ACA penalties: 4980H(a) vs. (b)
Learn the difference between ACA's 4980H(a) and (b) penalties, how they're calculated, and proven strategies to avoid costly employer mandate fines.
The ACA's employer mandate creates two distinct financial exposures for companies with 50 or more full-time employees. Miss the coverage requirements, and your company faces either the §4980H(a) penalty for not offering coverage or the §4980H(b) penalty for offering inadequate coverage. Both hurt, but understanding the difference helps you plan smarter.
The §4980H(a) penalty: no coverage offered
The (a) penalty triggers when you don't offer minimum essential coverage to at least 95% of your full-time employees and their dependents. This is the sledgehammer penalty. For 2026, it's $3,340 per full-time employee annually, calculated as: (total full-time employees minus 30) × $3,340. Take a company with 200 full-time employees offering no coverage. The math: (200 - 30) × $3,340 = $567,800 in annual penalties. That's over half a million dollars for doing nothing. The 30-employee reduction softens the blow for smaller applicable large employers (those with 50-99 full-time employees), but once you cross 100 employees, the penalty scales linearly with your workforce size.
Quick (a) penalty facts
- Triggers when coverage is offered to less than 95% of full-time employees
- 2026 penalty: $3,340 per employee (minus first 30)
- Requires at least one employee to receive a marketplace subsidy (PTC)
The §4980H(b) penalty: inadequate coverage offered
The (b) penalty is more surgical. It applies when you offer coverage that either isn't affordable (costs more than 9.96% of employee household income in 2026) or doesn't provide minimum value (covers less than 60% of total allowed medical costs). For 2026, the penalty is $5,010 per full-time employee who receives a premium tax credit through the marketplace. Not every employee triggers this penalty — only those who decline your coverage and qualify for subsidized marketplace coverage. This creates a different risk profile. With the same 200-employee company, if 40 employees receive marketplace subsidies because your coverage is unaffordable, the penalty would be 40 × $5,010 = $200,400. Lower than the (a) penalty in this example, but still substantial. The (b) penalty often catches employers who thought they were compliant. You offered coverage, employees enrolled, but the plan didn't meet affordability thresholds for lower-wage workers. Those employees sought marketplace coverage, received subsidies, and triggered your penalty.
Strategic implications for variable-hour employers
For employers with variable-hour workforces, both penalties create unique challenges. Tracking full-time status under ACA measurement rules is complex. Missing newly eligible employees triggers the (a) penalty. Offering coverage that costs $400/month to someone earning $2,000/month triggers the (b) penalty. MEC plans provide a strategic solution. By offering MEC coverage to at least 95% of full-time employees, employers eliminate their largest exposure — the (a) penalty, which is calculated across the entire workforce minus 30. Employers may still face (b) penalty risk for employees who obtain subsidized marketplace coverage, since MEC plans do not provide minimum value. However, the (b) penalty applies only per employee who actually receives a premium tax credit, making it significantly more manageable than the (a) penalty. When priced using affordability safe harbors (like the FPL safe harbor, capping employee contributions at $129.89/month for 2026), MEC plans further reduce the likelihood that employees seek marketplace coverage in the first place.
Important caveat
Penalty amounts adjust annually for inflation. The figures shown reflect 2026 rates. Always verify current-year amounts with your benefits advisor or at IRS.gov before making coverage decisions.
The math is straightforward: doing nothing costs more than doing something smart. Understanding which penalty you face helps you choose coverage that protects your business while serving your employees.
Frequently Asked Questions
Can an employer face both 4980H(a) and 4980H(b) penalties in the same year?
No, you cannot face both penalties simultaneously. The IRS assesses whichever penalty applies to your situation. If you offer coverage to at least 95% of full-time employees, you avoid the (a) penalty entirely. The (b) penalty then applies only if your coverage is unaffordable or doesn't provide minimum value, and only for employees who receive marketplace subsidies.
How does the IRS know if my employees received marketplace subsidies that trigger the (b) penalty?
The IRS receives Form 1095-A from marketplace exchanges showing which employees received premium tax credits. They cross-reference this with your Form 1094-C and 1095-C filings to determine if those employees were offered coverage. If an employee received subsidies and you offered coverage, the IRS calculates whether your coverage met affordability and minimum value standards.
What happens if I'm right at the 95% threshold for offering coverage?
The 95% rule provides some flexibility for administrative challenges. You can fail to offer coverage to up to 5% of full-time employees without triggering the (a) penalty. However, any full-time employees who don't receive an offer and obtain subsidized marketplace coverage will trigger the (b) penalty instead. It's generally safer to aim for 100% coverage offers.
Do seasonal employees count toward the 4980H penalties?
Seasonal employees working 120 days or fewer don't count as full-time employees for penalty calculations, even if they average 30+ hours per week during their season. However, determining who qualifies as seasonal under ACA rules requires careful tracking. Misclassifying regular employees as seasonal can lead to unexpected penalty exposure.
When do I actually pay these penalties?
ACA penalties are assessed after the IRS reviews your annual ACA filings (Forms 1094-C and 1095-C). The process typically takes 1-3 years after the tax year ends. You'll receive a Letter 226-J proposing penalties, with 30 days to respond. Payment isn't due until after you've had the opportunity to dispute the assessment.