The IRS has announced a significant increase in employer shared responsibility penalties for non-compliance with the Affordable Care Act (ACA) starting in 2026. These penalties, often referred to as the “pay-or-play” penalties, are designed to enforce employer obligations to provide affordable health insurance coverage to their full-time employees. The adjustment represents a 15.2% increase from 2025 penalty rates, making it essential for employers to stay informed and compliant.
In this blog we are going to explain why there are penalties for businesses that do not meet the minimum coverage requirements and how AUI can help you determine plans that will provide great coverage for your employees and avoid costly penalties.
What Is the IRS Pay-or-Play Penalties?
Under the ACA’s employer mandate, large employers must offer affordable health insurance that provides minimum essential coverage to their full-time employees and dependents. The government decides what coverage counts as “minimum.” Those who are found to not be compliant with those minimum requirements will face the penalties. It is that simple. So, what are the penalties, and how do they apply to your business? Keep reading as penalties have changed for 2026.
There are two types of penalties for businesses that apply. The first, known as Section 4980H(a) penalties, applies when an employer fails to offer coverage to at least 95% of full-time employees and their dependents. The second, known as Section 4980H(b) penalties, applies when the coverage offered is either unaffordable or fails to provide minimum value. Both penalties are triggered when at least one full-time employee purchases coverage through the ACA marketplace and qualifies for a premium tax credit.
2026 Penalty Rates in the USA
The updated penalties for 2026 reflect significant increases. The Section 4980H(a) penalty will rise from $2,970 per full-time employee annually in 2025 to $3,420 in 2026. In a similar trajectory, the Section 4980H(b) penalty will increase from $4,460 per full-time employee annually in 2025 to $5,140 in 2026. These adjustments represent a 15.2% increase, marking the largest hike in years. What does that mean for business owners? It is more important than ever to have great healthcare plans for your employees.
Why Are Penalties Increasing?
The penalties are adjusted annually to account for inflation, and the sharp 15.2% increase for 2026 reflects rising healthcare costs and broader economic factors. Employers who have not reviewed their compliance strategies in recent years may find themselves unexpectedly liable for these higher penalties, making it more critical than ever to stay informed and take initiative-taking steps to ensure compliance.
With many companies pulling out of the ACA plans for 2026, it is important to start advocating for your company now. Benefits change yearly but ensuring that the plan you offer your employees has your local hospital networks included in your plan is vital. It is important to review your plan yearly to ensure your team has the best coverage in your area.
Who Is Affected by Penalties Increasing?
The pay-or-pay penalties apply to Applicable Large Employers (ALEs), which are businesses with 50 or more full-time employees (including full-time equivalents). Even businesses that currently offer health insurance must ensure that their plans meet ACA requirements. Coverage must provide at least 60% of expected healthcare costs (minimum value) and must not exceed 9.02% of an employee’s household income in 2025 (affordability threshold). Because the affordability threshold is adjusted annually, employers need to stay updated on future changes to ensure compliance.
How to Reduce the Risk of Penalties
To avoid penalties, employers should carefully evaluate their compliance with ACA requirements. Conducting a comprehensive audit of your current health insurance offerings is a critical first step to ensure they meet minimum essential coverage and affordability standards. Monitoring affordability thresholds is equally important to ensure that employee contributions do not exceed the IRS limits. Additionally, employers must accurately track employee hours to determine full-time status under the ACA, which applies to employees working 30 hours or more per week. Staying up to date on ACA regulations, including changes to affordability thresholds and penalty rates, is key to avoiding unexpected liabilities.
Employers can also benefit from leveraging technology to streamline compliance efforts. Using benefits administration and compliance tools can simplify the process of tracking employee data, manage health plans, and file necessary reports. This can be especially valuable for businesses with large workforces or complex operations. You can review your shared responsibilities as an employer HERE.
The Cost of Non-Compliance with Healthcare Minimum Coverage
The financial impact of these penalties can be substantial, especially for organizations with large workforces. For example, a business with 100 full-time employees that fails to offer coverage could face a Section 4980H(a) penalty of $342,000 annually in 2026. If the same business offers coverage that is unaffordable or inadequate, the Section 4980H(b) penalty could total $514,000 annually if just 10 employees qualify for premium tax credits. These figures illustrate the importance of taking initiative-taking measures to avoid non-compliance.
How Can AUI Help Your Business Avoid Pay-to-Play Penalties?
For employers, navigating the complexities of ACA compliance can feel overwhelming. That is where AUI comes in. You do not have to navigate through this alone. With years of experience helping businesses stay compliant with federal regulations, AUI provides expert guidance and tailored solutions to protect your organization from costly penalties. Our team can help you audit your health insurance offerings, ensure your plans meet minimum essential coverage and affordability requirements, and implement systems to monitor ongoing compliance.
Additionally, AUI offers access to cutting-edge benefits administration tools that simplify the process of tracking full-time employee hours, managing reporting obligations, and staying informed about regulatory changes. By partnering with AUI, you can reduce your compliance risks and focus on what matters most running your business.
Just Call AUI the Risks are Not Worth Guessing
The 15.2% increase in pay-or-pay penalties for 2026 underscores the growing financial risks associated with non-compliance under the ACA. Employers must act now to evaluate their health insurance strategies, ensure compliance, and avoid costly penalties in the future. Trust us, it is just not worth the risks.
AUI is here to help. By partnering with AUI, you can stay ahead of regulatory changes, safeguard your business, and provide valuable health benefits to your employees. Staying compliant isn’t just a legal requirement, it is a smart investment in the future of your organization that costs you absolutely nothing to have a broker like AUI advocate for your business.
