How to Calculate ACA Penalty for Employers
Navigate ACA employer shared responsibility. Understand how to assess your potential penalty exposure and accurately calculate liabilities for compliance.
The Affordable Care Act (ACA) includes employer shared responsibility provisions encouraging larger employers to offer health benefits. Understanding these regulations helps businesses determine obligations and calculate potential payments. This article explains how employers can identify and calculate potential penalties.
Determining Applicable Large Employer Status
An employer must first determine if they qualify as an Applicable Large Employer (ALE), as only ALEs are subject to employer shared responsibility provisions and potential penalties. An employer is generally considered an ALE if they employed an average of 50 or more full-time employees, including full-time equivalent (FTE) employees, during the preceding calendar year. This threshold is based on the prior year’s average workforce size.
A full-time employee for ACA purposes works at least 30 hours per week, or 130 hours per month. To determine full-time equivalent employees, an employer calculates the aggregate hours of service for all non-full-time employees. The total hours worked by these employees in a month are added and then divided by 120. This result represents the number of FTEs.
When an employer consists of multiple entities with common ownership, these entities are combined and treated as a single employer for determining ALE status. If the combined total of full-time and FTE employees meets the 50-employee threshold, each individual employer within that group is an ALE member. This applies even if they would not meet the threshold independently. For new employers not in business during the entire preceding calendar year, ALE status is determined by the reasonable expectation of employing at least 50 full-time and FTE employees in the current year.
Understanding Employer Shared Responsibility Payments
Once an employer determines they are an ALE, they must understand the conditions that can trigger an Employer Shared Responsibility Payment (ESRP). There are two distinct types of ESRPs, referred to as Section 4980H(a) and Section 4980H(b) penalties, each with specific triggers. These payments arise only if at least one full-time employee receives a premium tax credit for purchasing health coverage through a Health Insurance Marketplace.
The Section 4980H(a) penalty applies if an ALE fails to offer minimum essential coverage (MEC) to substantially all (at least 95%) of its full-time employees and their dependents. Minimum essential coverage is health insurance that satisfies the ACA’s shared responsibility provision. If an ALE does not meet this 95% threshold and an employee obtains a premium tax credit, the Section 4980H(a) penalty may be assessed.
The Section 4980H(b) penalty can be triggered even if an ALE offers MEC to substantially all of its full-time employees and their dependents. This penalty applies if the offered coverage is not affordable or does not provide minimum value, and at least one full-time employee receives a premium tax credit. Minimum value means the employer-sponsored plan covers at least 60% of the total allowed costs of benefits. Affordability means the employee’s required contribution for the lowest-cost, self-only MEC plan does not exceed a specified percentage of their household income, which for 2025 is 9.02%.
Gathering Information for Penalty Calculation
To calculate potential ACA penalties, an employer must gather and organize specific data. Accurate record-keeping is important for precise penalty assessments. Employers need monthly counts of their full-time employees and their dependents.
Employers must maintain detailed records of MEC offers to full-time employees, including dates and recipients. For affordability, data on the employee’s share of the premium for the lowest-cost, self-only MEC plan is needed. Employee wage information is also required for affordability safe harbors, such as W-2 wages, rate of pay, or the federal poverty line.
Documentation confirming the offered coverage meets minimum value (MV) standards is necessary. Employers should also be aware of any IRS notifications, like Letter 226J, indicating employees received premium tax credits. Information on any employees exempt from the offer requirement, such as certain seasonal employees, should also be compiled.
Calculating Employer Shared Responsibility Payments
Employer Shared Responsibility Payments (ESRPs) are calculated monthly. The specific formula depends on whether the employer failed to offer adequate coverage or offered coverage that was not affordable or lacked minimum value.
Section 4980H(a) Penalty Calculation
This penalty applies when an ALE fails to offer MEC to substantially all full-time employees and their dependents. The monthly penalty is calculated by taking the total number of full-time employees (minus 30) and multiplying it by the applicable monthly penalty amount. For 2025, the annual penalty is $2,900 per employee, or approximately $241.67 per employee per month.
For example, if an ALE has 100 full-time employees and fails to offer MEC to at least 95% of them for a month, the penalty would be (100 – 30) x $241.67 = $70 x $241.67 = $16,916.90 for that month.
Section 4980H(b) Penalty Calculation
This penalty applies when an ALE offers MEC, but it is not affordable or does not provide minimum value. It is assessed for each full-time employee who receives a premium tax credit. For 2025, the annual penalty is $4,350 per employee, or approximately $362.50 per employee per month.
This penalty is capped at the amount that would have been assessed under Section 4980H(a) if no coverage was offered. For instance, if an ALE offers coverage, but 5 full-time employees receive premium tax credits because the coverage was unaffordable, the monthly penalty would be 5 x $362.50 = $1,812.50. This amount is then compared to the maximum potential 4980H(a) penalty for that month, and the lower amount is assessed.