By now, employers in the United States are well aware of the Affordable Care Act (ACA), yet they still miss the fine print and end up with an ACA penalty from the IRS.
The worst part is that the IRS will flag the penalty in the tax year, but the actual letter may not reach you for another year or even two. That means you very well could have tripped up an IRS penalty right now and not know it.
Below, we'll cover the most common ACA penalties to be aware of, what causes them, and how to avoid them.
What is the ACA Employer Mandate
The ACA, also known as the Patient Protection and Affordable Care Act, is a federal healthcare law enacted by the U.S. Congress and signed into law by then-President Barack Obama in 2010.
The law aims to make medical care more affordable and available to Americans. Employers play a critical part and have new compliance requirements they must meet.
The ACA employer mandate applies to all Applicable Large Employers (ALEs) — these are companies with 50 or more full-time equivalent employees. "Full-time equivalent" is the keyword there. The count combines actual full-time employees with a converted figure for part-time hours, calculated by adding up all part-time employee hours in a month and dividing by 120.
If you fall under that category, then here is what the ACA requires:
Minimum essential coverage: You must offer minimum essential coverage to at least 95% of full-time employees and their dependents.
Minimum value standard: The health plans you offer must cover at least 60% of expected costs.
Minimum affordability standard: The employee's share of the premium cannot exceed 9.96% of their household income (as of 2026, this figure is up from 9.02% set in 2025 and changes every year due to an inflation like number).
There's an important caveat with the "affordability standard": you won't necessarily know the household income of your employees. To work around that, you can follow the IRS safe harbor rule to calculate affordability. The IRS safe harbors include:
Your employee's W2 wages
Your employee's rate of pay (hourly rate multiplied by 130 working hours per month)
The federal poverty level guidelines
You can use the above safe harbors to prove ACA affordability when submitting annual returns. We'll cover how to use these in more detail later on.
ACA Deadlines You Need to Note
ALEs are responsible for filing ACA Form 1095-C to report the employees' health insurance coverage information to the IRS.
We'll cover the penalties below for filing these late; for now, note these deadlines:
March 2 Recipient copy deadline: You must notify and provide form copies to full-time employees (note the definition of who qualifies as full-time under the ACA).
March 2 Paper filing deadline: If you choose to file your ACA forms by paper, file them by this date.
March 31 Electronic filing deadline: If you choose to file ACA forms electronically, you must file them by this date.
Note that if you file 10 or more forms (such as the Form 1095-C), electronic filing with the IRS is mandatory.
In 2017, Congress eliminated the ACA's individual mandate penalty. However, certain states and the District of Columbia impose an individual mandate at the state level. Those deadlines are in the table below:
| State | ACA Form to File | Deadlines (2026) |
|---|---|---|
| California | IRS 1095-C Form | Form Distribution to Employees: January 31 State Filing: March 31 |
| District of Columbia | IRS 1095-C Form | Form Distribution to Employees: March 2 State Filing: April 30 |
| Massachusetts | MA 1099-HC Form | Form Distribution to Employees: February 2 State Filing: February 2 |
| New Jersey | IRS 1095-C Form | Form Distribution to Employees: March 2 State Filing: March 31 |
| Rhode Island | IRS 1095-C Form | Form Distribution to Employees: March 2 State Filing: March 31 |
| Vermont | Despite having an individual mandate, Vermont does not currently have a reporting requirement. | Not Applicable |
What are the ACA Employer Mandate Penalties?
There are three employer mandate penalties for ALEs that fail to offer ACA-compliant health coverage:
A 4980H(a) penalty
A 4980H(b) penalty
Return penalties
4980H(a) ACA Penalty
The 4980H(a) penalty applies when an ALE doesn't offer minimum essential coverage to at least 95% of its full-time employees, and at least one of those employees receives subsidized coverage through a health insurance exchange.
This penalty applies across the entire full-time workforce, minus the first 30 employees. It's the harsher of the two penalties because it scales with your whole employee count, not just the employees affected.
As of 2026, the penalties are:
Annual: $3,340
Monthly: $278.33
Employers must pay the monthly fee for each full-time employee, except for the first 30 employees. Suppose you have a company with 200 full-time employees; then the penalty would be $47,316.10 each month and $567,800 for the year.
4980H(b) ACA Penalty
The 4980H(b) penalty applies when an employer does offer coverage, but that coverage fails the affordability or minimum value test for one or more employees.
If your employees' required premium contributions for self-coverage exceed the 9.96% threshold, their dependents may qualify for premium tax credits and purchase individual health insurance. If that happens, you'll pay a penalty for every employee who receives a premium tax credit.
The Part B penalty applies per affected employee: you owe the monthly amount for each full-time employee who received a premium tax credit, not for your whole workforce. It's capped, though; the 4980H(b) penalty can never exceed what you'd have owed under 4980H(a) had you offered no coverage at all.
As of 2026, the penalties are:
Annual: $5,010
Monthly: 417.50
Employers must pay the monthly fee for each full-time employee with premium tax credits. Suppose you have a company with 200 full-time employees, 10 of them receive premium tax credits; then the penalty would be $4,175 each month and $50,100 for the year.
ACA 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 form. 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.
Those penalties run roughly $60 to $680 per form, depending on how late the correction is and the size of the business. For a company with several hundred employees, that adds up quickly if a batch of forms goes out with errors:
| For Tax Year 2026 | ||||
|---|---|---|---|---|
| Organization size | 30 or fewer days late | 31 or more days late, up to August 1 | After August 1 | Intentional nonfiling of required forms |
| < $5M in annual gross receipts | $60 per late return up to $239,000 | $130 per late return up to $683,000 | $330 per late return up to $1,366,000 | $680 per return (no maximum limitation) |
| >= $5M in annual gross receipts | $60 per late return up to $683,000 | $130 per late return up to $2,049,000 | $330 per late return up to $4,098,500 | $680 per return (no maximum limitation) |
Many employers are surprised to learn that a single error on a single Form 1095-C can trigger two penalties under two different sections of the Code. IRC section 6721 imposes a penalty for failure to file a correct information return with the IRS. IRC section 6722 imposes a separate penalty for failure to furnish a correct payee statement to the affected employee. The Forms 1094-C and 1095-C are subject to both. Consequently, an employer that fails to file with the IRS and fails to furnish a copy to the employee has not committed one violation; it has committed two. The IRS has taken the position that any employer who fails to file the Forms 1094-C and 1095-C with the IRS has also failed to furnish the Forms 1095-C to the requisite employees. Therefore, one failure automatically becomes two failures.
How Employers Are Notified About Penalties
The IRS cross-references the 1095-C filings employers submit against subsidy data from the health insurance exchanges. When something doesn't line up, the IRS sends a notice called Letter 226-J.
What makes these penalties so dangerous is that the IRS may not send a notice for a year or two, meaning you could have been exposed to the ESRP penalties and not know it for years.
If your company receives a 226-J letter, respond by the deadline stated in the letter (within 90 days). Don't ignore it and don't assume it will resolve itself. If the assessment looks wrong, you can dispute it, but you'll need documentation showing what coverage was actually offered and to whom.
The letter itself includes a response form, Form 14764, along with an Employee Premium Tax Credit Listing that shows exactly which employees the IRS believes triggered the penalty, month by month. Going through that list against your own coverage records is usually the fastest way to spot whether the assessment is accurate or whether it's based on a filing error on your end, like a coverage code that didn't match what was actually offered that month. Most disputes succeed or fail based on how precisely a company can produce that comparison.
While the thought of a steep IRS penalty is concerning, these penalties are completely avoidable.
How Employers Can Avoid Penalties
As you may have gathered so far, avoiding ACA penalties often comes down to good data management and timely reporting. The good news is both of those are within your control; they just require the following good practices.
Track Full-Time Status Accurately
The ACA defines full-time as averaging 30 or more hours per week, and that threshold applies regardless of how a role is classified internally. An employee your company considers part-time can still count as full-time under ACA rules if their hours cross that line during a measurement period.
Misclassifying employees is one of the most common causes of a 4980H(a) penalty, so it pays to review hours data regularly and not just at open enrollment. The roles to watch out for are ones that dance around the line: seasonal staff extending past their original date or hourly workers picking up extra shifts. These are workers you didn't hire with "full-time" in mind; nevertheless, they cross the 30-hour threshold.
Use an IRS Affordability Safe Harbor
As we shared above, measuring "affordability" is tricky because you'll never know an employee's household income.
To resolve this, the IRS offers three safe harbors instead:
W-2 wages
Rate of pay
The federal poverty line.
Each calculates affordability differently, and choosing the one that fits your workforce best protects you from a 4980H(b) penalty.
A company with a lot of hourly turnover, for example, often gets more consistent results from the rate-of-pay safe harbor than the W-2 method, since it doesn't get thrown off by mid-year hire dates.
The federal poverty line safe harbor is often the simplest. If the employee's premium contribution stays under a fixed dollar threshold published annually, the coverage is automatically deemed affordable regardless of what that employee actually earns. It's the least flexible of the three, but for companies that structure premium contributions the same way across the board, it removes affordability guesswork entirely.
Whichever safe harbor you choose, it has to be applied consistently for all employees in a reasonable category.
File Forms 1094-C/1095-C Accurately and On Time
On time means on time.
We recommend that you build in a review step before forms go out, specifically checking for the errors that trigger the reporting penalties covered earlier: mismatched SSNs, incorrect coverage codes, missing months of coverage.
A second set of eyes on these forms before submission catches far more than a post-filing correction ever will. It also helps reconcile the 1095-C data against payroll and enrollment records before filing, rather than after, since discrepancies between those systems are where most coverage-code errors originate. Platforms with ACA reporting built directly into the enrollment system, like Zevo Benefits, sidestep a lot of this reconciliation work entirely, since the coverage data being filed is the same data used to administer the benefit day to day.
Use Software That Flags Errors Before the IRS Does
As you can imagine, managing all of this manually can be a job in itself. But we're in the 2020s, and modern employers have software at their disposal to do much of the heavy lifting.
A benefits administration platform with built-in data validation will flag mismatches before a filing goes out so you can stay ahead of any IRS penalties.
Zevo Benefits, for example, runs this kind of check through a proprietary feature called Data Patrol, which catches mismatched SSNs, missing dependents, and incorrect coverage codes automatically as data moves through the system. For a company managing benefits across a few hundred to a couple thousand employees, that kind of automated check is the difference between catching an error in minutes and discovering it in a 226-J letter two years later.
Once you cross 100 employees, manual checks break down — fast. Automated data validation quickly becomes a necessity, so read on to see how you can choose the best software platform for the job.
The Best Software to Help With ACA Management
The good news is that you don't need to manage the above by hand. Armed with the right software platform, data management and form filing can be nearly automated.
We've covered how Zevo Benefits can help with data validation by flagging errors and mismatches before filings go out, but Zevo also offers a dedicated ACA platform, Accord, to validate your data and ensure forms are filed correctly and on time.
Accord Systems was founded on a simple but consequential insight: there is a gap between ACA reporting and accurate ACA reporting, and the cost of that gap — measured in ESRP penalties, late filing penalties under IRC sections 6721 and 6722, and the legal fees required to fight them — is enormous.
Accord offers eligibility tracking, giving you a dashboard to review ongoing eligibility and affordability data across your organization. Remember how tricky that affordability piece can be? Accord helps you manage it here.
Form Patrol is the validation piece. We worked with our Tax and ERISA attorney to review exactly what he does when checking a single form for correctness. Then we scaled that analysis across tens of thousands of ACA forms to build an algorithm that can approximate what an attorney will do when validating your forms.
Accord ingests data in any format from the systems you already use (payroll, benefits, Zevo itself), generates compliant forms, flags gaps, and tells you who you should offer coverage to per IRS rules using a measurement period and initial measurement period. Accord also handles those pesky edge cases — rule of parity, break-in-service tracking, school systems on a 26-week rather than 13-week rule of parity — plus state filings.
With 100,000 forms filed in its first year and over 100 different checks, think of it as full-service Affordable Care Act compliance management.
Better ACA Management Starts With the Right Software
ACA penalties can be steep, especially at scale. With the right prep and good time management, you can stay on top of ACA management and avoid the risk of a penalty.
You just need the right software to validate your data and forms before they go out. Which will you choose? With nearly a dozen benefits administration platforms to choose from and plenty of ACA solutions out there, the search can be daunting.
That's why we wrote a guide to choosing the right benefits administration platform.
In this free guide, you will learn:
What features to look for
What to ask potential vendors
How to evaluate your options
Which vendors are best for today's employers
Fill out the form below to get your copy. You still have time until the next open enrollment season begins.
About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC. Ryan received his LL.M. from Georgetown University Law Center and his J.D. from Saint Louis University School of Law. He has distinguished himself as a leader in the Affordable Care Act arena and has written and spoken on a variety of ACA topics as it relates to compliance for companies.
Legal Consent — The information contained on this site is not, nor is it intended to be, legal advice. An attorney should be consulted for advice regarding your situation. Copyright © 2026 by Accord Systems, LLC. All rights reserved. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include this copyright statement.