ACA Penalty 2025: Amounts, Examples, and the 2026 Jump

TL;DR

The ACA employer penalty for 2025 is $2,900 per employee (4980H(a)) or $4,350 per employee (4980H(b)), marking the first decrease since enforcement began in 2015. These penalties apply only to Applicable Large Employers with 50 or more full-time employees who fail to offer affordable, minimum value health coverage. The individual mandate penalty was eliminated in 2019, but employer mandate penalties remain fully enforced, and the IRS is sending Letter 226J notices at an increasing pace.

The ACA penalty refers to the financial assessment the IRS imposes on large employers that don’t offer qualifying health coverage to their workforce. For the 2025 tax year, the two penalty amounts are $2,900 (the “A penalty”) and $4,350 (the “B penalty”) per applicable employee. These numbers matter because they represent the first time penalties have decreased since the Affordable Care Act’s employer mandate took effect in 2015. But don’t get comfortable: the IRS has already announced a 15.2% increase for 2026.

This guide breaks down exactly who owes what, how the penalties are calculated, and the practical steps employers can take to stay compliant.

What Is the ACA Employer Penalty?

The ACA employer penalty exists under Internal Revenue Code Section 4980H. Its formal name is the Employer Shared Responsibility Payment (ESRP), though most people in HR and benefits circles just call it the “employer mandate penalty” or “ACA penalty.”

The rule is straightforward in principle: if you’re an Applicable Large Employer (ALE), you must offer affordable, minimum value health coverage to at least 95% of your full-time employees and their dependents. If you don’t, and at least one employee receives a premium tax credit (PTC) on the Health Insurance Marketplace, you’ll owe a penalty to the IRS.

Who qualifies as an ALE? Any employer that averaged 50 or more full-time employees (including full-time equivalents) during the prior calendar year. Full-time means 30 hours per week or 130 hours per month under ACA rules.

A common and costly misconception: Many business owners believe that ACA penalties were repealed entirely under the Tax Cuts and Jobs Act. That’s only half true. The individual mandate penalty was zeroed out starting in 2019. The employer mandate penalties remain fully in effect and are actively enforced. The IRS is not treating this as optional.

If your company is approaching the 50-employee mark, understanding how controlled group rules affect ALE testing is critical, since related entities can be aggregated together for counting purposes.

2025 ACA Penalty Amounts

4980H(a): The “A Penalty” (No Offer of Coverage)

The 4980H(a) penalty, sometimes called the “sledgehammer” penalty, applies when an ALE fails to offer minimum essential coverage (MEC) to at least 95% of its full-time employees and their dependents in any given month, and at least one full-time employee receives a PTC.

2025 amount: $241.67 per month, or $2,900 annualized, per applicable employee.

The formula: (Total full-time employees minus 30) × $2,900

Worked example: A company has 100 full-time employees and offers no health coverage. One employee gets a premium tax credit on the Marketplace.

• 100 − 30 = 70
• 70 × $2,900 = $203,000 annual penalty

That’s the cost of not offering any coverage at all. The 30-employee reduction is a statutory cushion, but it doesn’t help much once your headcount grows.

4980H(b): The “B Penalty” (Inadequate Coverage)

The 4980H(b) penalty, known as the “tack hammer” penalty, hits when an employer does offer coverage, but that coverage is either unaffordable, doesn’t meet minimum value, or both.

2025 amount: $362.50 per month, or $4,350 annualized, per employee who actually receives a PTC.

Unlike the A penalty, the B penalty is assessed on a per-violation basis. You only pay for the specific employees who went to the Marketplace and received subsidized coverage.

Worked example: A company with 100 full-time employees offers health coverage, but the employee contribution exceeds the affordability threshold. Ten employees enroll through the Marketplace and receive PTCs.

• 10 × $4,350 = $43,500 annual penalty

However, the B penalty for any employer is capped at what the A penalty would have been. In this example, the cap would be $203,000 (70 × $2,900), so the $43,500 stands.

Key Rule: No Double Penalty

Employers cannot be penalized under both 4980H(a) and 4980H(b) for the same tax year. If an organization triggers both, the IRS assesses whichever penalty produces the higher amount. This prevents stacking, but either penalty alone can be significant.

2025 Affordability Threshold and Safe Harbors

For the 2025 tax year, employer-sponsored coverage is considered “affordable” if the employee’s required contribution for self-only coverage doesn’t exceed 9.02% of their household income. That’s an increase from 8.39% in 2024, which actually gives employers slightly more room.

Since employers rarely know an employee’s total household income, the IRS provides three safe harbor methods:

Federal Poverty Line (FPL) Safe Harbor: This is the simplest and most commonly used method. For calendar-year plans starting January 1, 2025, the maximum employee contribution is $113.20 per month for employee-only coverage (lower 48 states and DC). For plan years beginning February 1, 2025 or later, the threshold adjusts to $117.63 per month ($146.95 for Alaska, $135.22 for Hawaii).

Rate of Pay Safe Harbor: Based on the employee’s hourly rate multiplied by 130 hours, then multiplied by 9.02%.

W-2 Safe Harbor: Based on Box 1 W-2 wages for the calendar year.

Minimum Value: The plan must cover at least 60% of the total allowed costs of benefits to meet the minimum value standard.

For employers evaluating whether their current benefits structure meets these thresholds, exploring alternatives to group health insurance can reveal options that satisfy affordability requirements while controlling costs.

ACA Penalty History: 2023 to 2026

This table shows how ACA employer penalties and affordability thresholds have changed over the past four years.

Two things stand out. First, 2025 marks the first time ACA employer penalties have decreased since enforcement began in 2015. Every prior year saw incremental increases. Second, that dip is temporary. The IRS has announced that 2026 penalties jump by 15.2%, the largest single-year increase in nearly a decade. The 4980H(a) penalty rises to $3,340 and the 4980H(b) penalty to $5,010.

The 2026 affordability threshold increasing to 9.96% does offer some relief, allowing employers to charge slightly higher employee contributions while still meeting the standard. For a detailed look at what this means for benefits planning, see the 2026 ICHRA affordability guide.

How the IRS Enforces ACA Penalties (Letter 226J)

Letter 226J is the IRS’s initial notification that an ALE may owe an Employer Shared Responsibility Payment. It’s not a bill, it’s a proposed assessment, but it demands a timely and thorough response.

The scale of enforcement is significant. For the 2015 plan year alone, the IRS sent approximately 30,000 Letter 226J notices seeking roughly $4.4 billion in ESRP payments. According to compliance vendors, the IRS has been sending these notices en masse since 2021, and the pace hasn’t slowed.

Important changes signed into law in late 2024:

• The response window for Letter 226J has been extended from 30 days to at least 90 days, giving employers more time to gather documentation and respond properly.
• A new six-year statute of limitations now applies to 4980H penalty assessments. Previously, the IRS took the position that no statute of limitations existed, meaning they could assess penalties for any prior year indefinitely.

Practitioners on Reddit and compliance forums frequently note that many Letter 226J assessments stem from data reporting errors rather than actual non-compliance. Incorrect codes on Form 1095-C, wrong full-time employee classifications, or missing information can all trigger a notice. In many cases, penalties can be reduced or eliminated entirely through a comprehensive response with proper documentation.

The takeaway: if you receive Letter 226J, don’t panic, but don’t ignore it either. Respond within the new 90-day window with corrected data and supporting records. Having an ICHRA audit-readiness checklist in place before any notice arrives makes this process far less stressful.

ACA Reporting Penalties (Separate from ESRP)

Beyond the coverage penalties themselves, employers face separate penalties for failing to file or furnish Forms 1094-C and 1095-C properly. For 2025 filings, the penalty for late or incorrect returns is $330 per return or statement. Intentional disregard carries a penalty of $660 per return (or 10% of the total required to be reported, whichever is greater). These add up quickly for large employers with hundreds of employees.

Who Is Exempt from the ACA Penalty?

Small employers with fewer than 50 full-time equivalent employees are completely exempt from ACA employer penalties. They are not required to offer coverage, and if they choose to do so, they are not required to make an affordable offer.

That said, three situations catch employers off guard:

Controlled group aggregation. Related companies under common ownership can be treated as a single employer for ALE testing purposes. A business owner with three separate entities of 20 employees each could be classified as an ALE.

Part-time hour aggregation. A recurring theme in small-business discussions online is that employers near the 50-FTE threshold often don’t realize part-time hours count. A company with 35 full-time employees and a significant number of part-time workers could exceed the 50-FTE threshold once part-time hours are converted to full-time equivalents.

Seasonal worker rules. Seasonal employees who work more than 120 days can affect ALE calculations, though there is a limited exception for employers that only exceed 50 FTEs for 120 days or fewer and the excess is attributable to seasonal workers.

Even if your business is under 50 employees and exempt from penalties, you can still offer tax-advantaged health benefits. Many small employers use ICHRA solutions designed for businesses under 50 employees to attract and retain talent without the complexity of group insurance.

How to Avoid ACA Penalties in 2025

Avoiding ACA penalties comes down to meeting three requirements and documenting everything:

1. Offer minimum essential coverage to at least 95% of full-time employees (and their dependents).

This is the threshold for dodging the 4980H(a) penalty entirely. “Dependents” means children up to age 26, not spouses (though offering spousal coverage is common).

2. Ensure coverage is affordable.

Use one of the three safe harbors (FPL, Rate of Pay, or W-2) to confirm that the employee’s cost for self-only coverage stays within the 9.02% threshold for 2025.

3. Meet minimum value.

The plan must cover at least 60% of the total allowed costs of benefits.

4. File Forms 1094-C and 1095-C accurately and on time.

Reporting errors are one of the most common triggers for Letter 226J. Get the offer codes right.

ICHRA as a Compliant Alternative to Group Insurance

A traditional group health plan isn’t the only way to satisfy the employer mandate. An Individual Coverage HRA (ICHRA) is a compliant alternative that allows employers of all sizes, including ALEs, to reimburse employees for individual health insurance premiums and qualifying medical expenses.

Here’s how ICHRA satisfies ACA requirements:

• MEC requirement: As long as the employer offers the ICHRA to at least 95% of full-time employees, and employees must enroll in individual coverage meeting MEC standards to participate, the MEC portion of the mandate is met.
• Affordability calculation: ICHRA affordability uses the same percentage threshold (9.02% for 2025) but is calculated differently. Take the cost of the lowest-cost Silver plan available to the employee on the Marketplace, subtract the monthly ICHRA allowance, and the remainder must not exceed 9.02% of the employee’s household income.
• No contribution cap: Unlike some other HRA types, ICHRA has no maximum reimbursement limit, giving employers flexibility to set allowances that comfortably meet affordability standards.

Large employers that use ICHRA need to monitor Silver plan pricing in their area each year and adjust reimbursement amounts accordingly to maintain affordability. The complete guide to ICHRA adoption walks through this process step by step.

For employers considering the switch from group coverage, it’s also worth understanding COBRA obligations when replacing group coverage with ICHRA to ensure a clean transition.

If you want to explore whether ICHRA makes sense for your ACA compliance strategy, schedule a free consultation to discuss your specific situation.

Preparing for the 2026 ACA Penalty Increase

The 2025 dip in ACA penalty amounts is not a trend. It’s an anomaly. With penalties jumping 15.2% in 2026 (to $3,340 for the A penalty and $5,010 for the B penalty), employers should be planning now rather than reacting later.

The affordability threshold rising to 9.96% in 2026 provides some breathing room on employee contributions, but the penalty amounts themselves represent the steepest increase since the employer mandate’s early years.

For growing companies approaching or just crossing the 50-FTE threshold, getting a compliant benefits structure in place before 2026 arrives is the smart move. Schedule a demo to see how SimplyHRA’s ICHRA platform helps employers meet ACA requirements with predictable costs and less administrative burden.

Frequently Asked Questions

What is the ACA penalty for 2025?

The ACA employer penalty for 2025 has two components. The 4980H(a) penalty is $2,900 per year ($241.67/month) per applicable full-time employee. The 4980H(b) penalty is $4,350 per year ($362.50/month) per full-time employee who receives a premium tax credit. These amounts represent the first decrease since ACA enforcement began in 2015.

Who has to pay ACA penalties?

Only Applicable Large Employers (ALEs) face ACA penalties. An ALE is any employer that averaged 50 or more full-time employees, including full-time equivalents, during the prior calendar year. Small employers with fewer than 50 FTEs are completely exempt.

How is the ACA penalty calculated?

The 4980H(a) penalty is calculated by taking the total number of full-time employees, subtracting 30, and multiplying by $2,900. For example, a 100-employee company would owe (100 − 30) × $2,900 = $203,000. The 4980H(b) penalty is $4,350 multiplied by the number of employees who actually received a premium tax credit, capped at the amount the A penalty would have been.

Can an ICHRA help me avoid ACA penalties?

Yes. An Individual Coverage HRA (ICHRA) satisfies the ACA employer mandate when offered to at least 95% of full-time employees. Employees must enroll in individual coverage meeting minimum essential coverage standards. The employer’s ICHRA allowance must also pass the affordability test based on the lowest-cost Silver plan in the employee’s area.

What happens if I get IRS Letter 226J?

Letter 226J is a proposed assessment, not a final bill. You now have at least 90 days to respond (extended from 30 days under a law signed in late 2024). Many assessments result from reporting errors on Form 1095-C rather than actual non-compliance. Respond with corrected data and documentation. Don’t ignore it.

Do small businesses under 50 employees pay ACA penalties?

No. Employers with fewer than 50 full-time equivalent employees are not subject to ACA employer mandate penalties. However, companies near the threshold should carefully calculate FTEs, since aggregating part-time hours can push them over the 50-employee line unexpectedly.

Did the individual mandate penalty come back for 2025?

The federal individual mandate penalty remains at $0 for 2025. It was effectively eliminated starting in 2019. Some states (California, Massachusetts, New Jersey, Rhode Island, and DC) have their own individual mandate penalties, but the federal employer mandate penalty is a separate provision that remains fully active.

How much will ACA penalties increase in 2026?

ACA penalties are increasing by 15.2% in 2026, the largest jump in nearly a decade. The 4980H(a) penalty rises to $3,340 per employee and the 4980H(b) penalty to $5,010 per employee. The affordability threshold increases to 9.96% of household income.

This article is for informational purposes only and does not constitute legal, tax, or compliance advice. Consult a qualified attorney or tax advisor for guidance specific to your situation. Penalty amounts are based on IRS Revenue Procedures and may be subject to further adjustment.