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Insights
Alerts
July 25, 2025
Background
When the Patient Protection and Affordable Care Act (more commonly referred to as the ACA or Obamacare) was passed in 2010, several provisions were set to be adjusted over time to keep up with various measures of insurance premiums and medical inflation. The IRS announces those adjustments annually.
Recently, the IRS released updated penalty amounts that affect the “pay or play” penalties, formally known as the employer shared responsibility penalties (ESRP). They apply to any applicable large employers (ALEs)—those with 50 or more full-time employees or the equivalent—that do not provide qualifying health coverage to at least 95% of their full-time employees and children (up to age 26). Qualifying coverage must be (1) minimum essential coverage (MEC), (2) minimum value, and (3) affordable. The penalties apply if even one full-time employee receives a federal subsidy for coverage through an ACA Health Insurance Exchange. These penalties are adjusted annually, and the IRS just published the penalties for 2026.
In addition, the IRS released adjustments to the basis for whether an employer plan is affordable and whether a household would be entitled to premium credits on an ACA Exchange. Included in that adjustment is a recent change in the methodology. Both are based on whether the cost of the coverage would exceed 9.5%, as adjusted, of a household’s annual income. That amount will be 9.96% in 2026 (up from 9.02% in 2025).
2026 Penalty Amounts
Two primary penalties may apply:
- Section 4980H(a) Penalty (“A” Penalty, sometimes referred to as the “Sledgehammer” penalty):
The “A” penalty applies if an ALE fails to offer MEC to at least 95% of its full-time employees (and children up to age 26). For 2026, the annualized penalty is $3,340 per full-time employee, minus the first 30 employees, even if the full-time employees have been offered coverage. The penalty is triggered if one full-time employee enrolls in ACA Exchange coverage and receives a subsidy from the federal government. - Section 4980H(b) Penalty (“B” Penalty, sometimes referred to as the “Jackhammer” penalty):
This applies if an ALE offers MEC to at least 95% of its full-time employees, but the coverage is either unaffordable (9.5%, as adjusted – 9.96% in 2026 of the employee’s monthly household income) or fails to provide minimum value (the plan covers at least 60% of the aggregate costs for the benefits under the plan). For 2026, the annualized penalty is $5,010 per full-time employee who receives a federal subsidy for coverage on an ACA Exchange.
The penalties are calculated monthly but are typically described as the annual amount.
Premium Credit Table
The availability of premium tax credits is on a graduated scale for households with income from 100% to 400% of the federal poverty line as set forth in the IRS table below:
|
Household income percentage of the Federal poverty line:
|
Initial Percentage |
Final Percentage |
|
Less than 133% |
2.10% |
2.10% |
|
At least 133% but less than 150% |
3.14% |
4.19% |
|
At least 150% but less than 200%
|
4.19% |
6.60% |
|
At least 200% but less than 250%
|
6.60% |
8.44% |
|
At least 250% but less than 300%
|
8.44% |
9.96% |
|
At least 300% but not more than 400%
|
9.96% |
9.96% |
Conclusion
Employers have time to consider the potential costs of the penalties and the optimal plan to avoid the penalties for their workforces.
This Legal Update is not intended to be exhaustive, nor should any discussion or opinion be construed as legal advice. Readers should contact legal counsel for legal advice. All rights reserved.
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