The individual ACA market and employer shared responsibility enforcement run in parallel lanes most of the time. Section 4980H of the Internal Revenue Code requires applicable large employers, or ALEs, with 50 or more full-time equivalent employees to offer minimum essential coverage or pay annual IRS penalties when at least one full-time employee receives an APTC subsidy through the Marketplace. That regulatory machinery sits in the background of every quote you run for a full-time worker at a mid-size or large company, and it is the reason some clients expect a substantial subsidy and receive nothing.
Key Takeaways
- ALEs average 50 or more full-time equivalent employees across the prior calendar year, counting part-time hours at 120 per month per worker
- The 4980H(a) penalty applies when an ALE does not offer MEC to at least 95 percent of full-time employees and at least one FTE receives an APTC subsidy
- The 4980H(b) penalty applies when an ALE offers MEC that is unaffordable or below 60 percent actuarial value and a full-time employee receives an APTC subsidy
- The IRS indexes both penalty amounts annually; in recent plan years 4980H(a) has run approximately $3,000 per year and 4980H(b) approximately $4,500 per year
- Three affordability safe harbors let employers test compliance without knowing employee household income: W-2 wages, rate of pay, and the federal poverty line
- An employee at an ALE with an affordable minimum-value offer cannot receive APTC even if their income would otherwise qualify
Who qualifies as an applicable large employer
ALE status is determined by averaging full-time equivalent employees across the prior calendar year. A full-time employee is anyone averaging 30 or more hours per week, or 130 or more hours in a calendar month. Part-time and variable-hour employees are converted to FTEs by adding up all their hours in a given month and dividing by 120. The monthly FTE totals are then averaged across all 12 months.
The 50-employee threshold applies at the controlled-group level. Related entities under common ownership are aggregated under IRS rules, so a holding company with two subsidiaries of 30 workers each is treated as a single employer with 60. This matters when a client's small employer turns out to share ownership with other entities the client had not mentioned.
There is a seasonal worker carve-out. If an employer exceeds 50 FTEs only because of seasonal workers, and the excess lasts no more than 120 days during the year, the employer may not qualify as an ALE. Agricultural operations and retail businesses with concentrated holiday hiring are the common scenarios where this applies.
Two penalty tracks under Section 4980H
Congress built two separate penalties because employer non-compliance takes two shapes: not offering coverage at all, and offering coverage that fails the affordability or minimum value tests. The IRS calls these the assessable payment under 4980H(a) and the assessable payment under 4980H(b).
| Dimension | 4980H(a): No offer | 4980H(b): Unaffordable or inadequate offer |
|---|---|---|
| Trigger | ALE fails to offer MEC to at least 95% of full-time employees and at least one FTE receives APTC | ALE offers MEC but coverage is unaffordable or below 60% actuarial value and at least one FTE receives APTC |
| Annual penalty (IRS-indexed) | ~$3,000 per year multiplied by all full-time employees minus the 30-employee deductible | ~$4,500 per year per FTE who received APTC; capped at the 4980H(a) total |
| Who is counted | All full-time employees, minus the 30-employee deductible | Only the full-time employees who actually enrolled in subsidized Marketplace coverage |
| Employee APTC eligibility | Employee is income-eligible for APTC if household income falls at or above 100% FPL | Employee is eligible for APTC if the employer offer fails the affordability or minimum value test |
Penalty amounts are IRS-indexed annually. Confirm current amounts in the applicable IRS notice before advising employer clients on compliance exposure.
The 4980H(b) cap matters in practice. An employer who offers coverage to most of the workforce but whose plan fails the affordability test for a handful of employees will owe 4980H(b) only for those employees who actually received an APTC subsidy. That number is usually far smaller than the full 4980H(a) calculation. The cap means a 4980H(b) liability can never exceed what the employer would have owed under 4980H(a) for the same year.
Affordability safe harbors and minimum value
A plan is affordable under Section 4980H if the employee-only premium contribution does not exceed the IRS-published affordability percentage of the employee's household income. The problem is that household income is unknown at enrollment. Congress addressed this with three employer safe harbors, each of which substitutes a known proxy for household income.
| Safe harbor | Test | Practical note |
|---|---|---|
| W-2 wages | Employee-only premium contribution does not exceed the affordability percentage of prior-year W-2 Box 1 wages | Simple to apply after W-2s are issued; less useful for new hires during their first year |
| Rate of pay | Employee-only premium contribution does not exceed the affordability percentage of the employee's current hourly rate multiplied by 130 hours (or the monthly salary for salaried workers) | Works in real time without prior-year wage data; requires updating if the wage rate changes |
| Federal poverty line | Employee-only premium contribution does not exceed the affordability percentage of the single-individual FPL for the calendar year | Easiest to administer uniformly across the workforce; may require a lower contribution than the other safe harbors |
The affordability percentage is updated annually by the IRS. For 2025 it was 9.02 percent. Confirm the current-year threshold before advising clients on compliance or subsidy eligibility.
Minimum value is a separate test from affordability. A plan meets minimum value if its actuarial value is at least 60 percent, meaning the plan pays at least 60 cents of every dollar of covered benefits on average. HHS publishes the AV Calculator for verifying minimum value. A plan can pass the affordability test and still fail minimum value if it is built with very high deductibles or cost-sharing.
Annual filing: Forms 1094-C and 1095-C
Every ALE must file Form 1094-C with the IRS and furnish Form 1095-C to each full-time employee by the ACA deadlines each spring. Form 1095-C has three parts. Part I is employer and employee identification information. Part II is the offer-of-coverage codes and the employee-only premium for the lowest-cost minimum-value plan. Part III covers self-insured plan enrollment.
The offer-of-coverage codes in Part II are how the IRS determines whether an employer has met the 4980H standard. Codes 1A through 1I cover different types of offers, including which affordability safe harbor applies. Incomplete or inconsistent codes are the primary trigger for IRS Letter 226J, the notice that opens an employer's ESRP audit.
Group benefits platforms like Connecture are built around employer plan management and typically do not flag whether an employer's 1095-C coding is consistent with the APTC amounts the IRS receives from Marketplace enrollment data. When an ACA broker is writing individual coverage for employees at an ALE client, that disconnect can surface later as a penalty notice neither the broker nor the employer anticipated.
What this means for individual market brokers
If a client works full time at a company with 50 or more employees and comes to you for individual coverage, the first diagnostic question is whether the employer offers group coverage. If yes, the second is whether that offer is affordable and meets minimum value.
An employee cannot receive APTC if their employer offers affordable, minimum-value coverage. The household income may fall at 200 percent of the federal poverty level, which would normally generate a meaningful subsidy, but the employer offer blocks it. This is the single most common reason a client at a mid-size company expects a subsidy and does not get one.
The family glitch fix changes part of this. IRS regulations effective 2023 expanded the affordability test to include family member contributions. Dependents whose cost of employer-sponsored family coverage is unaffordable under the expanded test may now qualify for Marketplace subsidies even when the employee-only offer is affordable. A client with dependents is worth re-checking under the current rules even if they were blocked from subsidies in prior years.
When an employer ends its group plan entirely, every affected full-time employee qualifies for a 60-day special enrollment period. Use the APTC subsidy calculator to show those clients what they qualify for before they assume they cannot afford individual coverage. The numbers often change significantly once the employer offer is no longer blocking the subsidy.
Section 4980H: frequently asked questions
Common questions from ACA brokers who encounter employer shared responsibility issues when writing individual market coverage.
What is an applicable large employer under the ACA?
An applicable large employer, or ALE, is a business that averaged 50 or more full-time equivalent employees during the prior calendar year. Full-time employees work 30 or more hours per week or 130 or more hours per calendar month. Part-time hours are converted to FTEs by dividing total part-time hours in a given month by 120. Related entities under common ownership are aggregated under IRS controlled-group rules, so a holding company with two subsidiaries of 30 workers each is treated as a single 60-employee employer.
Can a full-time employee at an ALE qualify for Marketplace subsidies?
Yes, under specific conditions. If the employer does not offer minimum essential coverage, the employee may qualify for APTC based on income. If the employer offers coverage that is unaffordable or below minimum value, the employee may also qualify. If the employer offers affordable, minimum-value coverage, the employee is generally not eligible for APTC even if their income falls within the subsidy range. Dependents may qualify separately if the family premium fails the expanded affordability test introduced in 2023.
What is the difference between 4980H(a) and 4980H(b)?
4980H(a) is the no-offer penalty. It applies when an ALE fails to offer minimum essential coverage to at least 95 percent of full-time employees and at least one FTE receives an APTC subsidy. The annual penalty is roughly $3,000 (indexed) multiplied by total FTEs minus a 30-employee deductible. 4980H(b) is the inadequate-offer penalty. It applies when an ALE offers coverage that is unaffordable or below minimum value and an FTE receives an APTC subsidy. The annual penalty is roughly $4,500 (indexed) per subsidized employee, capped at the total 4980H(a) amount the employer would owe.
What are the employer affordability safe harbors?
The IRS provides three safe harbors that substitute a known wage proxy for unknown household income. The W-2 safe harbor tests whether the employee-only premium contribution exceeds the affordability percentage of prior-year W-2 Box 1 wages. The rate-of-pay safe harbor tests against the employee's current hourly or monthly rate multiplied by 130 hours. The federal poverty line safe harbor tests against the single-individual FPL for the applicable calendar year. An offer is affordable under a safe harbor if the employee-only premium does not exceed the current IRS affordability percentage of that wage base.
What happens to an employee's coverage when an employer drops the group plan?
When an ALE or any employer ends group health coverage, affected employees experience a qualifying life event and become eligible for a 60-day special enrollment period through the Marketplace. They can enroll in an ACA-compliant plan and, if income-eligible, receive APTC subsidies. The employer's loss of ALE status does not eliminate the SEP window. Employees should be counseled to act within the 60-day window because coverage can be backdated to the loss-of-coverage date in most Marketplace systems.
