ACA Penalties for Employers, 2026 and 2027 Exposure

For 2026 an employer that fails to offer coverage to at least 95 percent of full-time employees owes $3,340 for every full-time employee beyond the first 30, not just the subsidized ones. An employer that clears 95 percent but offers unaffordable coverage owes $5,010 per affected employee. The difference at 150 employees is roughly $400,800 against $40,080.

Most explanations of the employer mandate stop at the two penalty amounts. That is the least useful part. The amounts are published and easy to look up. What decides whether a benefits budget survives the year is which of the two penalties applies to you, and that turns on a single percentage that behaves like a trapdoor rather than a dial.

Two other things have changed since the guidance most employers are working from was written, and both matter more than the indexed figures. The response window on a proposed assessment is now at least 90 days by statute rather than 30. And there is now a six-year period during which the IRS can assess, where previously the government's position was that no limitations period ran at all.

How ACA employer penalties are triggered

ACA penalties for employers in 2026 are either $3,340 per full-time employee, excluding the first 30, if an applicable large employer fails to offer coverage to at least 95% of full-time employees, or $5,010 per affected employee if coverage is offered to enough employees but is unaffordable or otherwise fails ACA standards. These rules matter most to HR and finance leaders at growing companies with roughly 20 to 250 employees, where a small miss on benefits compliance can turn into a large, fast-accumulating cost.

An employer is called an applicable large employer based on its workforce size in the previous calendar year. To be an ALE, certain employers must average at least 50 full-time employees or full-time equivalents; a full-time employee works at least 30 hours per week, and all types of employers, including tax-exempt organizations, can qualify. For FTE calculations, use hours from the preceding calendar year, divide total part-time hours by 120, and calculate annually rather than over any rolling 12-month period. If multiple employers are aggregated, ALE status can be determined at the group level, but each individual ALE member remains responsible for its own employer shared responsibility obligations. If you are close to that line, the point where your own employer becomes an ALE is the first question to settle, because nothing below applies until you cross it.

There are two penalties and they are mutually exclusive, so only one can apply in a given month. The first, under 4980H(a), is often called the no-offer or sledgehammer penalty. According to the IRS employer shared responsibility provisions, it applies when an employer does not offer minimum essential coverage to at least 95 percent of its full-time employees and their dependents, and at least one full-time employee receives a premium tax credit for coverage bought on an exchange.

The second, under 4980H(b), applies when the employer does clear the 95 percent threshold but a full-time employee still receives a premium tax credit because the coverage offered to that employee was unaffordable, did not provide minimum value, or was not offered to them individually. Below, we break down what triggers each penalty, the 2026 and 2027 amounts, how penalties accrue, how to respond to IRS penalty letters, recent rule changes, and practical steps to reduce exposure.

Both require an employee to actually receive a premium tax credit. An employer that offers nothing at all but has no employee claiming a credit owes nothing under either provision. This is not a defence to rely on, because you do not control who applies for a credit and you will not know until the IRS tells you.

The critical asymmetry is in the base. Under 4980H(a) the penalty is calculated on every full-time employee you have, minus the first 30, whether or not they were subsidized. Under 4980H(b) it is calculated only on the employees who actually received a credit. One misses by a percentage point and pays on the whole workforce. The other pays on a handful of people.

What the penalty amounts are for 2026 and 2027

Both amounts are indexed annually and set by revenue procedure. They are annual per-employee figures, but the penalty is assessed monthly, so the monthly amount is one twelfth.

The 2026 figures come from Rev. Proc. 2025-26 in Internal Revenue Bulletin 2025-33, and for 2026 the B penalty amount is $5,010 for each affected full-time employee; the 2027 figures come from Rev. Proc. 2026-22. Nothing beyond 2027 has been published, and the indexing procedure has appeared anywhere between February and August of the preceding year, so there is no reliable date to plan an announcement around.

One point worth noticing in that table, because it breaks the pattern people assume: the 2025 amounts were lower than the 2024 amounts of $2,970 and $4,460, set by Rev. Proc. 2023-17. Indexing does not only move up. Planning on last year's number being a floor is a mistake in both directions.

A caution on sources. The Internal Revenue Service question and answer page on these provisions carries the canonical explanation of the rules, but its own table of applicable dollar amounts still stops at 2023, when the 4980H(a) amount was $2,880 per full-time employee and the 4980H(b) amount was $4,320 per employee receiving tax credits for that tax year, and the main provisions page is current only to 2024. The rules there are reliable. The figures are not. Take amounts from the revenue procedure for the year in question.

Why the 95 percent offer threshold is a cliff

Here is the arithmetic that no amount of reading the rules will give you. Take one employer with 150 full-time employees, in 2026, where 8 employees end up receiving a premium tax credit.

If an employer offers coverage, applicable large employers must offer health insurance and health insurance coverage to at least 95% of full-time employees to avoid penalties under 4980H(a). Offer coverage to 143 of them and you are at 95.3 percent. You have cleared the threshold, 4980H(b) applies, and it applies only to the affected employees. Eight employees at $5,010 is $40,080.

Offer coverage to 142 of them and you are at 94.7 percent. You have failed the threshold, 4980H(a) applies, and it applies to 120 employees, being all 150 less the statutory 30. That is $400,800.

One employee's worth of difference in the offer count multiplies the bill by ten. The same shape holds at other sizes:

Each row assumes roughly five percent of the workforce ends up subsidized. The ratio widens as you grow, because the 30-employee reduction stops mattering. At 60 employees it absorbs half your headcount. At 1,000 it absorbs three percent.

Two mechanical details that change how the threshold should be managed. The rule is at least 95 percent of full-time employees, or five employees if greater, which is a meaningful allowance for a small applicable large employer and irrelevant above about 100 employees. This is the Affordable Care Act's way to encourage businesses to offer health coverage rather than absorb penalty costs. And the 95 percent test is applied month by month, not as an annual average, so a good year with one bad month is still a bad month.

The 4980H(b) penalty is also capped. It can never exceed what 4980H(a) would have been for the same employer. At 150 employees in 2026 that cap is $400,800, which is reached once more than 80 employees receive a credit. Below that number the cap is theoretical. Above it, the incentive to widen the offer disappears entirely, because you are paying the no-offer amount either way.

How exposure builds month by month

Both penalties accrue monthly, and almost every explanation presents annual figures anyway. That understates a partial-year problem and overstates a full-year one.

Take the same 150-employee company. Suppose a plan change leaves it below the 95 percent threshold from March through July, five months, and compliant for the other seven. The 4980H(a) monthly amount for 2026 is $278.33 per employee, applied to 120 employees, which is $33,400 a month. Five months is $167,000, not $400,800.

The 4980H(b) side works the same way but on a per-employee basis. Eight employees each subsidized for four months, at $417.50 a month, is $13,360. An employee who leaves in April stops accruing in April.

This matters for three practical reasons.

• A mid-year correction is worth real money. Fixing an offer failure in month three rather than month nine saves roughly two thirds of the annual figure, and there is no all-or-nothing threshold that makes a late fix pointless.
• New hires in a limited non-assessment period are not counted against you for those months, so a hiring surge does not create instant exposure.
• Any exposure estimate built on an annual figure is wrong unless the condition genuinely held for all twelve months. Check the months before you budget the number.

Affordability is where most 4980H(b) exposure originates, and penalties apply if an ALE fails to offer affordable coverage that meets affordability requirements, not only when coverage exists but is priced too high. For 2026 the affordability threshold is 9.96 percent, so coverage is affordable if the employee's share for self only coverage does not exceed that percentage of household income, as set by Rev. Proc. 2025-25 in Bulletin 2025-32. Under the W-2 safe harbor, the employee's contribution and employee's required contribution are tested using Box 1 wages; an employee with $48,000 in Box 1 wages can be charged no more than $398.40 a month to offer affordable coverage on the lowest cost minimum value plan. The federal poverty line method is the Federal Poverty Level Safe Harbor, based on annual FPL percentages, and the Rate of Pay Safe Harbor uses 130 hours multiplied by hourly wage. Run that test against your actual contribution schedule and the 4980H(b) question is largely settled. The mechanics of each safe harbour, and which one suits which workforce, are set out in how the affordability safe harbors work for a mid market employer, alongside the 2026 employer contribution rules and the 2027 affordability percentage, which rises to 10.22 percent under Rev. Proc. 2026-26, for next year's planning. Use the same safe harbor consistently for all employees on an annual basis.

What to do when Letter 226-J arrives

Letter 226-J is the initial Internal Revenue Service notice for potential ESRP penalties, telling an applicable large employer that it may owe an employer shared responsibility payment. It is generated by matching your Forms 1094-C and 1095-C against individual returns claiming a premium tax credit.

The single most important thing to know is that a 226-J is a proposal, not a bill, and that in practice a large share of proposed assessments trace back to reporting errors, including cases where employers failed to file accurate ACA information returns, rather than to an employer's plan that genuinely failed to offer coverage. A wrong indicator code in Part II of a 1095-C produces a letter that looks identical to a real liability, so understanding the potential penalties tied to those errors matters just as much as reviewing coverage.

The response sequence, in order:

1. Check the response date on the letter first. Under IRC 4980H(d)(4), added by the Employer Reporting Improvement Act, Public Law 118-168, the IRS must allow an employer at least 90 days from the first letter proposing an assessment before taking further action. Guidance written before that Act refers to 30 days. Work to the date printed on your letter, but know that the statutory floor is now 90 days.
2. Read Form 14765, the employee premium tax credit listing enclosed with the letter. It names each employee the assessment rests on and shows the indicator codes you reported for them, month by month.
3. Reconcile that listing against your own records for each named employee. You are looking for months where you did offer qualifying coverage but reported a code that says otherwise, and for employees who were not actually full-time in the month at issue.
4. Complete Form 14764, the ESRP response, indicating whether you agree or disagree, and return it with a corrected Form 14765 and a written explanation of each change. IRS guidance on Letter 226-J sets out both forms.
5. Read the Letter 227 that comes back. The Letter 227 series has six variants and they mean different things. 227-K closes the case with the payment reduced to zero. 227-J acknowledges an agreed assessment and closes the case. 227-L means the amount changed and encloses a revised listing. 227-M means it did not change. 227-N reflects an Appeals decision. 227-O is the version used for tax-exempt and government entities.
6. If the amount is still wrong after Letter 227, request a pre-assessment conference with Appeals within the window stated in that letter. Do not let the response date pass while assembling a better answer.

The practical lesson is that the defence is documentary. You win a 226-J by producing evidence of what you offered, to whom, in which months, which means the quality of your offer records decides the outcome long before the letter arrives and can help you avoid esrp penalties.

How the 2024 reporting laws changed your penalty risk

Two statutes signed on 23 December 2024 changed the mechanics around these penalties and expanded aca reporting risk under ACA Reporting Requirements, and both are still missing from most published guidance.

The Employer Reporting Improvement Act did four things:

• Added IRC 4980H(d)(4), the 90-day minimum response window described above.
• Added IRC 6501(n), which sets the assessment period to expire six years after the due date for filing the section 6056 return, or the actual filing date if later. Before this, the government's position was that no limitations period ran on these payments at all, because the 1094-C and 1095-C were not treated as a return of the tax. A definite six-year window is a substantial improvement, and it also tells you exactly how long to keep the evidence. Offer-of-coverage records for a filing year should survive six years from that year's filing deadline, not the three years most retention schedules assume.
• Allowed a full name and date of birth to substitute for a taxpayer identification number that cannot be collected, under IRC 6055(b)(1).
• Made an employee's affirmative consent to electronic delivery permanent until revoked in writing.

ALEs also have information reporting responsibilities to the IRS and must file Forms 1094-C and 1095-C accurately to avoid penalties.

Late or incorrect filings can trigger penalties under the internal revenue code sections 6721 and 6722, with late-form penalties ranging from $60 to $680 and annual totals reaching $1,366,000.

The Paperwork Burden Reduction Act removed the automatic obligation to furnish Forms 1095-B and 1095-C to every individual. An employer that gives clear, conspicuous and accessible notice may furnish the statement only on request, and on request must provide it by the later of 31 January following the calendar year or 30 days after the request. This applies to returns for calendar years after 2023.

Neither statute reduces the penalties. What they change is the shape of the risk. Filing with the IRS is unchanged, so the matching process that generates a 226-J is unchanged. The relief is in distribution, not in reporting. That matters because employers can still face shared responsibility payments as well as separate exposure for late or inaccurate filings. And the six-year assessment period means the years you are exposed on are the six most recent filings, which is a longer tail than most employers have provisioned for.

If you want a quick read on where your current offer and contribution structure sits against these tests, the ACA compliance checker walks the 95 percent and affordability questions in the order the IRS applies them.

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