Many small business owners assume they don’t need to worry about Affordable Care Act (ACA) penalties. However, as your company grows, these rules can apply sooner than expected.
A common misconception is that ACA penalties were eliminated entirely under the Tax Cuts and Jobs Act. While penalties for individuals were removed starting in 2019, employer-related requirements remain fully in force.
Ignoring ACA compliance can lead to costly consequences—especially as penalties increase in 2026.
Understanding the “Play-or-Pay” Threshold
What Is an Applicable Large Employer (ALE)?
The ACA’s employer shared responsibility provisions apply to Applicable Large Employers (ALEs). Generally, a business qualifies as an ALE if it has at least 50 full-time employees, including full-time equivalent employees (FTEs).
Importantly, your ALE status is based on your workforce size in the previous year, which means businesses can unknowingly cross the threshold.
How Full-Time Employees Are Defined
For ACA purposes, a full-time employee is someone who works at least 30 hours per week or 130 hours per month on average.
This definition often surprises employers, as workers considered “part-time” under standard business practices may still qualify as full-time under ACA rules.
How Full-Time Equivalents Are Calculated
FTEs are calculated by combining the total hours worked by non-full-time employees (capped at 120 hours per employee per month) and dividing by 120.
This calculation can quickly push a growing business into ALE status. For example, a company with 35 full-time employees and multiple part-time workers may exceed the 50-employee threshold once those hours are aggregated.
Types of ACA Employer Penalties
An ALE may face penalties under the ACA if it fails to meet health coverage requirements for its employees and their dependents.
Failure to Offer Coverage
Under Section 4980H(a), a penalty may apply if an employer does not offer minimum essential coverage to at least 95% of full-time employees and their dependents.
This penalty is calculated based on the total number of full-time employees, excluding the first 30.
Inadequate or Unaffordable Coverage
Under Section 4980H(b), penalties may apply if coverage is offered but is either unaffordable or does not provide minimum value.
In this case, penalties are triggered for each full-time employee who receives a premium tax credit through a Health Insurance Marketplace.
Updated ACA Penalties for 2026
Penalty amounts are increasing for the 2026 calendar year, making compliance even more important:
- $3,340 per employee under Section 4980H(a) (up from $2,900 in 2025) for failing to offer coverage
- $5,010 per employee under Section 4980H(b) (up from $4,350 in 2025) for offering inadequate or unaffordable coverage
These increases can significantly impact growing businesses that are not fully compliant.
IRS Penalty Notices
The IRS notifies employers of potential penalties through Letter 226-J. This notice includes Form 14764, which allows businesses to respond and either agree or dispute the proposed penalty.
Employers typically have 30 days to respond, making it critical to monitor communications and act quickly.
Key Considerations for Growing Businesses
As your company expands, proactive planning can help you avoid unexpected penalties. Consider the following:
- How close are you to the 50-employee ALE threshold?
- Are you correctly identifying full-time employees under ACA rules?
- Are you accurately calculating FTEs from part-time staff?
- If you become an ALE, will your health coverage meet affordability and minimum value standards?
- Are your payroll and HR systems ready to handle ACA reporting requirements, including Forms 1094-C and 1095-C?
Addressing these questions early can prevent compliance issues later.
Stay Ahead of ACA Compliance
ACA compliance remains an important responsibility for eligible employers. As small businesses grow into mid-sized organizations, the risk of penalties increases—especially with higher penalty amounts in 2026.
Taking a proactive approach can help you manage health care costs, meet regulatory requirements, and avoid unnecessary financial exposure.