On this page
- Affordable Care Act Compliance Starts With Your Employee Count
- How to Track Full-Time Status With the Monthly and Look-Back Methods
- Employer Shared Responsibility Payments for 2026
- Affordability and Minimum Value Rules for 2026
- Forms 1094-C and 1095-C Reporting Requirements
- Ways to Handle ACA Tracking and Reporting
- The Individual Mandate Penalty and State Mandates
- ACA Rules for Small Employers With Fewer Than 50 Employees
- ACA Compliance Checklist for 2026
- Frequently Asked Questions
Affordable Care Act compliance still applies to growing businesses in 2026. If you averaged 50 or more full-time employees last year, counting part-time hours as full-time equivalents, the ACA's employer rules apply to you. You need to offer affordable health coverage to your full-time staff or risk an IRS payment, and you need to file Forms 1094-C and 1095-C every year.
This guide explains how to tell whether those rules apply to your business, the 2026 penalty amounts and affordability percentage, the reporting changes Congress made in late 2024, and your options if you have fewer than 50 employees. Most of it depends on one thing: accurate records of the hours your employees work.
Key Takeaways
- Your business is an applicable large employer (ALE) for 2026 if it averaged at least 50 full-time and full-time equivalent employees during 2025.
- A full-time employee averages at least 30 hours of service a week or has at least 130 hours in a calendar month, and paid leave hours count.
- For 2026, the payment for not offering coverage is $3,340 per full-time employee after the first 30, and the payment for coverage that's unaffordable or too thin is $5,010 per affected employee.
- Coverage is affordable in 2026 if the employee's share for your cheapest self-only plan that provides minimum value is no more than 9.96% of their income, measured with an IRS safe harbor such as W-2 wages.
- ALEs can now give employees Form 1095-C on request, after posting a notice, instead of mailing it to everyone. You still have to file the forms with the IRS.
- Businesses with fewer than 50 full-time and full-time equivalent employees have no federal coverage requirement, and they may qualify for the small business health care tax credit or a QSEHRA.
What's New for 2026
The employer payment amounts went up for 2026: $3,340 a year for not offering coverage (up from $2,900 in 2025) and $5,010 a year for coverage that fails the affordability or minimum value test (up from $4,350). The affordability percentage rose to 9.96%, from 9.02% in 2025.
Two laws signed in December 2024 also changed reporting. You can furnish Form 1095-C only to employees who ask for it, as long as you post a notice. You can send forms electronically to employees who consent, and you get 90 days to respond to an IRS penalty letter. The IRS now has 6 years to assess an ACA employer payment.
Affordable Care Act Compliance Starts With Your Employee Count
The ACA's employer rules apply only to applicable large employers (ALEs). Your status for 2026 depends on your workforce in 2025, and your status for 2027 depends on 2026. The IRS explains how to count full-time equivalents (FTEs) and full-time employees in four steps:
- Count full-time employees for each month. An employee is full-time for a month if they have at least 130 hours of service in that month or average at least 30 hours a week.
- Add up the hours of everyone else. Total the hours of all employees who weren't full-time that month. Count no more than 120 hours for any one person.
- Turn those hours into FTEs. Divide the monthly total by 120.
- Add and average. Add each month's full-time employees and FTEs, add the 12 monthly totals together, and divide by 12. If the result, rounded down to a whole number, is 50 or more, you're an ALE for the next year.
Here's how the math works for a business with 38 full-time employees and 20 part-time employees who each work about 80 hours a month, every month of the year.
Part-time hours each month: 20 employees × 80 hours = 1,600 hours
FTEs each month: 1,600 ÷ 120 = 13.33
Full-time employees plus FTEs: 38 + 13.33 = 51.33
Yearly average, rounded down: 51
Result: this business is an ALE for the next calendar year.
If those 20 part-timers averaged 60 hours a month instead, they'd add up to 10 FTEs, and the business would average 48. It wouldn't be an ALE. A few extra shifts across a part-time crew can change your status, so it pays to check your numbers every month.
Hours of Service That Count Toward Full-Time Status
An hour of service is every hour you pay an employee for work. It also includes paid hours when no work is done, such as vacation, holidays, illness and other paid leave. Paid time off counts toward the 130-hour test and the FTE math, so your records need to show it.
Special Rules for Counting Employees
- Seasonal workers: If your workforce goes over 50 full-time and FTE employees for 120 days or fewer during the year, and the extra employees in that stretch are seasonal workers, you aren't treated as an ALE.
- Related businesses: Companies with a common owner, or that are otherwise related under the tax code's controlled group rules, are generally combined to decide ALE status. Two related companies with 30 full-time employees each make up one ALE, and each company follows the large employer rules.
- New businesses: A business that didn't exist last year is an ALE in its first year if it reasonably expects to employ, and actually does employ, an average of at least 50 full-time and FTE employees on business days during that year.
WATCH OUT
The look-back measurement method described below can't be used to decide whether you're an ALE. ALE status always comes from your actual monthly counts for the prior calendar year.
How to Track Full-Time Status With the Monthly and Look-Back Methods
Once you're an ALE, you need to know which employees are full-time each month, because those are the people you have to offer coverage to. The IRS allows two ways to identify full-time employees.
Monthly Measurement Method
You look at each employee's hours one calendar month at a time. Anyone with at least 130 hours of service in a month is full-time for that month.
This method is simple for steady schedules. For employees whose hours go up and down, though, it can move them in and out of full-time status from month to month, which makes it hard to offer coverage on time.
Look-Back Measurement Method
You average each employee's hours over a past stretch of time, called the measurement period. That average sets their status for a future stretch, called the stability period.
An employee who averaged at least 30 hours a week during the measurement period is treated as full-time for the whole stability period, even if their hours drop. An employee who averaged less is treated as not full-time for the stability period, even if their hours go up. For example, you might average hours over a 12-month measurement period and apply the result to the next 12 months.
This method is often the better fit for variable-hour, seasonal and part-time employees. Federal rules limit how long each period can be and allow an optional administrative period between them for enrollment, so check the regulations before you set your dates.
TIMECLICK TIP
Choose your measurement method before the year starts and apply it the same way to each group of employees. Then make sure your time records capture every hour of service, including paid leave, for every employee. The 130-hour test, the FTE math and Form 1095-C all depend on that data. Our guide to employee time tracking compliance covers what records to keep.
Employer Shared Responsibility Payments for 2026
The IRS charges an ALE an employer shared responsibility payment only when at least one full-time employee buys insurance through the Health Insurance Marketplace and receives a premium tax credit. There are two kinds of payments, named for sections 4980H(a) and 4980H(b) of the tax code. The IRS overview of the employer shared responsibility provisions explains both.
| Rule | 4980H(a) Payment | 4980H(b) Payment |
|---|---|---|
| When it applies | You don't offer coverage to at least 95% of your full-time employees and their dependents | You offer coverage to at least 95%, but a full-time employee's coverage isn't affordable, doesn't provide minimum value, or wasn't offered |
| 2026 amount | $3,340 a year ($278.33 a month) per full-time employee | $5,010 a year ($417.50 a month) per full-time employee who gets a premium tax credit |
| Employees counted | All full-time employees, minus the first 30 | Only full-time employees who get a premium tax credit |
| Maximum | The full amount for all full-time employees after the first 30 | Can't be more than the 4980H(a) payment would have been |
4980H(a) Payment Example for 2026
A business has 60 full-time employees all year and doesn't offer health coverage. One employee buys Marketplace coverage and gets a premium tax credit.
Full-time employees counted: 60 − 30 = 30
Payment: 30 × $3,340 = $100,200
2026 payment: $100,200
4980H(b) Payment Example for 2026
The same business offers coverage to all of its full-time employees, but the plan isn't affordable for 4 of them. Those 4 get premium tax credits for all 12 months.
Payment: 4 × $5,010 = $20,040
Maximum check: (60 − 30) × $3,340 = $100,200, so the limit doesn't apply
2026 payment: $20,040
Payments are figured month by month, so a gap of a few months costs that share of the yearly amount. The IRS page on how the payments are calculated has more examples. If the IRS proposes a payment, it sends Letter 226-J. Don't make a payment before the IRS contacts you.
Affordability and Minimum Value Rules for 2026
Offering coverage to 95% of your full-time employees protects you from the larger 4980H(a) payment. To avoid the 4980H(b) payment as well, the coverage has to pass two tests for each full-time employee. The IRS summarizes both on its minimum value and affordability page.
Minimum Value Test
A plan provides minimum value if it covers at least 60% of the total allowed cost of the benefits expected under the plan. It also has to substantially cover inpatient hospital services and physician services.
Affordability Test
For plan years starting in 2026, coverage is affordable if the employee's required contribution for your lowest-cost self-only plan that provides minimum value is no more than 9.96% of their household income. You don't know your employees' household income, so the IRS lets you use one of three safe harbors instead:
- Form W-2 safe harbor: uses the wages you report in Box 1 of the employee's Form W-2.
- Rate of pay safe harbor: uses the employee's rate of pay at the start of the coverage period.
- Federal poverty line safe harbor: uses the federal poverty line, which gives the same dollar limit for every employee.
You can use the safe harbors only if you offer coverage to at least 95% of your full-time employees and their dependents. For this rule, a dependent is an employee's child under age 26. Spouses, stepchildren and foster children aren't included.
Employee's 2026 Form W-2, Box 1 wages: $36,000
Yearly affordability limit: $36,000 × 9.96% = $3,585.60
Monthly limit: $3,585.60 ÷ 12 = $298.80
Result: if this employee pays $298.80 a month or less for your cheapest self-only plan, the coverage is affordable.
WATCH OUT
The affordability percentage changes every year. It was 9.02% for 2025, it's 9.96% for 2026, and it will be 10.22% for 2027. Recheck what you charge employees before each plan year.
Coming in 2027
The IRS has already set the 2027 numbers. The 4980H(a) payment rises to $3,780 per full-time employee, and the 4980H(b) payment rises to $5,670. Coverage will count as affordable for 2027 plan years if the employee's cost is no more than 10.22% of income.
Forms 1094-C and 1095-C Reporting Requirements
Every ALE files ACA information returns with the IRS each year, even if it didn't offer coverage. The IRS instructions for Forms 1094-C and 1095-C cover the details.
- Form 1095-C: one for each employee who was full-time for any month of the year. It shows the coverage you offered each month and the employee's cost.
- Form 1094-C: the transmittal form that sends your 1095-C forms to the IRS with your company's totals.
If you have to file 10 or more information returns during the year, you must file electronically. Up to 10 returns can still be filed on paper.
2024 Laws That Changed ACA Reporting
Two laws signed on December 23, 2024, made reporting easier for employers.
The Paperwork Burden Reduction Act means you no longer have to send Form 1095-C to every employee automatically. Instead, you can:
- Post a clear, easy-to-find notice on your website that employees can request a copy of their form, with an email address, mailing address and phone number for requests.
- Post the notice by the furnishing deadline and keep it up through October 15 of that year.
- Send the form to anyone who asks by January 31 or within 30 days of the request, whichever is later.
The Employer Reporting Improvement Act made four more changes:
- You can send Form 1095-C electronically to employees who have given consent to receive it that way.
- You can report an employee's date of birth when you can't get their Social Security number or other taxpayer ID.
- You get at least 90 days, up from 30, to respond to an IRS letter proposing an employer shared responsibility payment.
- The IRS has 6 years from the Form 1095-C filing due date (or the date you filed, if later) to assess a payment. Before this law, there was no time limit.
ACA Reporting Deadlines in 2026 and 2027
| Task | 2025 Forms (Due in 2026) | 2026 Forms (Due in 2027) |
|---|---|---|
| Give Form 1095-C to employees, or post the request notice | March 2, 2026 | March 2, 2027 |
| File with the IRS on paper (fewer than 10 returns) | March 2, 2026 | March 1, 2027 |
| File with the IRS electronically | March 31, 2026 | March 31, 2027 |
| Keep the request notice posted through | October 15, 2026 | October 15, 2027 |
For 2026 forms, the penalty is $340 for each return you don't file correctly and $340 for each statement you don't furnish correctly, so a single employee's form can cost $680 if both are wrong.
WATCH OUT
The federal furnish-on-request option doesn't change state rules. California, Massachusetts, New Jersey, Rhode Island and Washington, D.C. have their own individual coverage mandates, and you may still need to send forms to employees who live there. Check with the state tax agency before you stop mailing them.
Ways to Handle ACA Tracking and Reporting
Many small ALEs find the reporting harder than the forms look. The data has to be tracked all year: hours of service, monthly full-time status, coverage offers and each employee's cost. Here are the common ways businesses handle it.
| Option | What It Does | What to Know |
|---|---|---|
| Spreadsheets | You track hours and offers yourself and fill in the forms | Lowest cost, but errors get more likely as your workforce grows |
| Forms-only software | Creates and files the forms from data you enter | You still gather and monitor employee data all year |
| Reporting service | Prepares and files the forms for you | Ask whether it tracks status during the year or only at filing time, and add up the ongoing fees |
| Payroll provider | Uses payroll data to prepare ACA forms, often as an add-on | Check that it captures all hours of service, including paid leave |
| Full ACA software | Imports employee data, tracks full-time status monthly and produces the forms | Costs more to set up, but it can flag employees trending toward full-time before you need to offer them coverage |
Whichever option you choose, check full-time status throughout the year. You can file corrected forms to fix a reporting mistake, but you can't go back and offer coverage for months that have already passed.
The Individual Mandate Penalty and State Mandates
The federal individual mandate is still part of the ACA, but under the Tax Cuts and Jobs Act, the individual shared responsibility payment has been $0 since January 2019. Your employees don't owe the IRS anything for going without health insurance.
That change didn't touch the employer rules. ALE payments under section 4980H still apply in 2026, and the amounts keep rising each year.
Five places have their own individual mandates: California, Massachusetts, New Jersey, Rhode Island and Washington, D.C. Residents there can owe a state penalty for going without coverage, and employers there may have state reporting duties.
ACA Rules for Small Employers With Fewer Than 50 Employees
If you averaged fewer than 50 full-time and FTE employees last year, and you aren't part of a related group that reaches 50, the employer mandate doesn't apply to you. You don't owe 4980H payments, and you don't file Forms 1094-C and 1095-C.
A few ACA rules can still apply:
- If you self-insure your health plan, you have to file an annual return (Forms 1094-B and 1095-B) reporting who was covered.
- If you filed fewer than 250 Forms W-2 for the prior year, reporting the cost of health coverage in Box 12 of Form W-2 (code DD) is optional.
SHOP Marketplace for Small Businesses
Employers with 50 or fewer employees can generally buy group coverage through the Small Business Health Options Program (SHOP). Buying through SHOP is generally required to claim the tax credit below.
Small Business Health Care Tax Credit
The small business health care tax credit can cover up to 50% of the premiums you pay (35% for tax-exempt employers). To qualify, you need to:
- Have fewer than 25 full-time equivalent employees.
- Pay average annual wages below the IRS limit, which is $68,200 per FTE for 2026.
- Pay at least 50% of the premium for employee-only coverage.
- Offer a qualified health plan through SHOP, unless a limited exception applies.
The credit shrinks if you have more than 10 FTEs or pay average wages above $34,100 for 2026. You can claim it for only two consecutive tax years, using Form 8941.
TIMECLICK TIP
The tax credit counts FTEs differently from the ALE test. Form 8941 uses 2,080 hours of service per FTE for the year, so total your employees' yearly hours and divide by 2,080. Accurate hour totals make this a quick calculation.
QSEHRA and ICHRA Reimbursement Options
If group insurance doesn't fit your budget, a health reimbursement arrangement lets you repay employees, tax-free, for health insurance they buy on their own.
- QSEHRA (qualified small employer HRA): available only to employers that aren't ALEs and don't offer a group health plan. For 2026, reimbursements can't be more than $6,450 for self-only coverage or $13,100 for family coverage. You report the amount each employee is entitled to in Box 12 of Form W-2 with code FF. See IRS Publication 15-B for the full rules.
- ICHRA (individual coverage HRA): available to employers of any size, with no federal dollar limit on reimbursements. Employees must have individual health insurance to use it, and an ALE can use an ICHRA as its offer of coverage if it's affordable under the ICHRA rules.
ACA Compliance Checklist for 2026
Use this list to stay on track for the rest of 2026 and the 2027 filing season.
- Count full-time employees and FTEs for every month of 2026 to find out whether you'll be an ALE in 2027.
- Record every hour of service, including paid vacation, holiday and sick time.
- Choose the monthly or look-back method, write down your periods, and apply them the same way each year.
- Offer coverage to at least 95% of your full-time employees and their dependents.
- Confirm that each plan provides minimum value and that employee costs for self-only coverage meet the 9.96% affordability limit (10.22% for 2027 plan years).
- Post your Form 1095-C request notice, or furnish the forms, by March 2, 2027.
- File Forms 1094-C and 1095-C by March 31, 2027, if you file electronically, or March 1, 2027, on paper.
- Check state rules if you have employees in California, Massachusetts, New Jersey, Rhode Island or Washington, D.C.
- Keep your ACA records for at least 6 years, the time the IRS has to assess a payment.
Frequently Asked Questions
Quick answers to common questions about ACA employer rules.
Is Affordable Care Act compliance still mandatory in 2026?
Yes. The employer rules are still in force for applicable large employers, and the IRS raised the payment amounts for 2026 to $3,340 and $5,010. The only major ACA penalty that went away is the federal individual mandate penalty, which has been $0 since 2019.
Do part-time employees count toward the 50-employee threshold?
Yes. Their hours are combined into full-time equivalents. Add up the monthly hours of all employees who aren't full-time (up to 120 hours each) and divide by 120. Those FTEs are added to your full-time count.
Do I have to offer health insurance to part-time employees?
No. As an ALE, you need to offer coverage to at least 95% of your full-time employees (30 or more hours a week, or 130 hours a month) and their dependents. Part-time employees count toward your ALE status, but you don't owe a payment for not covering them.
What happens if I'm an ALE and don't offer coverage?
Nothing happens unless at least one full-time employee gets a premium tax credit through the Marketplace. If one does, you can owe $3,340 for each full-time employee after the first 30 for 2026. The IRS would notify you with Letter 226-J, and you'd have at least 90 days to respond.
Do I still have to send Form 1095-C to my employees?
Not automatically. Since the Paperwork Burden Reduction Act, you can post a notice on your website and send forms only to employees who ask for them. You still have to file every Form 1095-C with the IRS, and some states with their own mandates may still require you to send forms to employees.
Is there still a penalty for not having health insurance?
Not at the federal level. The federal penalty has been $0 since 2019. Residents of California, Massachusetts, New Jersey, Rhode Island and Washington, D.C. can still owe a state penalty.
This guide is general information and isn't legal or tax advice. For your situation, check with the IRS, your benefits broker or a tax professional.
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