Many small businesses assume ACA penalties no longer apply, but that’s a costly misconception. While the individual mandate penalty was repealed in 2019, employer shared responsibility rules remain in force — and the penalties are set to rise in 2026. As your company grows, ACA compliance can quickly become a critical issue.
Understanding the Play-or-Pay Threshold
The ACA’s employer shared responsibility rules apply to Applicable Large Employers (ALEs). Generally, this means businesses with 50 or more full-time employees, including full-time equivalents (FTEs). The threshold is based on the prior year’s workforce size, and many owners don’t realize they’re approaching ALE status until it’s too late.
For ACA purposes, a full-time employee is anyone working at least 30 hours per week or 130 hours per month. Part-time hours are aggregated to calculate FTEs, which can push a company over the 50-employee threshold faster than expected.
Two Types of Employer Penalties
ALEs may face penalties if they fail to offer minimum essential coverage to full-time employees and their dependents, or if the coverage offered is unaffordable or doesn’t meet minimum value standards.
- Section 4980H(a): Applies if coverage isn’t offered to at least 95% of full-time employees and dependents.
- Section 4980H(b): Applies when coverage is offered but employees still qualify for premium tax credits due to affordability or value issues.
Updated Penalty Amounts for 2026
The IRS has announced increased penalty amounts for 2026:
- $3,340 under Section 4980H(a) (up from $2,900 in 2025).
- $5,010 under Section 4980H(b) (up from $4,350 in 2025).
Employers are notified of potential penalties via IRS Letter 226-J, which includes Form 14764 (“ESRP Response”). Businesses must respond within 30 days, making timely review essential.
Key Considerations for Growing Businesses
As your workforce expands, ask yourself:
- Are you nearing the 50 full-time employee threshold?
- Are you correctly classifying employees under ACA rules?
- Is your health coverage structured to meet affordability and minimum value standards?
- Are your payroll and HR systems prepared for ACA reporting (Forms 1094-C and 1095-C)?
Final Thoughts
ACA compliance remains a critical responsibility for businesses crossing into ALE status. By planning ahead and understanding the updated penalty structure, you can avoid unexpected costs and ensure your growth strategy doesn’t come with compliance risks.