Guide to ACA employer penalties

If you employ workers in the United States, it's important to understand the Affordable Care Act's (ACA) employer mandate and the potential penalties that come with it. Under federal law, all organizations with 50 or more full-time equivalent employees (FTEs) must offer qualifying health insurance to their workers. If you fail to do so, you may have to pay a penalty.

In this article, we'll discuss the various financial penalties under the ACA and how to avoid compliance risks.

In this blog post, you'll learn:

• The employer shared responsibility penalties for 2026.
• How to minimize ACA penalty risk, such as using safe harbors and ACA penalty calculators.
• Your options for affordable health insurance coverage.

What is the ACA employer mandate?

The ACA, also known as the Patient Protection and Affordable Care Act, or Obamacare, is a federal healthcare law enacted by the U.S. Congress and signed into law by then-President Barack Obama in 2010. The law aimed to make medical care more affordable and available to Americans.

The employer shared responsibility provisions (ESRP) of the ACA require certain employers to offer health insurance to their employees¹. Collectively, these are known as the ACA employer mandate, or the pay-or-play provisions.

Under the employer shared responsibility provisions, all applicable large employers (ALEs), or organizations with 50 or more FTEs, must offer health insurance to at least 95% of their full-time employees that includes minimum essential coverage (MEC). This employer-sponsored health coverage must be affordable and provide minimum value (MV) to full-time employees and their dependents.

Small businesses with fewer than 50 FTEs don’t need to offer coverage. But, it’s still a good idea to do so to better attract and retain employees.

What is affordable health insurance coverage?

An employer's health insurance benefit is affordable if the employee’s contribution toward the premium doesn't exceed a specified threshold. The federal government bases affordability on an employee's annual household income. The amount changes every year to account for inflation. For 2026, employee contributions can't exceed 9.96% of their household income. This is a fairly steep increase from the 9.02% threshold in 2025². This means employers may not need to contribute as high a share of premiums in 2026 as they did in 2025.

Since you likely don't know the annual household incomes for your entire workforce, you can use the Internal Revenue Service (IRS) safe harbors to calculate affordability.

The IRS safe harbors include:

• Your employees’ Form W-2 wages
• Your employees’ rate of pay (hourly rate multiplied by 130 working hours per month)
• The federal poverty level guidelines

As of 2023, the IRS calculates affordability for dependents differently. If your employees' required premium contributions for family coverage exceed the 9.96% threshold, their dependents may qualify for premium tax credits and purchase individual health insurance. Previously, family members weren't eligible for tax credits if an employee's self-only employer-sponsored coverage was affordable. This was known as the “family glitch.”

This means an employee's family member might receive premium tax credits due to unaffordable family coverage. While the ACA’s ESRP requires employers to offer coverage to dependents, it only requires you to offer affordable coverage to your full-time employees³. If a family member enrolls in an individual plan and qualifies for a tax credit, the employer doesn’t owe any penalties.

What are the ACA employer mandate penalties?

If an ALE fails to offer affordable MEC with minimum value to at least 95% of their full-time employees, they may be subject to a penalty if at least one full-time employee purchases individual health insurance coverage and receives a premium tax credit.

There are two employer mandate penalties for ALEs that fail to offer ACA-compliant health coverage:

• A 4980H(a) penalty
• A 4980H(b) penalty

There are also ACA fines for failing to file proper returns with the IRS under 26 U.S. Codes § 6721⁴ and 6722.⁵

The ACA intended for the penalties to roll out in 2014, but the IRS delayed them to 2015. In 2015, the IRS limited enforcement of the penalties to ALEs with at least 100 full-time employees. The ESRP penalties went into full effect in 2017 and apply to all ALEs.

4980H(a) ESRP penalty

If an ALE doesn't provide MEC health insurance to at least 95% of its full-time employees (or all but five full-time employees if five is greater than 5%) and their dependents, and at least one full-time employee receives a premium tax credit, the ALE must pay an employer shared responsibility penalty. The IRS adjusts the penalty for inflation each year.

For ESRP Part A penalties, dependents only include an employee's children, not their spouse or stepchildren⁶. While most group plans and health benefits include spouses, failing to offer coverage to a spouse doesn’t trigger a penalty.

Employers must pay the monthly fee for each full-time employee, except for the first 30 employees.

4980H(b) penalty

If an ALE offers MEC coverage to at least 95% of its employees but doesn't offer at least one of those full-time employees adequate or affordable coverage, it must pay a penalty. The IRS typically assesses this penalty for each full-time employee who was offered unaffordable or inadequate coverage and also received a premium tax credit.

Adequate coverage refers to the minimum value, while affordable coverage relates to the affordability threshold.

The amount an ALE must pay for the Part B penalty varies. Organizations must pay either the monthly penalty multiplied by the total number of full-time employees who received tax credits or the amount of the 4980H(a) penalty (if that penalty is greater than $1), whichever is less. This is because if the 4980H(a) penalty is lower for an ALE, they could've avoided a larger penalty by not offering any health coverage to their employees.

If an ALE's total penalty is less than the 4980H(a) penalty, they must pay the following per employee with premium tax credits:

Return penalties

In addition to the employer mandate Part A and B penalties, ALEs must comply with ACA reporting requirements. The IRS assesses return penalties on employers who either don't file the required 1094-C or 1095-C forms or file an inaccurate form⁷. Filing IRS forms is crucial for reporting your health benefits and benefit enrollment to the federal government.

Form 1094-C is a summary form for the organization, while employers must complete a Form 1095-C for each full-time employee. The IRS uses these forms to determine if an ALE owes an ESRP payment.

The ACA fines for incorrect or late returns are as follows⁸:

How are employers notified of any ACA fines?

ALEs will receive penalty notices. State and federal health insurance exchanges will notify ALEs in violation of the ESRP in advance. The exchanges must inform an employer that one of their employees is eligible for advance premium tax credits and enrolled in an individual health insurance policy.

At the end of the tax year, the IRS will notify employers if they must pay an ESRP penalty with Letter 226-J.¹⁰ The IRS estimates the penalty amounts and gives employers 30 days to agree with or appeal the amount.

What health benefits satisfy the ACA employer mandate?

The easiest way for ALEs to avoid employer shared responsibility provision payments is to offer ACA-compliant health benefits to their employees. While most employers choose to offer traditional group health insurance coverage that meets the standards for minimum essential coverage (MEC), minimum value, and affordability, it isn't the only option.

A health reimbursement arrangement (HRA) can also help you satisfy the ACA employer mandate, depending on the type you offer.

Individual coverage HRA (ICHRA)

The individual coverage HRA (ICHRA) allows organizations of all sizes, including ALEs, to reimburse their employees for qualifying medical expenses and individual health insurance premiums. Unlike one-size-fits-all traditional group health insurance plans, an ICHRA allows your employees to purchase the qualified health insurance coverage that best fits their unique needs. This helps to keep health plan costs low for both employers and employees.

It works like this:

• First, employers set up a monthly allowance for their employees.
• Next, employees make qualified healthcare purchases and submit their receipts for reimbursement.
• Then, you verify your employees' expenses and, once approved, reimburse them up to their available allowance.

Best of all, reimbursements are tax-free for employers and employees. There are also no contribution limits or participation requirements. However, to satisfy the mandate, you need to offer an affordable ICHRA allowance to at least 95% of your full-time employees. This means ensuring your employees pay no more than 9.96% of their household income (or the safe harbor amount) for the lowest-cost silver plan on the Health Insurance Marketplace after accounting for their ICHRA contribution.

You can customize allowances and eligibility with 11 different employee classes. This allows you to offer the benefit to only your full-time employees, for example. Or, you can offer a group policy to your full-time employees and an ICHRA to your part-time workers. With employee classes, you can customize your ICHRA to fit your needs.

You can save time and money by administering your ICHRA through PeopleKeep's automated benefits platform. Our team of experts will review your employees' expenses for you to ensure compliance. Then, you'll simply approve the reimbursement amounts and pay your employees through payroll, cash, or check. We'll help you maintain compliance so you can focus on running your business.

If you’re an ALE looking for a full-service ICHRA administration provider, with additional features like white-glove customer service and automatic premium payments, Remodel Health’s ICHRA+ solution is right for you.

Group coverage HRA (GCHRA)

Another option for ALEs is the group coverage HRA (GCHRA). This is also known as an integrated HRA. A GCHRA supplements a group health insurance policy. This allows employers to reimburse their employees for the qualifying medical expenses their group policy doesn't fully cover. This includes deductibles, copayments, and coinsurance.

One advantage of offering a GCHRA alongside group coverage is that employers can switch to a high-deductible health plan (HDHP) to save money on insurance premiums. Employers can then use a GCHRA to offset the higher out-of-pocket medical expenses.

Many carriers offer integrated HRAs alongside a specific health insurance plan. By administering your GCHRA through PeopleKeep by Remodel Health, you can integrate your HRA with any group health insurance plan.

What is the individual mandate?

At first, the ACA required everyone in the U.S. to get health insurance that met basic requirements, either through their job or on their own. Otherwise, they faced penalties for noncompliance. This was known as the individual mandate.

While the federal government has since repealed the financial burden of the individual mandate, some state agencies still require their residents to have health insurance.

Residents need qualified health plans in these areas to avoid penalties:

• New Jersey
• California
• Rhode Island
• Massachusetts
• District of Columbia

In Vermont, state law recommends that residents have coverage, but there’s no financial consequence for not having it.

Conclusion

Understanding the ACA employer mandate and the associated penalties is essential for maintaining regulatory standards under the law. By offering health coverage that meets MEC, minimum value, and affordability requirements, you'll avoid ESRP penalties, improve employee retention and productivity, and stay competitive in today’s job market.

If you're an ALE looking to offer a compliant health benefit, PeopleKeep by Remodel Health can help! Schedule a call with one of our HRA specialists to get started.

This article was originally published on July 6, 2023. It was last updated on March 2, 2026.

References

1. IRS - Employer shared responsibility provisions
2. IRS - Rev. Proc. 2025-26
3. Affordability of Employer Coverage for Family Members of Employees
4. 26 U.S. Code § 6721 - Failure to file correct information returns
5. 26 U.S. Code § 6722 - Failure to furnish correct payee statements
6. IRS - Questions and answers on employer shared responsibility provisions under the Affordable Care Act
7. IRS - 2025 Instructions for Forms 1094-C and 1095-C
8. IRS - General Instructions for Certain Information Returns
9. IRS - 2026 Information Return Penalties
10. Understanding your letter 226-J