Many business owners assume Affordable Care Act (ACA) penalties are no longer a concern. That assumption can be costly. While the individual mandate penalty was eliminated under the Tax Cuts and Jobs Act starting in 2019, the employer mandate remains fully in effect.
As your company grows, ACA compliance can quickly move from irrelevant to critical. Failing to prepare can expose your business to significant financial penalties that are set to increase in 2026.
Here is what you need to understand to stay compliant and protect your business.
When The ACA Employer Mandate Applies
The ACA’s employer shared responsibility provisions apply to Applicable Large Employers (ALEs). In general, your business qualifies as an ALE if you have 50 or more full-time employees, including full-time equivalent employees (FTEs).
What many companies overlook is that ALE status is based on the prior year’s workforce. This means you could already be subject to the rules before realizing it.
Under ACA guidelines:
- A full-time employee is someone working at least 30 hours per week or 130 hours per month
- This threshold is lower than the traditional 40-hour workweek many employers use
In addition, part-time employees are factored into the equation through FTE calculations. Their combined hours can push your business over the ALE threshold faster than expected.
For example, a company with 35 full-time employees and a large part-time workforce may exceed the 50-employee limit once hours are aggregated.
How Full-Time Equivalent Employees Are Calculated
To determine FTEs, total the monthly hours worked by part-time employees (capped at 120 hours per employee), then divide by 120. The result is added to your full-time employee count.
This calculation often surprises business owners who believe they are safely below the threshold. In reality, many growing companies unknowingly cross into ALE territory.
Understanding The Two Types Of ACA Penalties
If your business qualifies as an ALE, you may face penalties under two primary scenarios.
Failure To Offer Coverage
Under Section 4980H(a), a penalty applies if you do not offer minimum essential health coverage to at least 95 percent of your full-time employees and their dependents.
This penalty is calculated based on your total number of full-time employees, excluding the first 30.
Coverage That Falls Short
Under Section 4980H(b), penalties may apply if your company offers health coverage that is either unaffordable or does not meet minimum value requirements.
This penalty is triggered when at least one full-time employee receives a premium tax credit through a Health Insurance Marketplace.
Higher ACA Penalties For 2026
The IRS has increased penalty amounts for the 2026 tax year, making compliance even more important.
- $3,340 per employee under Section 4980H(a) for failing to offer coverage (up from $2,900 in 2025)
- $5,010 per employee under Section 4980H(b) for offering inadequate or unaffordable coverage (up from $4,350 in 2025)
These penalties can add up quickly, especially for businesses with a growing workforce.
IRS Enforcement And What To Expect
The IRS notifies businesses of potential ACA penalties using Letter 226-J. This letter outlines the proposed penalty and includes Form 14764, which allows employers to respond.
Businesses typically have 30 days to reply, making it essential to act quickly. Ignoring or delaying a response can lead to additional complications.
Key Considerations For Growing Businesses
If your company is expanding, proactive ACA planning is essential. Consider the following:
- Are you approaching the 50 full-time employee threshold?
- Are you accurately classifying full-time employees under ACA standards?
- Are your FTE calculations properly accounting for part-time hours?
- Does your health coverage meet affordability and minimum value requirements?
- Are your payroll and HR systems prepared for ACA reporting, including Forms 1094-C and 1095-C?
Addressing these questions early can help you avoid unexpected penalties and maintain compliance as your business scales.
Stay Ahead Of ACA Compliance
ACA rules remain a critical consideration for growing businesses. As you transition from a small company to a mid-sized employer, the risks and responsibilities increase significantly.
Working with an experienced accounting and advisory firm like Botwinick & Co. can help you navigate ACA requirements, minimize risk, and implement cost-effective health coverage strategies.
Contact our team today to ensure your business is fully prepared for ACA compliance in 2026 and beyond.
