August 2025
Stephanie Hall, Associate Director, Benefits Compliance
On July 22, 2025, the Internal Revenue Service (“IRS”) announced the updated penalty amounts for 2026 related to the employer shared responsibility (“pay-or-play”) rules under the Affordable Care Act (“ACA”). For calendar year 2026, the adjusted $2,000 penalty amount is $3,340, and the adjusted $3,000 penalty amount is $5,010. This is an increase from the penalty amounts for the 2025 calendar year, which are $2,900 and $4,350, respectively.
Employer Action Items
- Applicable large employers (“ALEs”) should confirm that minimum essential coverage (“MEC”) is being offered to 95% or more of the ALE’s full-time employees (those averaging thirty (30) or more hours of service each week).
- Determine if such offered coverage also meets minimum value (“MV”).
- Run reports and review pay information to determine if the offered coverage is “affordable” under at least one of the allowed safe harbors (i.e. federal poverty line, W-2, or rate of pay).
- Take steps to rectify any failures and reserve funds for any potential penalties that may result from any such failures.
Summary
Under the pay-or-play rules, an ALE is only liable for a penalty if at least one full-time employee receives a subsidy for coverage from the health insurance marketplace (“Exchange”). Employees who are offered affordable, MV coverage are generally not eligible for these Exchange subsidies.
Depending on the circumstances, one of two penalties may apply under the pay-or-play rules:
- Under Internal Revenue Code (“IRC”) Section 4980H(a), an ALE will be subject to a penalty if it does not offer coverage to “substantially all” (generally, at least 95%) of its full-time employees (and their dependents) and any one of its full-time employees receives a subsidy toward their Exchange plan. The monthly penalty assessed on ALEs that fail to offer coverage to substantially all full-time employees and their dependents is equal to the ALE’s number of full-time employees (minus 30) multiplied by 1/12 of $3,340 for any applicable month (in 2026).
- Under IRC Section 4980H(b), ALEs that offer coverage to substantially all full-time employees (and their qualifying dependents) may still be subject to a penalty if at least one full-time employee obtains a subsidy through an Exchange because the ALE did not offer coverage to the full-time employee, or the ALE’s coverage is unaffordable or does not provide minimum value. The monthly penalty assessed upon an ALE for each full-time employee who receives a subsidy is 1/12 of $5,010 for any applicable month (in 2026). However, the total penalty for an ALE is limited to the Section 4980H(a) penalty amount.
Additional Information and Resources
- IRS’s Webpage Employer Shared Responsibility Provisions
- IRS’s Webpage Types of Employer Payments and How They are Calculated
For more information
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