Compliance in 2026: Avoiding ACA Penalties

For Applicable Large Employers (ALEs), ACA compliance isn’t optional. The IRS continues to aggressively enforce the Employer Shared Responsibility provisions, and the penalties for non-compliance have increased significantly for 2026. Understanding the requirements and common pitfalls can help your organization avoid costly assessments.

The Basic Requirements

If your organization employed an average of 50 or more full-time employees (including full-time equivalents) during the prior calendar year, you’re classified as an ALE. That designation triggers two core obligations:

Offer coverage to at least 95% of full-time employees.
The coverage must qualify as Minimum Essential Coverage and provide Minimum Value (covering at least 60% of expected healthcare costs).

Make that coverage affordable.
For 2026, employee contributions for self-only coverage cannot exceed 9.96% of the employee’s household income. Since employers rarely know household income, the IRS provides three safe harbors: W-2 wages, rate of pay, and the federal poverty line.

Fail on either count and you’re exposed to penalties if any full-time employee receives a Premium Tax Credit through the Marketplace.

2026 Penalty Amounts

Section 4980H(a):
If you don’t offer coverage to at least 95% of full-time employees, the penalty is $3,340 per full-time employee annually (minus the first 30). A company with 200 full-time employees could face $567,800.

Section 4980H(b):
If you offer coverage but it’s unaffordable or doesn’t meet minimum value, the penalty is $5,010 per employee who received a Premium Tax Credit.

These amounts are assessed monthly, so partial-year violations result in partial penalties.

The Statute of Limitations Changed

For years, the IRS took the position that there was no expiration period for assessing ACA penalties. Unlike typical tax matters with a 3-year or 6-year window, ESRP assessments could theoretically come at any time.

The Employer Reporting Improvement Act, signed in December 2024, changed this for future returns. ACA penalty assessments now have a six-year statute of limitations, calculated from the later of the Form 1094-C/1095-C due date or the actual filing date.

Important caveat:

This only applies to returns due after December 31, 2024. Tax years 2024 and earlier still have no statute of limitations. The IRS can assess penalties for those years indefinitely. If you have compliance gaps from prior years, they remain a liability.

Common Mistakes That Trigger Penalties

Most penalty assessments stem from reporting errors rather than actual coverage failures. The IRS bases its determinations on what you filed. If your forms don’t accurately reflect your coverage, you’ll receive a penalty notice even if you did everything right.

Form 1094-C errors:

• Failing to check “Yes” in Part III when you offered qualifying coverage (this alone can trigger a full 4980H(a) penalty)
• Incorrect full-time employee counts
• Wrong Aggregated ALE Group information

Form 1095-C errors:

• Missing or incorrect Line 14 codes (offer of coverage)
• Missing Line 16 safe harbor codes (2F, 2G, or 2H) that prove affordability
• Incorrect employee social security numbers
• Wrong coverage start/end dates

Classification errors:

• Miscounting hours for variable-hour employees
• Not properly applying look-back measurement periods
• Misclassifying employees as part-time when they averaged 30+ hours

Strategies for Staying Compliant

Track hours accurately.
The 30-hour threshold for full-time status isn’t forgiving. Implement systems that capture actual hours worked, not just scheduled hours. Pay particular attention to variable-hour employees, seasonal workers, and employees who work across multiple locations or positions.

Document your safe harbor elections.
Choose an affordability safe harbor at the start of each plan year and apply it consistently. Keep records showing which safe harbor you used and how employee contributions were calculated.

Review forms before filing.
A single coding error on Line 14 or Line 16 can generate a penalty notice. Build in a review process that checks every form for completeness and accuracy before submission.

Retain records.
Given that pre-2025 tax years have no statute of limitations, keep your ACA documentation indefinitely. This includes enrollment records, declination forms, payroll data showing hours worked, and affordability calculations.

File on time.
For the 2025 tax year (filed in 2026), the deadlines are March 2 for furnishing forms to employees (or posting the alternative notice) and March 31 for electronic filing with the IRS. Late filing carries its own penalties: $340 per return, up to $4,098,500 annually.

Recent Changes to Know

Two December 2024 laws eased some reporting burdens:

• Alternative furnishing method:
  You no longer need to automatically mail Form 1095-C to every employee. Instead, you can post a clear notice on your website stating that employees may request their form. The notice must stay up through October 15, and you must fulfill requests within 30 days.
• Electronic filing threshold:
  The threshold dropped from 250 returns to just 10. Since all ALEs have at least 50 employees, this effectively requires every ALE to file electronically through the IRS AIR system.
• State requirements still apply:
  California, New Jersey, Rhode Island, and Washington D.C. have their own individual mandate reporting requirements. The federal alternative furnishing method doesn’t override state obligations to provide forms to employees.

What To Do If You Receive a Penalty Notice

If you receive Letter 226-J, you have 90 days to respond (extended from 30 days as of January 2025). Many employers successfully reduce or eliminate their proposed penalties by demonstrating that their original filings contained errors or that the IRS data was incomplete.

Read our guide on responding to ACA penalty notices.

How Tesseon Can Help

ACA compliance requires ongoing attention to employee classifications, coverage offers, affordability calculations, and accurate reporting. Tesseon provides comprehensive ACA compliance services including filing, monitoring, and penalty resolution support.

If you’re concerned about your ACA compliance posture or need help responding to an IRS notice, contact us.