ACA (Affordable Care Act): What It Means for Employers

What it means in practice

For employers, the ACA works in two layers. Some rules apply to group health plans of any size, such as the cap on waiting periods and coverage of children to age 26. Other rules apply only to applicable large employers: the employer shared responsibility provisions (Internal Revenue Code section 4980H, often called the employer mandate or "pay or play") and annual information reporting on offers of coverage. The IRS says "the vast majority of employers will fall below the ALE threshold" and so are not subject to the shared responsibility provisions. Separately, the federal individual penalty for going without coverage no longer applies; HealthCare.gov describes it as a fee for plan years 2018 and earlier. The ACA is one part of the wider set of employee benefits rules an employer deals with.

Who is an applicable large employer. ALE status is set each calendar year from the prior year. The employer adds its full-time employees for each month of the prior year to its full-time equivalent employees for each month and divides by 12; a result of 50 or more makes it an ALE (IRS ALE page). The FTE (full-time equivalent) page walks through the 120-hour formula, rounding and the seasonal worker exception. All types of employers can be ALEs, including tax-exempt organizations and government entities, and companies under common ownership are aggregated to test ALE status, although each member is generally responsible for its own payment (IRS ESRP page).

Who is a full-time employee. For ACA purposes a full-time employee, for a calendar month, averages at least 30 hours of service per week or 130 hours of service in the month. An hour of service includes hours paid for work and paid hours with no duties because of vacation, holiday, illness, layoff, jury duty, military duty or leave of absence. Employers can identify full-time employees month by month (the monthly measurement method) or by looking back over a measurement period and applying the result to a later stability period (the look-back measurement method), but the look-back method cannot be used to decide ALE status (IRS, Identifying full-time employees). This ACA definition is separate from any company policy on full-time hours. An ALE does not have to offer coverage to part-time employees, and a part-time employee's premium tax credit cannot trigger a payment (IRS ALE page).

The two employer shared responsibility payments. An ALE member may offer affordable minimum essential coverage that provides minimum value to its full-time employees and their dependents, or potentially owe a payment. The first payment, under section 4980H(a), applies if the employer does not offer coverage to at least 95 percent of its full-time employees and their dependents and at least one full-time employee receives the premium tax credit for Marketplace coverage; it is based on all full-time employees minus 30. The second, under section 4980H(b), applies to an employer that does make the 95 percent offer, for each full-time employee who receives the premium tax credit because the offer was not affordable, did not provide minimum value, or the employee was not offered coverage. The second payment cannot exceed what the first would have been, and an employer cannot owe both. Both are figured month by month. For this purpose a dependent is an employee's child under age 26, including a child legally adopted or placed for adoption; spouses, stepchildren and foster children are not dependents (IRS ESRP page). For 2026 the annual amounts are $3,340 and $5,010 (Rev. Proc. 2025-26).

How the IRS raises a payment. The IRS says an employer "is not obligated to calculate its liability, and should not make a payment without first being contacted by the IRS." It proposes a payment by Letter 226J, which explains how to agree or disagree before any amount is assessed (IRS ESRP Q&A 56 and 57). The ALE's 1095-C information is what the IRS uses to administer these provisions and the premium tax credit (IRS, Information reporting by ALEs).

Affordability. Coverage is affordable if the employee's required contribution for the lowest-cost self-only coverage that provides minimum value is no more than the adjusted percentage of household income: 9.96% for plan years beginning in 2026 (Rev. Proc. 2025-25). Because employers rarely know household income, the regulations give three safe harbors that use information the employer has: Form W-2 box 1 wages, the employee's rate of pay, or the federal poverty line for a single individual. An employer may use different safe harbors for reasonable categories of employees, applied uniformly within each category (IRS ESRP Q&A 39; 26 CFR 54.4980H-5).

Minimum value. A plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits expected under the plan (IRS, Minimum value and affordability). HealthCare.gov adds that the plan must also include substantial coverage of physician and inpatient hospital services, and points employees to the Employer Coverage Tool to ask an employer about its plan.

Example 1: rate of pay safe harbor (illustration). Assumed numbers: an ALE pays an hourly employee $16.00 on the first day of a 2026 calendar plan year and never lowers the rate. The safe harbor base is 130 hours x $16.00 = $2,080 a month (26 CFR 54.4980H-5(e)(2)(iii)). 9.96% of $2,080 is $207.17, so a monthly employee contribution of $207 for the cheapest self-only minimum value option is affordable under this safe harbor. A $215 contribution would not be, though another safe harbor might still apply.

Example 2: no offer of coverage (illustration). Assumed numbers: an ALE has 80 full-time employees every month of 2026, offers no coverage, and one full-time employee receives a premium tax credit all year. The 4980H(a) payment is (80 - 30) x $3,340 = $167,000 for the year, figured monthly at 50 x $3,340 / 12 = $13,916.67. Every full-time employee counts in the 80, including those covered elsewhere (IRS ESRP page). In an aggregated group, only one 30-employee reduction is allowed and it is split ratably among the members (26 U.S.C. 4980H(c)(2)(D)).

Example 3: an unaffordable offer (illustration). Same employer, but it offers minimum value coverage to all full-time employees and their children, and the price is unaffordable for 4 lower-paid full-time employees who receive premium tax credits all year. The 4980H(b) payment is 4 x $5,010 = $20,040 for 2026 ($1,670 a month), well under the $167,000 cap from Example 2.

Reporting. ALE members report the coverage offered to full-time employees to the IRS on Form 1094-C (the transmittal) and Form 1095-C, and give each full-time employee a statement with the same information, whether or not the employer offers coverage (IRS). Employers that sponsor self-insured coverage, ALE or not, also have coverage provider reporting duties (IRS ESRP page). Every employer that provides applicable employer-sponsored coverage, including tax-exempt and government employers, reports its cost in Form W-2 box 12 with code DD, generally counting both the employer and employee shares; reporting is not required for health FSAs funded only by salary reductions, HSA contributions or stand-alone dental and vision plans (IRS W-2 reporting page). See the flexible spending account and health savings account pages for how those are reported.

Small employers: SHOP and the tax credit. Employers generally with 1 to 50 employees may offer Small Business Health Options Program (SHOP) plans through an insurer or a SHOP-registered agent or broker, generally year-round (HealthCare.gov). Buying SHOP coverage is generally the only way to claim the small business health care tax credit, which is worth up to 50 percent of premiums paid (35 percent for tax-exempt employers) for two consecutive taxable years. To qualify, an employer must have fewer than 25 FTEs, pay at least 50 percent of employee-only premiums, and pay average annual wages under an inflation-adjusted limit: less than $67,000 per FTE for tax year 2025, with the credit shrinking above 10 FTEs or $33,000 in average wages (IRS; Instructions for Form 8941 (2025)). This credit counts FTEs on a 2,080-hour basis, not the 30-hour ACA test.

Notice of coverage options. Section 18B of the Fair Labor Standards Act requires employers covered by the FLSA to give each employee written notice at the time of hiring about the Health Insurance Marketplace, how to contact it, possible premium tax credit eligibility, and that buying Marketplace coverage may mean losing any employer contribution (29 U.S.C. 218b). DOL says this applies to FLSA-covered employers, generally those with at least $500,000 in annual dollar volume of business plus hospitals, schools and government agencies, and to each employee regardless of plan enrollment or part-time or full-time status (Technical Release 2013-02). DOL publishes model notices for employers that do and do not offer a plan, updated February 2024, and says "there is no fine or penalty under the law for failing to provide the notice."

Plan rules that apply regardless of size. A group health plan may not make an otherwise eligible person wait more than 90 days for coverage; a bona fide orientation period of up to one month may come first (29 CFR 2590.715-2708). A plan that offers dependent coverage must cover children until age 26 and cannot restrict it based on financial dependency, residency, student status, marital status or employment (2590.715-2714). Non-grandfathered plans must cover recommended preventive services, such as USPSTF A and B items and recommended immunizations, without cost sharing in network (2590.715-2713; 2590.715-1251). Plans must also give a summary of benefits and coverage, a document separate from the ERISA summary plan description, and a willful failure can bring a fine of up to $1,000 per failure, as adjusted for inflation (2590.715-2715).

Where states differ. Some states run their own coverage mandates and reporting. For example, New Jersey requires most residents to keep minimum essential coverage and requires employers and other coverage providers to send 1095 forms to its Division of Taxation, noting its 1095-C requirements differ from the federal ones (NJ Health Insurance Mandate). California's Franchise Tax Board requires entities that provide minimum essential coverage to file the federal 1094/1095 forms with the state (FTB, Report health insurance information). Some states also use their own websites for SHOP (HealthCare.gov).

Questions employers ask. Does a 30-employee company have to offer health coverage? Not under the employer shared responsibility provisions, which apply only to ALEs; such an employer may qualify for the small business credit (IRS ALE page). If it does sponsor a plan, the plan rules above apply. Must an ALE cover spouses? Not to avoid a 4980H payment; spouses are not dependents for this purpose (IRS ESRP Q&A 38). Is the code DD amount taxable? No; the IRS says reporting it "does not mean that the coverage is taxable." Is affordability tested on family coverage? For the employer payment, no; it uses the lowest-cost self-only minimum value option (Q&A 39). Confirm your own situation with a qualified benefits or tax professional.

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