ACA Employer Mandate & Shared Responsibility Overview & Penalties

The Affordable Care Act (ACA) requires employers with 50 or more full-time employees to offer health insurance that meets minimal coverage and affordability standards to their full-time employees and their dependents. If they don't and an employee receives a Premium Tax Credit (PTC) for buying insurance on the marketplace, the employer will be subject to significant penalties, called Employer Shared Responsibility Payments (ESRP). The IRS sends Notice CP220J about ESRP assessments, but first, you'll get several warning letters about the proposed assessments and chances to appeal. 

There are also penalties for failure to file annual forms showing the coverage offered to employees. It’s crucial for employers to understand their legal requirements and the potential consequences for failing to meet those requirements. 

Key takeaways

• Affordable Care Act (ACA) -- health insurance reform signed into law in 2010, sometimes called "Obamacare"
• Employer mandate -- ACA requirement for large employers to offer full-time equivalent employees and dependents healthcare coverage that meets minimal coverage and affordability rules. 
• Applicable Large Employers (ALE) -- employers with at least 50 full-time equivalent employees, based on the previous year's numbers, who are subject to the ACA employer mandate.
• Health insurance coverage -- must be offered to at least 95% of employees, meet minimal coverage standards, and be affordable (under 9.96% of the employee's household income, as of 2026)
• Employee Shared Responsibility Payment (ESRP) -- penalty on employers who don't meet ACA requirements if at least one employee receives a Premium Tax Credit for marketplace insurance. 

Understanding the Employer Mandate

The Employer Mandate only covers ALEs—Applicable Large Employers. An Applicable Large Employer is an employer with at least 50 full-time employees or full-time equivalent employees. This is determined on an annual basis, using the employment numbers from the previous year. 

For example, if a company had 25 full-time employees the previous year but grew to include 60 full-time employees in the current year, they would not be considered an ALE for the current year. However, they would be considered an ALE for the next calendar year. 

Criteria for Full-Time Employees

When some people think of full-time work, they think of a standard 40-hour work week. However, under the Employer Mandate, full-time employees are those who work 30 or more hours per week. To calculate an employer’s average workforce across the year, you add the total number of full-time employees for each of the months in the calendar year. You should also include full-time equivalent employees in this number. You then divide that sum by 12 to find the average workforce for the year.

What is a full-time equivalent employee? This refers to a combination of employees working the same amount as a full-time employee. This calculation involves adding all the hours worked by non-full-time employees in a month, up to 120 hours per employee. You then divide that number by 120 for the number of full-time equivalent employees. Note that this number is used just to determine if the company is an ALE; it does not mean that the company has to offer health insurance to part-time employees.

Health Insurance Requirements

The health insurance provided by the company must meet certain standards. First, it must be offered to at least 95% of all full-time employees and their dependents. A dependent is an employee’s child up to the end of the month in which that child turns 26. The health insurance must be affordable, which means that it does not exceed a certain percentage of the employee’s household income. In 2026, that percentage is 9.96%.

IRS safe harbors provide multiple ways to calculate whether or not coverage is affordable. Coverage is considered affordable if self-only coverage is less than the indexed percentage of the employee’s monthly wages, the employee’s W-2 wages, or the federal poverty level for a single individual.

The coverage provided must also provide minimum value which is at least one plan that pays at least 60% of covered services.

If the coverage is not accessible to 95% of full-time employees, is not affordable under the calculations provided, or does not provide minimum value, an employer may be subject to penalties.

ACA Penalties Explained

Different penalties may be applied, depending on the way in which an employer falls short of the Employer Mandate. Note that ACA penalties are actually excise taxes, so while you'll hear the word "penalty" often, you actually must deal with these assessments as if they're excise taxes. Companies should be familiar with these and other business tax issues in order to avoid hefty penalties.

These penalties only apply if at least one of your employees receives a Premium Tax Credit (PTC) for buying insurance on the marketplace. Otherwise, they don't apply -- even if you don't meet the rules. They also don't apply if employees receive insurance through Medicaid or Medicare. 

The A Penalty: Failing to Offer Coverage (IRC 4980H(a))

As of 2026, if an employer does not provide coverage to at least 95% of its full-time employees (and at least one employee claims a PTC), the employer will be charged a sizable $3340 per full-time employee for the year. This amount increases each year to account for inflation. The penalty is charged per full-time employee, not per full-time equivalent employee. Additionally, the penalty does not apply to the first 30 full-time employees. The IRS calculates the penalty monthly -- $3340 is the annual number. 

For example, say you have 130 employees and the penalty applies for all 12 months. First, take away 30 employees, and then multiply 100 by $3340, making the ESRP $334,000. Usually, the calculations are more complex due to changing staff levels and how the penalty only applies in months where an employee received a PTC. 

There's an "all-but-five rule" that creates an exception for ALEs with fewer than 100 employees. If you offer coverage to all but five employees, and that is over 5% of your FTEs, you don't have to pay this penalty. For example, if you have 60 FTEs, you offer coverage to 55 of them. You've only excluded 5 people, and because that's 8.3%, which is more than 5%, you don't face this penalty. 

The B Penalty: Failing to Offer Affordable Coverage With Minimum Value (IRC 4980H(b))

If a company fails to offer affordable coverage or coverage that provides minimum value, it will be charged an even larger penalty -- but with a smaller scope. If it does not cover at least 60% of the individual’s medical expenses, it does not provide minimum value. If the coverage is expensive enough that it exceeds 9.96% of an employee's household income as of 2026, it is considered unaffordable.

Again, this penalty only applies if an employee receives a PTC for marketplace insurance, and it applies per employee who receives the PTC. As of 2026, the penalty is $5010. Again, this number increases each year to account for inflation. Note this is the annual penalty. The IRS divides this number by 12 and assesses the penalty for each month of non-compliance.

For example, say you had 10 employees who received all received the PTC for the full year, the penalty is $50,010 -- again, the calculation is a bit more involved if employees didn't receive the PTC all year. For example, if a single employee received the PTC for 6 months, the penalty would be $2505. That's $5010 (annual penalty) divided by 12 (number of months in the year), making the monthly penalty $417.50. Then, you multiply the monthly penalty by 6 months. 

Note that the 4980H(a) penalty is capped at the penalty that would have applied if the employer were subject to ESRP under the terms of IRC 4980H(a). 

Reporting Requirements

Companies report their compliance (or non-compliance) with the Employer Mandate on Forms 1094-C and 1095-C. Businesses with 50 or more full-time employees must file these forms each year. Form 1095-C includes information on the health coverage offered, the lowest premium available, and which months of the year it was available. Form 1094-C summarizes the details of 1095-C and includes your business name, EIN, and contact information. If you don't file these forms, the IRS may assess a penalty for failure to file informational returns and send you Notice CP215 or a similar notice.

Deadlines and Submission Guidelines

You must provide a copy of Form 1095-C to each employee who was offered coverage by the last day of February after the tax year. Then, you must file Forms 1094-C and 1095-C with the IRS by the last day of February if you file on paper, or the last day of March if you e-file. The due date moves to the next business day if those dates fall on a weekend or holiday. You can get an automatic 30-day extension on IRS filing when you file Form 8809.

The due dates for 2025 forms are:

• Furnish to employees -- March 2, 2026
• Mail to IRS -- March 2, 2026
• E-file with IRS -- March 31, 2026

The due dates for 2026 forms are: 

• Furnish to employees -- March 1, 2027
• Mail to the IRS -- March 1, 2027
• E-file with the IRS -- March 31, 2027

You only need to submit one 1094-C with all of your 1095-C forms—there is one 1095-C form per employee. However, if you have a lot to send and you send them in batches, ensure that there is one 1094-C for each bundle of 1095-C forms.

How the IRS Uses This Information

The IRS uses the information included on these forms, along with details on employees' individual income tax returns, to determine whether or not ALEs are compliant with the Employer Mandate. If not, the IRS may assess an Employer Shared Responsibility Payment (ESRP) against you. If you receive notification of penalties, it’s likely due to the information on these forms. It’s crucial to check these forms multiple times for accuracy; many incorrectly assessed penalties are the result of false or incomplete information on 1094-C and 1095-C forms.

IRS Letter 226-J: Notification of Potential Penalties

You will receive IRS Letter 226-J if the IRS believes you are liable for an Employer Shared Responsibility Payment, or ESRP. This is the penalty charged when you don’t provide health coverage, or the health coverage you provide is unaffordable or does not offer minimum value. It's technically an excise tax, but it feels like a penalty. 

What Leads to Letter 226-J?

The IRS has processed your 1094-C and 1095-C forms, compared that information to what's reported on your employees' income tax returns, and determined that you are liable for an ESRP.

Your Next Steps

First, read the letter in its entirety. The IRS gives very specific directions regarding what to do if you agree or disagree with the information. Pay attention to the response date on the form and ensure that you have submitted your response with Forms 14764 and 14765 by that date.

Responding to the IRS

There are two forms you must submit when you respond to Letter 226-J. You can agree and make a payment, agree and wait to make a payment, or disagree and challenge the IRS’s decision.

Forms 14764 and 14765

Form 14764 is essentially agreeing or disagreeing with the IRS’s penalty assessment. You can also indicate whether you are including payment, making an EFTPS payment, or not making a payment. If you disagree, you will include that information in the next form.

Form 14765 is a form that includes all of your employees who received healthcare through the Marketplace and received a Premium Tax Credit as a result. Any month marked is a month in which the employee received the PTC, and you do not qualify for any safe harbor relief. However, if you disagree with the calculations or believe that a safe harbor applies, you can include additional information. If the penalty is the result of incorrect information on your 1094-C or 1095-C, you can include the changes you’d like to make in your response. However, Letter 226-J says you should not amend those forms with the IRS.

Timeline and Consequences of Your Responses

Pay attention to the “response date” listed at the top of your 226-J letter. You must submit Forms 14764 and 14765 by that date. If you do not, the IRS will assume their calculations are correct and send you a Notice and Demand for the ESRP listed. If you submit information disagreeing with their assessment, they will respond with some variation of Letter 227, indicating whether they agree or disagree with your proposed changes. Your ESRP may be eliminated completely, revised, or left as-is. Some 227 letters give you the right to appeal, but not all, so read them carefully. Once you've exhausted appeals, the IRS will send Notice CP220J showing the ESRP assessment. At that point, you can request a reconsideration to present new information, or you can pay and ask for a refund, but if those options don't apply, you need to pay or risk collections. 

Best Practices for Compliance

Careful adherence to the Employer Mandate could potentially save your business tens or even hundreds of thousands of dollars every single year. A few changes to your compliance strategies and your approach to health coverage offerings are often enough to catch errors before they lead to penalties.

Coverage Offerings and Employment Numbers

Ensure that the HR or compliance department of your company conducts regular reviews of your coverage offerings. They should be available to at least 95% of all employees and their dependents, or meet the all but five rule. If your business is near the limit for full-time employees, tracking your employment numbers throughout the year can help you prepare better for the year ahead.

Affordability and Minimum Value

It’s also important to ensure that the coverage you offer meets the minimum standards listed in the Employer Mandate. Calculate how much of your employees’ household income it makes up, checking that number against employees of different earning levels. You should also connect with your health insurance representative to verify that the plans you have selected meet the minimum value standard.

Accurate and Timely Reporting

In some cases, penalties are the result of inadequate documentation or missed deadlines. Keeping records on a monthly basis makes it far easier to submit your 1094-C and 1095-C forms in advance of the deadline.

The Employer Mandate does require additional work on the part of ALEs, but the IRS provides the information you need to stay compliant and provide employees with the health coverage they are legally entitled to. As a business owner, take steps to stay abreast of legislative changes, adjustments to penalties and requirements, and deadlines. If you’re struggling to stay on top of your company’s business tax needs, it’s time to find a business tax pro. Use our listings on TaxCure to explore your options.

FAQs

What qualifies an employer as an ALE under the ACA?

The ACA considers an employer to be an Applicable Large Employer if it had 50 or more full-time employees or full-time equivalent employees in the preceding calendar year.

How is the affordability of health coverage determined for ACA requirements?

The ACA considers a health plan affordable if it is less than 9.96% as of 2026 of an employee’s household income. Note that this percentage is adjusted each year, so your company may need to stay on top of new percentages if you are near the limit.

What are the consequences of failing to meet the ACA Employer Mandate?

Depending on which way you violate the Employer Mandate, as of 2026, you may be on the hook for penalties of $3340 times your number of full-time employees minus 30, or $5010 times the number of employees who received a PTC. The amount depends on whether you do not offer coverage to the required number of employers or the coverage is considered either unaffordable or not of minimum value, and these values are indexed to inflation.

What is the purpose of IRS Forms 1094-C and 1095-C in ACA compliance?

Forms 1094-C and 1095-C allow the IRS to determine whether or not companies are compliant with the Employer Mandate. Based on the information included on those forms (combined with info about PTC claims on your employees' individual tax returns), they can assess penalties and look into your business operations to determine if you are compliant with other ACA requirements.

How should an employer respond to Letter 226-J?

An employer who receives Letter 226-J should respond with Forms 14764 and 14765. These forms allow you to indicate whether you disagree or agree with the IRS’s assessment. If you disagree, it gives you space to provide information on why you disagree and which calculations are incorrect.

Can I appeal the ESRP after assessment?

No, once the penalty is assessed, you cannot appeal it. However, you can pay it and ask for a refund, or you can request a reconsideration if you have information that wasn't considered during the initial proposal and appeal process. If the IRS denies either of these requests, you can take the issue to U.S. District Court.