As the weather becomes cooler, and celebrations are in full swing, the new year comes with new employer compliance updates regarding offering health benefits to employees and avoiding potential penalties.

Since March 23, 2010, the Affordable Care Act has become the "law of the land" and mandates an applicable large employer (ALE) with 50+ full-time or full-time equivalent employees must offer affordable benefits to eligible employees or potentially face one of two penalties for non-compliance. This is known as the shared responsibility or "pay-or-play" rule.

To remain compliant, the employer must offer affordable or minimum essential coverage (MEC) medical plans to 95% of their full-time employees and dependents. Instead of using household income to determine affordability, the IRS allows three safe harbors:

  • Use Form W-2 wages
  • Employee rate of pay
  • Federal poverty line

Failure to comply can trigger one of the "pay-or-play" penalties, which can be substantial:

  • 4980H (a) penalty: If the employer fails to offer affordable or "MEC" coverage to at least 95% of their full-time employees and dependents, the penalty per employee applies. The amount is $241.67 monthly or $2900.00 annualized for each full-time employee, minus the 30-employee exemption.

    For example, the employer has 130 full-time employees and fails to provide affordable/MEC coverage. The assessed penalty would be 130 – 30 = 100 employees, times $2900 (annual) penalty per employee (100) = $290,000 for penalty (a).

  • 4980H (b) penalty: If the employer fails to offer affordable or "MEC" coverage or offers coverage that doesn't provide minimum value, and the employee goes to the state-run Exchange and receives a subsidy, the employer will receive a (b) penalty per full-time employee receiving the subsidized coverage on the Exchange. The (b) penalty is $362.50 monthly or $4350 annualized.

    For example, based on the above criteria, five employees enroll through the Exchange and receive a subsidy. The assessed penalty would be five employees times $4350 (annual) = $21,750 for penalty (b).

  • If an ALE triggers both (a) and (b) penalties, the IRS will apply either (a) OR (b), the most expensive to the employer.

To avoid penalties, we recommend employers re-evaluate their contribution strategy annually to maintain affordability compliance and provide coverage that meets or exceeds the minimum requirements.

Historically, penalties (a) and (b) have increased each year; The good news is for 2025, they decreased. The (a) penalty for 2024 was $2970 annually; for 2025, it's been lowered to $2900 annually. The (b) penalty for 2024 was $4460 annually; for 2025, it's also been reduced to $4350 annually.

Although the penalties have come down for 2025, they are still substantial. Additionally, the affordability threshold has increased from 8.39% in 2024 to 9.02% in 2025, allowing employers to shift a greater amount of the premium to the employees. 

The bad news is that the "good faith" transition relief was removed starting in 2020. Since then, the IRS has pursued greater penalty enforcement for companies that do not comply.

The bottom line: If your company is considered an applicable large employer (ALE), offer affordable medical coverage to your eligible employees and their dependents and avoid the IRS penalties that can be levied for non-compliance.

Additional information can be found here:

If you'd like to learn more, please contact me at:

Robert Guenther
Senior Client Manager
rguenther@venbrook.com 
818.598.8935