The ACA employer mandate: who must offer coverage and the 2026 penalties

The ACA employer mandate, formally the employer shared responsibility provision in Internal Revenue Code section 4980H, applies to an applicable large employer: one that averaged at least 50 full-time employees, counting full-time equivalent hours, in the prior calendar year. Such an employer must offer affordable, minimum-value coverage to at least 95% of its full-time employees and their dependent children, or it can owe a penalty. For 2026 the annual amounts are $3,340 and $5,010, and the affordability percentage is 9.96% of income.

Are you an applicable large employer?

Count by month for the prior calendar year. A full-time employee averages at least 30 hours of service per week, or 130 hours in a calendar month (26 CFR 54.4980H-1). Then add full-time equivalents: total hours worked by everyone who is not full-time, capped at 120 hours per person per month, divided by 120. Add the two counts for each month, average the twelve months, and round down. If the result is 50 or more, you are an ALE for the current year.

Points that trip owners up:

• Controlled groups count together. Businesses under common ownership are aggregated under the controlled-group and affiliated-service-group rules, so two 30-person companies owned by the same person can together be an ALE even though neither alone would be.
• Seasonal worker exception. If you exceed 49 full-time employees (counting FTEs) for 120 days or fewer in the prior year, and the excess is from seasonal workers, you are not an ALE.
• Not a PEO question. Using a professional employer organization does not necessarily move ALE status or penalty exposure off your books; the contract and the IRS rules on who is the common-law employer matter. Get that in writing.
• Count the people, not the headcount. Owners often count W-2 employees only. Hours of variable-hour and part-time staff feed the FTE number. See Benefits for part-time and seasonal workers: ACA and eligibility rules.

The ACA employer mandate (ALE) calculator runs this count on your hours and shows whether you cross 50.

The two penalties

Both are paid monthly in practice (one-twelfth per month) and are assessed by the IRS after a letter, not at filing. They are not deductible.

The (a) penalty: failing to offer to 95%

If an ALE fails to offer minimum essential coverage to at least 95% of its full-time employees and dependents, and at least one full-time employee gets a premium tax credit on a Marketplace, the employer owes the section 4980H(a) amount times all its full-time employees, minus the first 30. For calendar year 2026 that amount is $3,340 per employee (IRS Rev. Proc. 2025-26). It applies whether or not the employee who got the subsidy is the one you did not cover.

The (b) penalty: coverage that is not affordable or not minimum value

If you do offer to 95% but the coverage is unaffordable or lacks minimum value for a particular full-time employee who then gets a premium tax credit, the (b) amount applies to that employee only: $5,010 for 2026 (Rev. Proc. 2025-26). The total (b) penalty can never exceed what the (a) penalty would have been. Recall also that the (b) penalty is triggered one employee at a time, so an offer that fails for 3 people costs 3 x $5,010.

For comparison, the IRS has already published the 2027 figures: $3,780 for (a) and $5,670 for (b) (Rev. Proc. 2026-22).

What counts as "affordable" and "minimum value"

Minimum value means the plan pays at least 60% of the total allowed cost of benefits for a standard population and provides substantial coverage of inpatient hospital and physician services. Carriers and the HHS minimum value calculator can confirm it, and most group plans do meet it. Many bare-bones, fixed-indemnity and "skinny" plans do not.

Affordable means the employee's required contribution for the lowest-cost self-only plan that provides minimum value does not exceed a percentage of household income. For plan years beginning in 2026 that percentage is 9.96% (IRS Rev. Proc. 2025-25), up from 9.02% in 2025 and rising to 10.22% in 2027 (Rev. Proc. 2026-26). Because the employer does not know household income, the regulations offer three safe harbors, measured against the self-only premium:

1. Form W-2 wages (Box 1): the contribution must not exceed 9.96% of the employee's W-2 wages for the year.
2. Rate of pay: 9.96% of the hourly rate x 130 hours per month, or monthly salary for salaried staff.
3. Federal poverty line: the monthly contribution must not exceed 9.96% of the single-person poverty guideline divided by 12. Using the 2025 HHS guideline of $15,650 (valid for calendar-year 2026 plans, since a guideline in effect within six months before the plan year can be used), the ceiling is about $129.89 per month in the 48 states and DC. A plan year starting later in 2026 may use the 2026 guideline of $15,960, about $132.47. The IRS does not publish those dollar figures; they are our arithmetic from the HHS guidelines (see 26 CFR 54.4980H-5).

Employers often choose the poverty-line safe harbor because it is predictable, and then set the employee-only contribution at or below the ceiling. Keep in mind that the rule looks only at employee-only coverage. Family premiums can be much more expensive without creating a penalty, though the family glitch fix means family members may be eligible for Marketplace subsidies in some cases.

A worked example (hypothetical)

Say a 90-employee distribution company in Georgia has 78 full-time employees in 2026.

• No offer at all: (78 - 30) x $3,340 = $160,320 for the year, if at least one full-time employee receives a premium tax credit.
• Offers coverage to 95% but it is unaffordable for 4 people who receive credits: 4 x $5,010 = $20,040. That is below the (a) cap of $160,320, so $20,040 is the penalty.
• Offers affordable coverage that meets minimum value: no penalty, even if employees still choose to buy elsewhere.

Run your own headcount and contribution in ACA employer mandate (ALE) calculator, and test premium design with group health insurance cost and affordability calculator.

Measurement methods and the monthly test

Employers with variable-hour workers can use a look-back measurement method: a standard measurement period of 3 to 12 months, an optional administrative period of up to 90 days, and a stability period at least as long as the measurement period. Done right, it locks in full-time status for the stability period. Done wrong (no documented policy, hours not tracked), the employer is stuck with the monthly method, where a person is full-time any month they hit 130 hours. A 90-day waiting period is allowed, and a new full-time employee must be offered coverage by the first day of the fourth full calendar month of employment to avoid (a) penalty exposure for that person.

Reporting and how penalties start

ALEs report offers to the IRS on Forms 1094-C and 1095-C, which the IRS uses to match against Marketplace subsidy data. Deadlines for 2025 forms in 2026 were March 2 (furnishing and paper filing) and March 31 (electronic filing). Employers filing 10 or more information returns of all types must file electronically. See ACA reporting: Forms 1094-C and 1095-C for large employers for the procedure.

If the IRS finds a mismatch it sends Letter 226-J proposing a penalty, to which you respond with a Form 14764 response and supporting documents. Treat the letter as time-limited and bring in the payroll and benefits administrators. Most penalties are fixable with a documented offer record, such as enrollment screenshots and the Form 1095-C codes you used.

Alternatives for large employers

An ICHRA can satisfy the offer requirement if it meets affordability and minimum value tests for the employee's rating area; the rules are in ICHRA explained: individual coverage HRAs for employers. A QSEHRA is only available to employers that are not ALEs, as explained in QSEHRA explained: the small employer HRA, 2026 limits and rules. Employers under 50 can also look at the The small business health care tax credit (Form 8941): rules and 2026 figures. Other employer-sponsored rules may apply by state, so check workers' comp and benefits requirements by state for mini-COBRA and mandated-offer requirements.

Key takeaways

• An applicable large employer averaged 50 or more full-time employees including FTEs in the prior year; controlled groups are combined.
• For 2026 the (a) penalty is $3,340 per full-time employee minus 30, and the (b) penalty is $5,010 per subsidized employee, capped at the (a) amount (IRS Rev. Proc. 2025-26).
• Affordability for plan years beginning in 2026 is 9.96% of income for the lowest-cost self-only plan; 2027 rises to 10.22%.
• Use a safe harbor deliberately, track hours, and keep proof of offers to answer an IRS Letter 226-J.
• Sources: IRS Rev. Proc. 2025-25, Rev. Proc. 2025-26 and IRS employer shared responsibility provisions.