What Is the 4980H(b) Penalty for Employers?

The Internal Revenue Code’s Section 4980H(b) establishes a penalty for certain employers under the Affordable Care Act (ACA). This penalty applies when an employer offers health coverage to its full-time workforce, but the plan fails to meet federal standards for quality and affordability. It is a distinct financial assessment from the 4980H(a) penalty, which targets employers who fail to offer any health coverage.

Determining Employer Applicability

The regulations under Section 4980H apply only to employers classified as Applicable Large Employers (ALEs). An organization’s ALE status is determined by the size of its workforce in the preceding calendar year, not the current one. The calculation requires a business to count its full-time employees and its full-time equivalent employees.

A full-time employee is defined by the ACA as an individual who averages at least 30 hours of service per week, or 130 hours of service in a calendar month. To determine the number of full-time equivalent (FTE) employees, a business must aggregate the total hours worked by all non-full-time employees in a month. This sum is then divided by 120, and the result is added to the count of full-time employees.

For example, if a company has 40 full-time employees and several part-time employees who collectively work 1,800 hours in a month, the FTE calculation would be 1,800 divided by 120, which equals 15 FTEs. Adding these 15 FTEs to the 40 full-time employees gives the employer a total of 55 employees for that month. If an employer’s combined total of full-time and full-time equivalent employees is 50 or more on average during the prior year, it is considered an ALE for the current year.

Triggers for the Penalty

For an ALE that offers health coverage, the 4980H(b) penalty is triggered when the offered coverage fails one of two tests and a full-time employee subsequently seeks subsidized coverage. The first test is for affordability. Employer-sponsored coverage is considered unaffordable if the employee’s contribution for the lowest-cost, self-only plan exceeds a certain percentage of their household income, which is 9.02% for 2025.

Because employers do not have access to an employee’s total household income, the regulations provide three safe harbors. The Form W-2 safe harbor bases affordability on the employee’s reported wages in Box 1 of their Form W-2. The rate of pay safe harbor uses the employee’s hourly wage or monthly salary to calculate affordability. The federal poverty line safe harbor deems coverage affordable if the employee’s contribution does not exceed a set percentage of the mainland federal poverty line.

The second test is for minimum value. A health plan fails to provide minimum value if it does not cover at least 60% of the total allowed costs of benefits. This means the plan’s share of costs, including deductibles and copayments, must meet this 60% threshold. Employers can determine if their plan meets this standard by using the Minimum Value (MV) Calculator provided by the Department of Health and Human Services.

Even if an employer’s plan fails either test, the penalty is not automatic. The final trigger occurs when at least one full-time employee rejects the employer’s coverage, enrolls in a Health Insurance Marketplace plan, and is approved for a Premium Tax Credit (PTC). The employee’s receipt of the PTC is what signals a potential compliance failure to the IRS.

Calculating the Penalty Amount

The 4980H(b) penalty is calculated on a monthly basis and is tied to the number of employees who trigger it. Unlike the 4980H(a) penalty, this assessment is not based on the employer’s entire full-time workforce. It is levied only for each full-time employee who was offered non-compliant coverage and subsequently received a Premium Tax Credit (PTC) for that month.

For the 2025 tax year, the annualized penalty amount is $4,350 per employee, which is $362.50 per month. This amount is indexed for inflation. For instance, if an ALE has five full-time employees who receive a PTC for all 12 months of the year, the employer’s total penalty would be $21,750 ($4,350 multiplied by 5).

The total penalty amount an employer could face under 4980H(b) for any given month cannot be more than the amount they would have owed under the 4980H(a) “no offer” penalty. The 4980H(a) penalty is calculated using the employer’s total number of full-time employees, minus the first 30. This cap prevents an employer who tried to offer coverage from being penalized more heavily than an employer who offered none.

The IRS Assessment and Response Process

The assessment process for the 4980H(b) penalty begins when the IRS identifies a mismatch in information. This occurs when an employer’s reporting on Forms 1094-C and 1095-C conflicts with Marketplace information showing that a full-time employee received a Premium Tax Credit. The first contact an employer receives is IRS Letter 226J, a preliminary notice of a proposed Employer Shared Responsibility Payment (ESRP).

This letter details the proposed penalty amount and explains the reason for the assessment. It is not a final bill but an opportunity for the employer to respond and contest the findings. The letter gives the employer a 30-day window to reply before the IRS proceeds with a formal demand for payment.

Included with Letter 226J is Form 14764, the ESRP Response form. On this form, the employer indicates whether they agree or disagree with the proposed penalty. If disagreeing, the employer must provide a detailed explanation and supporting documentation to refute the IRS’s findings.

The IRS also provides Form 14765, the Employee Premium Tax Credit (PTC) Listing. This document lists each full-time employee the IRS has identified as receiving a PTC, along with codes from that employee’s Form 1095-C. The employer uses this list to respond on an individual employee basis, providing corrections or explanations.