Business Tax Preparation · Advising the business taxpayer

ACA compliance

The employer shared responsibility rules are unusual in the Code: nothing is owed until an employee does something, the amount depends on which of two provisions applies, and the whole regime turns on a headcount measured in a year that has already ended. That last feature is what catches employers, because by the time the obligation exists it is too late to avoid it.

The rule

Who is caught. an applicable large employer is one that employed an average of at least 50 full-time employees on business days during the preceding calendar year — so status for the current year is fixed by last year’s workforce^TY2026 (IRC § 4980H(c)(2)(A)), with an employer is not treated as employing more than 50 full-time employees where its workforce exceeds 50 for 120 days or fewer during the calendar year and the employees in excess of 50 during that period were seasonal workers^TY2026 (§ 4980H(c)(2)(B)) and all persons treated as a single employer under IRC § 414(b), (c), (m) or (o) are treated as one employer for the size test — and a predecessor counts as the employer^TY2026 (§ 4980H(c)(2)(C)).

Who counts. a full-time employee is one employed on average at least 30 hours of service per week for the month — not a contractual description and not a job title^TY2026 (IRC § 4980H(c)(4)(A)). The size test also brings in full-time equivalents computed from the hours of part-time employees, which is how a business with few full-time staff can still be an applicable large employer.

Two payments, not one. where an applicable large employer offers no minimum essential coverage and at least one full-time employee receives a premium tax credit for a month, the payment is the applicable payment amount multiplied by the number of full-time employees for that month^TY2026 (IRC § 4980H(a)) — the no-coverage payment, computed on the whole full-time workforce. And where the employer does offer coverage but one or more full-time employees still receive a premium tax credit, the payment is computed on those employees only, subject to an overall ceiling measured by what the no-coverage payment would have been^TY2026 (IRC § 4980H(b)) — the offered-coverage payment, computed only on the employees who received a credit. Both are subject to the number of full-time employees in a month is reduced by 30 solely for computing the no-coverage payment and the overall ceiling on the offered-coverage payment — with a single reduction allocated among aggregated employers^TY2026 (§ 4980H(c)(2)(D)).

The Code’s figures are out of date on their face. the statutory payment amounts are indexed for calendar years after 2014 by the premium adjustment percentage under section 1302(c)(4) of the Patient Protection and Affordable Care Act, so the figures in the Code text understate the current amounts substantially^TY2026 (IRC § 4980H(c)(5)).

Reporting is separate from liability. an applicable large employer must file a return under IRC § 6056 reporting its offer of coverage, and any person providing minimum essential coverage must file a return under IRC § 6055 — two separate obligations that a self-insured large employer meets on one form^TY2026 (IRC §§ 6055(a) and 6056(a)), and a failure is an information return failure penalised under IRC §§ 6721 and 6722 — for a failure relating to a return required to be filed in 2027, the penalty is $340 per return with a calendar year maximum of $4,191,500 — or $1,397,000 for a person whose average annual gross receipts for the most recent three taxable years are $5,000,000 or less. Corrected within 30 days of the required filing date the penalty is $60, capped at $698,500 or $244,500; corrected after that but on or before 1 August it is $130, capped at $2,095,500 or $698,500 (IRC § 6721(a), (b), (d))^TY2026.

And there is a credit at the other end. {fig:aca.45R_eligible} (IRC § 45R(d)(1)), with {fig:aca.45R_2026} (Rev. Proc. 2025-32 § 3.09).

Current figures

How it works in practice

Determine status a year in advance, because that is when it is decided. Applicable large employer status for a calendar year is fixed by the average number of full-time employees on business days during the preceding calendar year. An employer that crosses the line in one year is subject to the rules for the whole of the next, and nothing done in the next year changes that. Advising a growing business in December is advising it about the year after next.

Count hours, not people. A full-time employee is one averaging at least 30 hours of service per week for the month. The count for the size test also includes full-time equivalents derived from the aggregate hours of part-time employees, so a restaurant with fifteen full-time staff and eighty part-timers can be an applicable large employer while an employer describing everyone as part time is not thereby outside the rules.

Aggregate before counting. IRC § 414(b), (c), (m) and (o) treat commonly controlled and affiliated service group members as one employer. Splitting a workforce across two companies with the same owners does not work, and the reduction by 30 is allocated among the group rather than given to each member.

Distinguish the two payments and note the different bases. The § 4980H(a) payment applies where no offer of minimum essential coverage was made and is computed on all full-time employees less the reduction of 30 — so it is much larger. The § 4980H(b) payment applies where an offer was made but was unaffordable or lacked minimum value, and is computed only on the employees who actually received a credit, subject to a ceiling of what the (a) payment would have been. Making a defective offer is therefore very much better than making none.

Never quote the figures from the Code text. The statute prints figures that were current in 2014 and IRC § 4980H(c)(5) indexes them by the premium adjustment percentage, which has moved substantially since. The same is true of the § 45R wage limit, which Rev. Proc. 2025-32 restates annually.

Treat reporting as a separate compliance obligation. IRC § 6056 requires an applicable large employer to report its offers of coverage, and IRC § 6055 requires any provider of minimum essential coverage to report the coverage — two obligations, met on one form by a self-insured large employer and on separate forms otherwise. A failure is penalised per return and per payee statement under IRC §§ 6721 and 6722, entirely independently of whether any assessable payment is due.

Scenarios

Traps

How this has changed

The individual mandate payment under IRC § 5000A was reduced to zero by Pub. L. 115-97 for months beginning after 31 December 2018, and it has not been restored. The employer shared responsibility provisions in IRC § 4980H were not touched, which is the most common misunderstanding in this area: individuals face no payment for going uncovered, while employers face the same assessable payments they always did.

The reporting obligations have been eased in form rather than in substance. The requirement to furnish statements to individuals may now be satisfied on request where the employer posts a clear notice of availability, and the deadline for furnishing has been extended by regulation — but the returns to the Service under IRC §§ 6055 and 6056 remain due, and the penalties under IRC §§ 6721 and 6722 apply to failures on both sides.

The assessable payment figures have risen every year since 2014 through the premium adjustment percentage, and the § 45R wage limit is restated annually — for 2026 at the figure in Rev. Proc. 2025-32 § 3.09. Neither has ever fallen.

Nothing in the post-2024 legislation alters IRC § 4980H, § 6055, § 6056 or § 45R.

Exam focus

Know the applicable large employer test exactly: an average of at least 50 full-time employees on business days during the preceding calendar year, with full-time equivalents included for the size test, aggregation under IRC § 414, and the seasonal worker exception at 120 days or fewer.

Know that a full-time employee is one averaging at least 30 hours of service per week, and that the payments are computed on full-time employees only.

Distinguish the two payments by trigger and by base — no offer against a defective offer, whole workforce less 30 against claimants only — and know that the (b) payment is capped at what the (a) payment would have been.

Remember the reduction by 30 is allowed once for an aggregated group, allocated among its members.

Finally, keep reporting separate from liability: IRC §§ 6055 and 6056 obligations exist regardless of whether any payment is due, and their failure is penalised under IRC §§ 6721 and 6722.

Check yourself

1. An employer averaged 46 full-time employees and 12 full-time equivalents during the preceding calendar year. Is it an applicable large employer?

Answer: Yes. The size test under IRC § 4980H(c)(2) counts full-time employees together with full-time equivalents derived from part-time hours, so the total is 58 and the threshold of 50 is exceeded. Note the asymmetry that makes this worth stating carefully: the equivalents count for determining status, but any assessable payment under § 4980H(a) or (b) is computed on full-time employees only — so the 12 equivalents bring the employer into the regime and then drop out of the arithmetic.

2. An applicable large employer with 60 full-time employees offers no coverage. Three employees obtain premium tax credits. On how many employees is the payment computed?

Answer: On 30 — all 60 full-time employees reduced by 30 under IRC § 4980H(c)(2)(D)(i). The § 4980H(a) payment is triggered by at least one full-time employee receiving a credit, but once triggered it is computed on the whole full-time workforce, not on the claimants. The contrast with § 4980H(b), which is computed only on the employees who received credits, is the single most important distinction in the section.

3. A retailer’s workforce exceeds 50 full-time employees for 95 days over the holiday season, and the excess employees are all seasonal. Is it an applicable large employer?

Answer: No, provided both limbs of IRC § 4980H(c)(2)(B) are met. The workforce must exceed 50 full-time employees for 120 days or fewer during the calendar year, and the employees in excess of 50 during that period must be seasonal workers — retail workers employed exclusively during holiday seasons being named in the definition. Ninety-five days is inside the limit, so the exception applies. Had the excess persisted for 130 days, or had any of the excess been non-seasonal, the exception would fail.

4. A client says the Affordable Care Act penalties were repealed. What is the accurate answer?

Answer: That the individual payment under IRC § 5000A was reduced to zero for months beginning after 31 December 2018, and that the employer shared responsibility payments under IRC § 4980H were not changed at all. Applicable large employers remain exposed to both assessable payments, the figures have been indexed upward every year since 2014, and the IRC §§ 6055 and 6056 reporting obligations remain in force with penalties under §§ 6721 and 6722. Confusing the two is the most common error in this area.

5. Why should an employer that cannot afford affordable coverage still make an offer?

Answer: Because it moves the exposure from IRC § 4980H(a) to § 4980H(b), and the two are computed very differently. With no offer, one employee’s premium tax credit triggers a payment on the entire full-time workforce less 30, at the higher per-employee rate. With an offer that is merely unaffordable or lacks minimum value, the payment is computed only on the employees who actually received a credit — and § 4980H(b)(2) caps it at what the § 4980H(a) payment would have been, so the offer can never make the position worse.