What Code to Use on 1095-C If Employee Declines Coverage?

There is no separate code on Form 1095-C for an employee who declines coverage. You report the offer you extended on Line 14, the employee’s monthly cost for the cheapest self-only minimum value plan on Line 15, and an affordability safe harbor on Line 16. The IRS scores the form on what you offered, not on what the employee accepted, so the correct 1095-C code when an employee declines coverage is whatever code accurately describes the offer — most often 1E paired with a 2F, 2G, or 2H safe harbor.¹

Line 14: The Offer Code Stays the Same Whether They Enroll or Not

Line 14 uses indicator codes 1A through 1U to describe the coverage you made available. The code reflects the offer, not the enrollment decision. If you offered family coverage and the employee walked away from it, you still enter the family offer code.¹

The three codes that show up most often in a declined-coverage scenario:

1E: minimum essential coverage providing minimum value offered to the employee, spouse, and dependents. This is the broadest offer and gives the strongest penalty protection.
1C: minimum essential coverage providing minimum value offered to the employee and dependents, but not the spouse.
1B: minimum essential coverage providing minimum value offered to the employee only.

One wrinkle catches employers who offer spousal coverage with a condition attached. If your spouse offer applied only when the spouse had no other coverage available, use Code 1K instead of 1E. Conditional spousal offers get their own code.²

The 1A Qualifying Offer Shortcut

Code 1A is a special “qualifying offer” code that simplifies the rest of the form. You can use it when the coverage provides minimum value, you offered at least MEC to the spouse and dependents, and the employee’s required contribution for self-only coverage was at or below 9.5% (as adjusted) of the mainland single federal poverty line divided by 12.²

Use 1A and you leave Line 15 blank and Line 16 becomes optional. A qualifying offer is treated as affordable by definition, so no safe harbor code is needed to back it up.¹ The offer has to have been available for every month the employee was full-time during the year.

Line 15: Fill In the Cost Even Though They Declined

Line 15 is the line that most often gets skipped when the employee said no, and skipping it undercuts everything else. The entry is the employee’s share of the monthly premium for the lowest-cost self-only plan providing minimum value. You must complete it whenever Line 14 shows an offer code such as 1B, 1C, 1E, or another code indicating a minimum value offer.¹

Line 15 is not what the employee would have paid for the tier they were offered. It is the cost of the cheapest self-only minimum value option. If self-only would have cost the employee $150 per month but family coverage was $400, Line 15 is $150. If the employee’s cost was zero, enter “0.00” rather than leaving the line blank.³ A blank Line 15 leaves the IRS without any evidence that your offer was affordable.

Line 16: The Safe Harbor Code Is Your Real Defense

Line 16 is where the affordability defense lives. When an employee turns down coverage and later collects a premium tax credit through the Marketplace, the IRS pulls up your 1095-C and reads Line 16. The IRS has stated plainly that there is no exception from the Section 4980H(b) penalty just because the employee declined the offer.³ You still have to prove affordability. That means picking one of three safe harbor codes:

2F, the W-2 safe harbor: the employee’s required contribution was not more than the affordability threshold (9.96% for 2026) of the employee’s Box 1 W-2 wages. If you use 2F for an employee, you must use it for every month you offered that employee coverage during the year.
2G, the federal poverty line safe harbor: the employee’s required contribution was not more than 9.96% of the single-person federal poverty line divided by 12. For plan years starting January 2026, that caps the monthly employee cost at $129.89 for mainland employees. For plan years starting July through December 2026, the cap is $132.46.
2H, the rate of pay safe harbor: affordability is measured against the employee’s hourly rate or monthly salary. This is the workable option for hourly workers whose year-end W-2 wages are hard to predict.

The 9.96% affordability threshold for 2026 comes from Revenue Procedure 2025-25,⁴ and the federal poverty line for a single individual in the 48 contiguous states is $15,960 for 2026.⁵

Line 16 is technically not required. The IRS instructions say an employer “may” enter a code.² In practice, a blank Line 16 for a full-time employee who declined coverage is one of the fastest ways to draw a penalty notice. The IRS has no way to know the offer was affordable unless you tell them.

A Worked Example

You offered MEC and minimum value to the employee, spouse, and dependents. The employee’s monthly cost for the cheapest self-only minimum value plan would have been $125. You use the federal poverty line safe harbor to measure affordability. The employee said no.

Line 14: 1E (offer of MEC and MV to employee, spouse, and dependents).
Line 15: 125.00 (the employee’s share of the lowest-cost self-only MV plan).
Line 16: 2G (FPL safe harbor; $125 sits under the $129.89 monthly cap).

Those three entries together tell the IRS that you made a full offer, disclosed exactly what it would have cost, and met the affordability standard. That is the complete defense against the 4980H(b) penalty even if the employee ends up with a premium tax credit.²

When the Employee Enrolled and Then Dropped Coverage

A decline is not always a January-to-December event. An employee might enroll at the start of the year and drop coverage mid-year after a qualifying event. The coding then shifts month by month.

For any month the employee was enrolled for the full month, put your offer code on Line 14 (1E, for example) and Code 2C on Line 16. Code 2C indicates the employee was enrolled and overrides any other Line 16 code for that month.¹

For months after the drop, the coding depends on whether the offer stayed open. If coverage was still available and the employee simply chose not to re-enroll, keep the offer code on Line 14 and put the applicable affordability safe harbor (2F, 2G, or 2H) on Line 16. If coverage terminated before the last day of a month and no fresh offer was extended, Line 14 becomes Code 1H (no offer of coverage) for that month.³

Multiemployer Union Plans Follow a Different Path

If you contribute to a multiemployer health plan under a collective bargaining agreement, the coding does not follow the pattern above. Under the multiemployer interim guidance, enter Code 1H on Line 14 and Code 2E on Line 16 for every month you were required to contribute on the employee’s behalf. Code 2E provides ESRP relief even though 1H technically means “no offer of coverage”; the IRS treats the multiemployer contribution as satisfying the employer mandate.² Code 2E overrides other Line 16 codes for that month, including 2C. If the employee’s only coverage comes through the multiemployer plan, do not complete Part III of Form 1095-C for that employee; the plan sponsor reports that separately.

What Miscoding Costs

The IRS uses Letter 226-J to notify employers of a proposed ESRP liability, and the proposal is built entirely from what you reported on Forms 1094-C and 1095-C.⁶ For 2026, the Section 4980H(b) penalty runs $5,010 per year ($417.50 per month) for each full-time employee who received a premium tax credit because the coverage offer was missing, unaffordable, or lacked minimum value. That is the penalty a declined-coverage scenario most often triggers when Line 16 is left blank.⁷

The coding errors that produce those notices are predictable:

Leaving Line 16 blank. When an employee declines your affordable offer and later collects a Marketplace tax credit, a blank Line 16 leaves the IRS with no affordability defense on file, and the 4980H(b) penalty gets proposed by default.
Entering 1H on Line 14 when you actually made an offer. Every month coded as 1H for a full-time employee reads as a potential penalty month.
Leaving Line 15 blank. Without the cost figure, the safe harbor code on Line 16 has nothing to measure.
Switching safe harbors mid-year. Code 2F must be used for every month you offered coverage to a given employee that year. Mixing 2F with a different code for the same employee invalidates the W-2 safe harbor.

If a Letter 226-J arrives, you have until the date stated in it to respond using Form 14764. You can agree and pay, or disagree and submit corrected information with supporting records. The IRS then issues a final determination, which can be appealed.⁶ Many proposed penalties trace back to a coding mistake that can be corrected, but the correction depends on records from the reporting year, and those get harder to reconstruct the longer the response waits.

1
Internal Revenue Service. Instructions for Forms 1094-C and 1095-C (2025)
2
Internal Revenue Service. Instructions for Forms 1094-C and 1095-C (2025)
3
Internal Revenue Service. Questions and Answers About Information Reporting by Employers on Form 1094-C and Form 1095-C
4
Internal Revenue Service. Revenue Procedure 2025-25
5
HealthCare.gov. Federal Poverty Level (FPL)
6
Internal Revenue Service. Understanding Your Letter 226-J
7
Internal Revenue Service. Revenue Procedure 2025-26