What Is Employer Shared Responsibility? Penalties and Form 1095-C

Employer shared responsibility is the Affordable Care Act rule that requires businesses with 50 or more full-time employees, counting full-time equivalents, to offer health coverage that meets federal minimum-value and affordability standards to their full-time employees and those employees’ dependent children. If a covered employer fails to do so and even one full-time employee receives a premium tax credit through the Health Insurance Marketplace, the IRS can assess a penalty. For 2026, that penalty is $3,340 per full-time employee when no coverage is offered, or $5,010 per subsidized employee when the coverage offered falls short.¹

Which Employers the Rule Covers

The rule applies to Applicable Large Employers, or ALEs. You’re an ALE for the current year if you employed an average of at least 50 full-time employees, including full-time equivalents, during the prior calendar year.² A full-time employee is anyone averaging at least 30 hours of service per week, or 130 hours in a calendar month.³

Part-time workers still count. Add up total hours worked by all non-full-time employees in a month, capping each person at 120 hours, then divide by 120. That gives you full-time equivalents for the month. Average those monthly figures across the year to get your FTE count.²

Related Companies Are Combined

Businesses under common ownership or otherwise related under Section 414 of the Internal Revenue Code are combined into a single employer for ALE purposes.² A parent with three subsidiaries of 20 full-time workers each has 60 for the count, even though no single entity crosses the line. Each entity still offers coverage to its own workers, but the combined headcount is what determines whether the mandate applies to any of them.

Seasonal Spike Exception

If your workforce only crosses 50 because of seasonal workers, and the spike lasts 120 days or fewer in the calendar year, you can stay outside the ALE definition. Both conditions must be true: the total exceeded 50 for no more than 120 days, and the workers pushing it above 50 were seasonal. A new employer with no prior-year data is an ALE in its first year if it reasonably expects to employ, and actually does employ, an average of at least 50 full-time employees, including equivalents, that year.²

What the Coverage Has to Look Like

Once you’re an ALE, the offer to each full-time employee needs to clear three tests. It has to be minimum essential coverage, it has to provide minimum value, and it has to be affordable. Missing any one of these can trigger a penalty if a full-time employee ends up on a subsidized marketplace plan.⁴

Minimum essential coverage means the plan is an eligible employer-sponsored plan recognized under the ACA, which most standard group health plans are. Minimum value means the plan covers at least 60 percent of the total allowed cost of benefits expected under the plan. You can confirm minimum value using the IRS’s online calculator or a certification from a qualified actuary.⁵

Affordability turns on the employee’s required contribution for self-only coverage. For plan years beginning in 2026, that contribution cannot exceed 9.96 percent of the employee’s household income.⁶ If the cheapest minimum-value plan you offer costs an employee more than that share, the coverage is unaffordable as to that person, and they may qualify for a marketplace subsidy that puts you on the hook.

Dependents Means Children, Not Spouses

The mandate reaches full-time employees and their dependents, but “dependent” here is narrow. It means a child under age 26 as defined in Section 152(f)(1) of the tax code. It does not include the employee’s spouse.⁷ You do need to offer coverage to eligible children, and the child stays eligible for the full calendar month in which they turn 26. A group health plan also cannot restrict dependent eligibility based on the child’s marital status, student status, employment, or financial dependency on the employee.⁸

Safe Harbors for Measuring Affordability

Employers rarely know an employee’s total household income, which is the figure the affordability test technically uses. Three IRS safe harbors let you substitute a proxy.⁵

W-2 wages. Use the employee’s Box 1 wages on Form W-2. If the required monthly contribution for self-only coverage doesn’t exceed 9.96 percent of W-2 income divided by 12, the offer is treated as affordable.
Rate of pay. For hourly employees, multiply the hourly rate by 130 hours. For salaried employees, use the monthly salary. Apply the 9.96 percent threshold to that figure.
Federal poverty line. Use the mainland FPL for a single individual. If the monthly contribution doesn’t exceed 9.96 percent of the FPL divided by 12, the offer passes.

Different safe harbors can apply to different categories of employees, such as hourly versus salaried, but within a category you have to apply the same one consistently for the year. The FPL safe harbor is the most conservative: if your plan clears it, it clears for everyone regardless of actual income.

The Two Penalties

Two separate assessments live in Section 4980H, and both are triggered only when at least one full-time employee receives a premium tax credit through the marketplace. If no employee gets a subsidy, no penalty applies, even if the coverage is technically deficient.¹

4980H(a): No Offer

This one applies when an ALE fails to offer minimum essential coverage to at least 95 percent of its full-time employees, or all but five (whichever is greater), and their dependents. For 2026, the annualized penalty is $3,340 per full-time employee, calculated after subtracting the first 30 employees from the total.¹ The 30-employee reduction applies only to the penalty math, not to ALE status. An employer with 200 full-time workers who trips 4980H(a) for the full year owes $3,340 × 170 = $567,800.

4980H(b): Offer That Falls Short

This applies when the employer offers coverage but the coverage fails minimum value or affordability. For 2026, the assessment is $5,010 per year for each full-time employee who actually receives a premium tax credit.¹ Unlike 4980H(a), it applies only to the subsidized employees, not the whole workforce. The law caps the 4980H(b) total so it never exceeds what 4980H(a) would have produced, and the two penalties cannot both apply in the same month.

Both penalties are calculated monthly (the annual figure divided by 12) and assessed after the fact. An employer who fixes a coverage gap partway through the year limits exposure to the months when coverage was missing or deficient.

Reporting: Forms 1094-C and 1095-C

Every ALE has to file two forms with the IRS each year and furnish statements to employees, whether a penalty is owed or not.

Form 1094-C is the transmittal. It summarizes how many 1095-Cs you’re filing, whether you offered coverage to the required percentage of employees each month, and which entities are in your controlled group.⁹ Form 1095-C is prepared for each full-time employee and describes the coverage offered, the employee’s share of the lowest-cost self-only premium, and the months coverage was available. Indicator codes on the form tell the IRS the type and quality of each offer.¹⁰

Self-insured employers have an added layer. Part III of Form 1095-C must list every individual enrolled in the plan, including the employee, a covered spouse, and each covered dependent, along with Social Security numbers (or dates of birth when SSNs aren’t available) and months of coverage. Part III also has to be completed for non-employees enrolled in the plan, such as retirees or COBRA beneficiaries.¹⁰

For tax year 2025 (returns filed in 2026), Form 1095-C must be furnished to each full-time employee by March 2, 2026. Paper filings with the IRS are due March 2, 2026; electronic filings are due March 31, 2026.¹¹ Almost every ALE ends up filing electronically because the threshold is 10 or more information returns of any type across all form categories, so the practical IRS deadline is March 31.¹²

If the IRS Says You Owe: Letter 226-J

After the IRS matches your filings against marketplace enrollment data, it may determine that a payment is due. The formal notice is Letter 226-J, which proposes a specific dollar assessment and includes an Employee Premium Tax Credit Listing showing which employees received subsidies and for which months.¹³

Every Letter 226-J comes with Form 14764, the ESRP Response, which you have to complete, sign, and return by the date printed on the first page whether you agree with the assessment or not. If you agree, include payment. If you disagree, attach a signed statement explaining why, a corrected PTC Listing, and any supporting documentation, such as evidence of coverage offers the IRS may not have captured.¹³

These letters often come out of reporting errors rather than actual coverage failures: a wrong indicator code, a missing month of coverage data, or a mismatch between an employee’s marketplace application and your records. Reviewing the PTC Listing line by line is usually the most productive step, because corrections on even a few employees can substantially reduce the proposed amount.

Penalties for Reporting Errors

Separate from any 4980H assessment, the IRS can impose penalties under Sections 6721 and 6722 for failing to file correct information returns or furnish correct employee statements on time. For 2026 the per-return amounts are:¹⁴

Up to 30 days late: $60 per return.
31 days late through August 1: $130 per return.
After August 1 or not filed: $340 per return.
Intentional disregard: $680 per return, with no maximum cap.

For an ALE with several hundred full-time employees, these amounts add up fast. Filing 500 forms more than a month late after August 1 would mean $170,000 in reporting penalties on its own. The IRS may waive them for reasonable cause, which requires showing that you acted responsibly before and after the failure and that significant mitigating factors or events beyond your control caused the problem.¹⁵ A first-time error with a clean compliance history and a prompt correction carries the strongest case for relief.

1
Office of the Law Revision Counsel. 26 USC 4980H – Shared Responsibility for Employers Regarding Health Coverage
2
Internal Revenue Service. Determining if an Employer Is an Applicable Large Employer
3
Internal Revenue Service. Identifying Full-Time Employees
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Internal Revenue Service. Employer Shared Responsibility Provisions
5
Internal Revenue Service. Minimum Value and Affordability
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Internal Revenue Service. Adjusted Items for 2026
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eCFR. 26 CFR 54.4980H-1 – Definitions
8
eCFR. 45 CFR 147.120 – Eligibility of Children Until at Least Age 26
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Internal Revenue Service. About Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns
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Internal Revenue Service. Instructions for Forms 1094-C and 1095-C
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Internal Revenue Service. 2025 Instructions for Forms 1094-C and 1095-C
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Internal Revenue Service. E-File Information Returns
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Internal Revenue Service. Letter 226-J
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Internal Revenue Service. Information Return Penalties
15
Internal Revenue Service. Penalty Relief for Reasonable Cause