The ACA employer mandate (also called the Employer Shared Responsibility Provision) requires Applicable Large Employers — those with 50 or more full-time equivalent employees averaged across the prior calendar year — to offer affordable, minimum value health coverage to at least 95% of their full-time employees and their dependent children up to age 26, or face IRS penalties under IRC Section 4980H. Small employers with fewer than 50 FTEs are not subject to the mandate and face no 4980H penalties, though they may still have other ACA reporting obligations.

The 4980H(a) “sledgehammer” penalty applies when you fail to offer Minimum Essential Coverage to at least 95% of your full-time employees and at least one employee gets a premium tax credit. It is calculated across your entire full-time workforce minus the first 30 employees — making it potentially enormous. The 4980H(b) “tack hammer” penalty applies when you DO offer coverage, but it is either not affordable or doesn’t meet minimum value. It is assessed per affected employee who receives a premium tax credit — no 30-employee reduction. You cannot face both penalties simultaneously for the same employee.

The IRS cross-references employer-filed 1094-C/1095-C forms with employees’ premium tax credit claims on their individual tax returns. When an employee claims a premium tax credit and the IRS determines the employer may be liable for a penalty, the IRS sends the employer a Letter 226-J. Employers now have 90 days (increased from 30 days under the 2024 Employer Reporting Improvement Act) to respond, agree, or contest the proposed penalty. The IRS has significantly increased its enforcement activity in recent years and has eliminated many good-faith transition relief provisions that previously existed.

Since employers don’t know employees’ household incomes, the IRS provides three safe harbors for testing affordability. (1) Federal Poverty Line (FPL): Coverage is affordable if the employee contribution for self-only coverage does not exceed the FPL safe harbor amount — $113.20/month in 2025. This is the simplest and most conservative approach. (2) Rate of Pay: The maximum contribution is 9.02% (2025) of the employee’s hourly rate multiplied by 130 hours. (3) W-2 Wages: The maximum contribution is 9.02% of the employee’s prior-year W-2 wages divided by 12. Employers can use different safe harbors for different groups of employees.

Letter 226-J is the IRS’s proposed assessment of ACA employer mandate penalties. You have 90 days from the date of the letter to respond. You should immediately review your 1094-C and 1095-C filings for errors, gather evidence of coverage offered, verify employee full-time status, and determine whether you were actually an ALE in the relevant year. Many penalty assessments contain errors that can be successfully contested. Do not ignore the letter — failure to respond results in a CP 220J notice formalizing the penalty. Contact JS Benefits Group or an ACA compliance attorney immediately upon receipt.

Yes. Level-funded and self-funded plans can satisfy the employer mandate, provided they offer Minimum Essential Coverage (MEC), meet Minimum Value (60% actuarial value), and are offered to at least 95% of full-time employees and their dependent children. In fact, level-funded plans are increasingly popular among small and mid-size employers as a way to manage costs while maintaining ACA compliance. JS Benefits Group can help you design and implement a level-funded plan that meets all ACA requirements. Note that level-funded plans are not subject to all ACA market rules, which is part of why they can offer premium savings vs. fully-insured plans.

JS Benefits Group provides comprehensive ACA compliance services including: ACA employer mandate analysis and exposure assessment, plan design to ensure MEC and minimum value compliance, affordability testing and safe harbor selection, 1094-C and 1095-C reporting coordination, Letter 226-J response support, and ongoing compliance monitoring. Because we also design your benefits plan and shop 30+ carriers, we can simultaneously ensure ACA compliance AND optimize your plan costs — something standalone compliance consultants can’t do. Contact us at (877) 355-6070 for a free ACA compliance assessment.