Many small businesses assume the Affordable Care Act (ACA) only becomes an issue once they reach a certain size. But growth can trigger ACA obligations faster than expected—and many employers don’t realize it until penalties are already on the table.
A common misunderstanding adds to the risk. While the Tax Cuts and Jobs Act eliminated the individual mandate penalty starting in 2019, it did not remove the ACA’s employer requirements. Those rules—often called play‑or‑pay—are still very much in effect.
If your business is expanding, understanding ACA employer shared responsibility rules now can help you avoid costly surprises later.
Understanding the ACA Employer Shared Responsibility Rules
The ACA’s play‑or‑pay requirements apply to Applicable Large Employers (ALEs). In general, an ALE is a business that averaged 50 or more full‑time employees, including full‑time equivalents (FTEs), during the prior calendar year.
Once you cross that threshold, you must meet specific requirements related to employee health coverage—or potentially face penalties.
The challenge? Many growing businesses don’t realize they’re approaching ALE status until after the fact.
Who Counts as a Full‑Time Employee?
For ACA purposes, “full‑time” doesn’t mean 40 hours per week.
An employee is generally considered full‑time if they work:
- 30 or more hours per week, or
- 130 hours per month, on average
This means employees you may view as part‑time could still count as full‑time under ACA rules.
How Full‑Time Equivalents (FTEs) Push You Over the Line
FTEs are calculated by:
- Adding up all hours worked in a month by non‑full‑time employees (capped at 120 hours per employee), and
- Dividing that total by 120
Those FTEs are then added to your full‑time employee count.
Example:
A company with 35 full‑time employees and a sizable part‑time workforce may exceed the 50‑employee threshold once part‑time hours are combined—triggering ALE status sooner than expected.
More details on employer size calculations are available from the IRS.
The Two ACA Penalties Employers Need to Know
An ALE may face penalties if it:
- Does not offer minimum essential coverage to full‑time employees and eligible dependents, or
- Offers coverage that is unaffordable or does not provide minimum value
Penalties are generally triggered when at least one full‑time employee receives a premium tax credit for purchasing coverage through a Health Insurance Marketplace. See guidance from Healthcare.gov.
Penalty Structure Overview
Two separate penalty provisions may apply:
- Section 4980H(a)
Applies if the employer fails to offer coverage to at least 95% of full‑time employees and their dependents. The penalty is calculated using the total number of full‑time employees, minus the first 30. - Section 4980H(b)
Applies when coverage is offered, but one or more full‑time employees receive premium tax credits because the coverage is unaffordable or lacks minimum value.
Updated ACA Penalty Amounts for 2026
For failures occurring in the 2026 calendar year, the IRS has increased penalty amounts:
- $3,340 per applicable employee under Section 4980H(a) (up from $2,900 in 2025)
- $5,010 per applicable employee under Section 4980H(b) (up from $4,350 in 2025)
The IRS notifies employers of potential liability using Letter 226‑J, along with Form 14764 (ESRP Response). Employers typically have 30 days to respond.
More information on enforcement can be found on the IRS’s website here.
Key Questions for Growing Businesses
If your workforce is expanding, now is the time to ask:
- How close are we to the 50 full‑time employee threshold?
- Are we properly classifying employees under ACA definitions?
- How will our health plan meet affordability and minimum value standards if we become an ALE?
- Are payroll and HR systems ready to support ACA reporting, including Forms 1094‑C and 1095‑C?
Addressing these issues early can help ensure growth doesn’t come with unexpected ACA penalties.
If you’d like help evaluating your employee counts or planning benefit strategies, explore our business advisory services or review how we support clients with payroll and HR compliance.
Staying Ahead of ACA Compliance
ACA employer shared responsibility rules remain a critical compliance issue for midsize employers. For growing small businesses, proactive planning is the best defense against costly mistakes.
If you’re unsure whether your company is approaching ALE status—or want guidance on managing health benefit costs—contact Landmark CPAs to start the conversation. Staying ahead of ACA employer shared responsibility rules can protect both your people and your bottom line.
© 2026 Landmark CPAs
