By: HUB’s EB Compliance Team
The IRS recently announced the employer mandate penalties for 2026. After a small but surprise decrease from 2024 to 2025, penalty amounts will jump significantly in 2026. Specifically, the (a) penalty will be $3,340 (up from $2,900 in 2025) and the (b) penalty will go up to $5,010 (up from $4,350).
Who Pays?
As a reminder, the (a) penalty is triggered when an “Applicable Large Employer” or “ALE” does not offer coverage to at least 95% of its full-time employees and at least one full-time employee receives a Premium Tax Credit (“PTC”) or subsidy to purchase individual coverage through an ACA public exchange. (The penalty applies on a total headcount basis, minus the first 30 employees.)
By contrast, the (b) penalty applies on an individualized basis. Specifically, for each month when an ALE offers coverage that is either unaffordable or does not meet minimum value requirements, or does not offer coverage to a full-time employee, and that employee receives a PTC to purchase individual coverage through an exchange.
An ALE is generally an employer that averages 50 or more full-time equivalent (“FTE”) employees during the prior calendar year. (“Related” employers inside a control group should note that an enterprise-wide headcount could make each member an ALE.) Only employers who are ALEs are subject to the employer mandate. Except for employers not in existence in the previous calendar year who reasonably expect to employ 50 or more FTEs in their first year, ALE status is always based on the prior calendar year rather than the employer’s plan year.
Why The Increase?
Under the law, the penalty amounts are based on the “premium adjustment percentage” which measures the increase in premiums in employer-sponsored insurance since 2014. The original penalty amounts ($2,000 for (a); $3,000 for (b)) are multiplied by that percentage and then rounded down to the next lowest multiple of $10. The projection used by the Department of Health and Human Services showed that 2025 premiums were going down compared to 2024, hence the (slight) decrease in penalties. For 2026, the projection once again shows an increase in premiums, which is why penalties are once again on the upswing.
Conclusion
The increase in penalties for 2026 serves as a reminder for ALEs to focus on their Affordable Care Act compliance. The higher penalty amounts unquestionably expose employers to greater financial liability for non-compliance. Moreover, although the higher affordability threshold helpfully gives employers greater leeway about setting employee contributions, miscalculations still lead to penalties. (Especially for plan sponsors seeking to collect the absolute maximum compliant contribution.) Making sure that offers of coverage are compliant helps avoid penalties, regardless of the amount. In short, employers that vigilantly monitor health coverage offers, accurately track their monthly full-time headcount, and carefully maintain ACA reporting are optimally positioned for compliance. HUB offers several resources to help employers understand their obligations.
If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.
NOTICE OF DISCLAIMER
Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.