ebm > ebm > What is the ACA 4980H penalty and how to avoid it

What is the ACA 4980H penalty and how to avoid it

December 8, 2025 ebm

The Affordable Care Act’s employer mandate includes strict requirements for offering health coverage and reporting it accurately. If employers fail to comply, they may be subject to costly penalties under Section 4980H—often referred to as “employer shared responsibility” penalties. These penalties can add up quickly, especially for Applicable Large Employers (ALEs) with complex workforces or multiple entities.

This guide explains what the 4980H penalty is, who it applies to, how penalties are triggered, and what employers can do now to stay compliant. You’ll also find an overview of affordability rules, reporting requirements, and steps to prepare for 2026.

Understanding the ACA employer mandate (Section 4980H)

What the employer shared responsibility provision requires

Under Section 4980H, Applicable Large Employers must:

  • Offer Minimum Essential Coverage (MEC) to at least 95% of their full-time employees and their dependents, and

  • Ensure the coverage offered is affordable and provides minimum value.

Failing to do either can result in penalties.

Determining ALE status

An employer is considered an ALE if it has 50 or more full-time employees, including full-time equivalent employees, on average during the prior calendar year.

To determine this:

  • Count all employees averaging 30+ hours per week (full-time)

  • Convert part-time employee hours into full-time equivalents

  • Apply controlled group rules, which aggregate companies with common ownership or management for ACA purposes

Identifying full-time employees

Employers have two methods to identify full-time employees for ACA eligibility:

  1. Monthly measurement method – Determines full-time status based on actual hours worked each month.

  2. Look-back measurement method – Allows employers to review hours over a fixed period to determine full-time status for a future stability period.

Special rules apply for variable-hour, seasonal, and part-time employees.

Types of 4980H penalties

4980H(a) penalty — failure to offer MEC to 95% of full-time employees

This penalty applies when:

  • The employer does not offer MEC to at least 95% of full-time employees (and dependents), and

  • At least one full-time employee receives a premium tax credit on a Marketplace.

Minimum Essential Coverage (MEC) refers to basic, compliant employer-sponsored coverage (not limited to preventive-only plans).

2026 penalty amounts continue trending upward due to inflation adjustments. The penalty is calculated per full-time employee (minus the first 30).

Example:
If an employer has 100 full-time employees and fails to offer MEC to at least 95% of them, the penalty applies to 70 employees (100 – 30), multiplied by the 2026 indexed amount.

4980H(b) penalty — failure to offer affordable, minimum value coverage

This penalty applies when:

  • The employer offers MEC to at least 95% of full-time employees, but

  • The coverage is either unaffordable or fails to provide minimum value, and

  • A full-time employee receives Marketplace subsidies.

Minimum value means the plan covers at least 60% of total allowed costs.
Affordability is based on the employee’s contribution for self-only coverage in the lowest-cost plan.

This penalty is calculated per employee receiving a subsidy.

How penalties are indexed annually

4980H penalties increase every year. The adjustments are tied to premium growth and statutory indexing formulas—meaning penalties continue to rise even if the employer’s workforce stays the same.

ACA reporting season is approaching. Are you ready for compliance?

With ebm, staying compliant with ACA requirements has never been simpler.

Learn more about how ebm can help

Affordability requirements under 4980H

The ACA affordability percentage

The IRS sets an affordability percentage each year. This percentage determines the maximum amount an employee can be required to contribute for self-only coverage.

The 2026 affordability threshold continues the recent trend of declining percentages, requiring careful contribution planning.

Affordability safe harbors

Employers may use one of three IRS safe harbors to meet affordability requirements:

  • W-2 safe harbor – Uses employee wages from Box 1 of the W-2.

  • Rate of pay safe harbor – Uses an employee’s hourly rate or monthly salary.

  • Federal Poverty Line (FPL) safe harbor – Uses an FPL-based contribution limit.

Each safe harbor has advantages depending on workforce structure, compensation models, and plan options.

Minimum value standards

To meet the minimum value standard, a plan must:

  • Cover at least 60% of total allowed costs (actuarial value), and

  • Include substantial coverage of inpatient and physician services.

Plans failing to meet minimum value expose employers to 4980H(b) penalties.

How employers become liable for 4980H penalties

Triggers for 4980H(a) penalties

Common triggers include:

  • Failing to offer MEC to at least 95% of full-time employees

  • Not offering coverage to dependents (children up to age 26)

Triggers for 4980H(b) penalties

These penalties arise when:

  • Offered coverage is unaffordable

  • The plan does not provide minimum value

  • The employee receives a Marketplace subsidy

Common employer mistakes that lead to penalties

Operational issues often cause unexpected liability, including:

  • Misclassifying variable-hour or seasonal employees

  • Not tracking hours correctly

  • Incorrect 1095-C codes

  • Failing to adjust contributions after annual affordability updates

Reporting requirements that impact penalty exposure

Forms 1094-C and 1095-C

These forms document:

  • Whether the employer offered coverage

  • To whom it was offered

  • Affordability and minimum value indicators

  • Months of coverage

Accuracy is crucial because the IRS relies on this data for penalty assessments.

Reporting penalties

Separate reporting penalties apply for:

  • Late filings

  • Incorrect or incomplete filings

  • Failures that lead to IRS Letter 226J assessments

Reconciling coverage with employee subsidy data

The IRS cross-references employer filings with Marketplace subsidy data. Discrepancies—such as incorrect coding or eligibility errors—can trigger audits or penalty notices.

How to avoid 4980H penalties

Offer MEC to at least 95% of full-time employees

Employers should:

  • Verify eligibility monthly or via look-back periods

  • Maintain accurate full-time determinations

  • Ensure dependents receive MEC offers

Ensure plans meet minimum value

Evaluate plan actuarial value and avoid “skinny plans” that cover limited benefits.

Maintain affordable employee contributions

Strategies include:

  • Adjusting for each year’s affordability percentage

  • Using safe harbors strategically based on workforce structure

Improve tracking and documentation

Best practices include:

  • Keeping records of offers of coverage

  • Tracking hours of service with consistent processes

  • Maintaining audit-ready documentation

Strengthen ACA reporting processes

To reduce errors:

  • Verify coding (2C, 2F, 2G, 2H, etc.)

  • Audit 1095-Cs before submission

  • Coordinate with HR, payroll, and benefits systems to ensure data accuracy

Planning ahead for 2026 compliance

Review plan contribution strategy

Ensure contributions reflect the 2026 affordability threshold. Review your lowest-cost plan and adjust if necessary.

Audit your eligibility classification

Pay close attention to:

  • Variable-hour employees

  • Seasonal workers

  • Controlled-group or multi-entity structures

Leverage technology and expert support

ACA compliance tools and third-party administrators can help employers:

  • Track hours

  • Generate accurate eligibility determinations

  • Streamline ACA reporting processes

  • Reduce the likelihood of IRS penalties

Conclusion

Section 4980H penalties pose significant financial and compliance risks for employers, especially those with large or complex workforces. The good news is that these penalties are avoidable with the right combination of accurate eligibility tracking, compliant coverage offerings, affordability planning, and strong reporting processes.

As employers look ahead to 2026, early preparation is key. Reviewing plan contributions, auditing employee classifications, and solidifying ACA reporting workflows now will help ensure full compliance when the next filing cycle arrives.

The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any subject matter. The reader should not act or refrain from acting on the basis of any content included in this article without seeking tax, legal, or other professional advice. The contents of this article contain general information and may not reflect current legal developments or address the reader’s situation. ebm disclaims all liability for actions the reader takes or fails to take based on any content within this article.

Never miss out – get the latest content delivered straight to your inbox.


    Related articles

    Get in touch

    Give us a ring, send an email, or fill out the form below. We endeavor to answer all inquiries within 24 hours on business days.
    855-400-0792








      Disclaimer SMS: By providing my phone number to ebm Insurance Solutions, LLC, I agree and acknowledge that ebm Insurance Solutions, LLC may send text messages to my wireless phone number for any purpose. Message and data rates may apply. Message frequency will vary, and you will be able to Opt-out by replying “STOP” at any time. For more information on how your data will be handled, please see our Privacy Policy.