly and the electronic filing thresholds have tightened.

Neither obligation contains an exception for employers who use a co-employment arrangement.

Who the common law employer is

The test is control: who directs the work, sets the hours, supervises, has the right to discharge. The IRS and the courts apply a facts-and-circumstances analysis, and the classic articulation of the factors is in Revenue Ruling 87-41. In a normal PEO arrangement, the answer is obvious — you do. Your people work at your site, on your projects, under your managers. The provider processes payroll and administers benefits. You are the common law employer.

This is not a defect of the arrangement. It is what co-employment is. The provider is an employer for specified statutory purposes under contract and, if certified, for certain federal employment taxes under section 3511; see certified PEOs and what CPEO status means and how co-employment works. Section 4980H is not in that set.

What transfers and what does not

The aggregation row is the one that causes real damage. Applicable large employer status is determined across a controlled group under the aggregation rules, and a provider administering one operating company has no visibility into affiliates, newly acquired entities, or employees who sit outside the arrangement — seasonal staff, interns, a small team in another state on a separate payroll. An employer who believed it was under the threshold because the provider's census said so is the archetypal failure here.

The staffing-firm analogy, and its limit

Practitioners often reason about PEOs by analogy to staffing firms, where the regulations under section 4980H address when an offer of coverage by an unrelated staffing firm is treated as made by the client employer — conditioned, in the regulation, on the client paying more for an enrolled worker than it would for the same worker not enrolled. That fee-differential condition is specific to that provision and specific to staffing arrangements, and reasoning from it to a PEO arrangement without reading the regulation is how buyers end up with a conclusion they cannot support.

The honest summary: the general position in a conventional PEO arrangement is that coverage offered through the arrangement counts as the client's offer, and the precise basis for that conclusion in your facts is a question for benefits counsel reviewing your actual service agreement and plan documents. We are not going to pretend a website can settle it, and anyone who tells you it is automatic has not read the agreement.

What to put in the contract

Before signature, in writing:

1. Which party determines full-time employee status, using which measurement

method — monthly or look-back — and which measurement, administrative and stability periods.

1. Who produces the forms, who files them, and by when you receive drafts for

review. You want a review window, because the forms report your offers.

1. What data you must supply and by when. Reporting failures are usually data

failures, and the data usually comes from you.

1. Who responds to IRS correspondence, with a commitment on turnaround.

Proposed assessment letters carry short response deadlines and a missed deadline is expensive.

1. Indemnity in both directions, for failures caused by the other party's

data or action.

1. What happens at exit — specifically who files the forms for the partial

year in which co-employment ends, and who holds the data needed to do it. This is routinely forgotten, and it is one more reason leaving a PEO mid-year is harder than leaving at year end.

These belong in the same written round as the unbundling questions in what a PEO costs and the exit terms in what actually moves a PEO contract. You are asking for them while you still have leverage.

What to do next

1. Determine your own applicable large employer status, across your whole

controlled group, from your own records. Do it annually and keep the working. Do not outsource the determination to a census you did not assemble.

1. Read the current form instructions for the year you are filing. They

change.

1. Get the six contract points above in writing. If a provider will not

commit to a review window on forms filed in your name, that is informative.

1. Keep your own copy of the filed forms and the underlying hours data. You

will need them if an assessment letter arrives two years later, and by then you may have changed providers.

1. Take the legal question to a lawyer. Whether a particular offer counts as

yours, whether an aggregation rule captures an affiliate, how to respond to a proposed assessment — these are legal and tax determinations with money attached. Peolet is not a PEO, not a broker and not your adviser; we publish the mechanics and name the primary sources so you can arrive at that conversation already knowing what to ask.

And the uncomfortable one: if ACA administration is the main reason you are considering a PEO, the arrangement may be larger than your problem. Reporting can be bought as a service on its own, and an administrative services arrangement can lift the work without restructuring your employment relationships — see PEO vs ASO and run your situation through the decision tool. Buying co-employment to solve a forms problem is a poor trade, and the liability you were trying to move does not move anyway.