ACA penalties come in two very different varieties. Neither is very pleasant.

First are the employer shared responsibility payments under Section 4980H — the ACA employer mandate penalties that can apply when an Applicable Large Employer (ALE) fails to offer qualifying coverage to full-time employees. In 2026, the annualized penalty amounts are $3,340 under Section 4980H(a) and $5,010 under Section 4980H(b). The IRS increased those amounts to $3,780 and $5,670, respectively, for 2027.

Then there are information-reporting penalties under Sections 6721 and 6722, which can apply when required ACA forms are late, missing, or incorrect.

They are separate penalty systems. And yes, an employer can potentially have problems with both.

That is what makes ACA penalty exposure difficult to estimate from a single number. The real question isn’t simply, “What’s the ACA penalty this year?”

It’s:

Which requirement failed, for which employees, for which months, and what did the employer report to the IRS?

Let’s break down the math.

The best ACA penalty strategy is preventing the letter in the first place. Selerix helps employers continuously track eligibility, affordability, ACA coding, filing, and corrections instead of waiting until year-end to find the gaps. Explore Selerix ACA Compliance

What Are the ACA Penalties for Employers?

Applicable Large Employers can face two primary categories of federal ACA penalties.

The first comes from the employer shared responsibility provisions under Internal Revenue Code Section 4980H. These penalties relate to whether an ALE offered appropriate health coverage to its full-time employees.

The second comes from Sections 6721 and 6722, which govern failures to file correct information returns with the IRS and failures to furnish correct employee statements.

The distinction matters because an employer can satisfy one obligation while failing the other.

You could offer compliant coverage all year but file inaccurate Forms 1094-C and 1095-C. Or you could file your forms perfectly and have them accurately document that affordable coverage was not offered to an employee who should have received it.

Accurate reporting does not erase an employer-mandate problem. And compliant coverage does not erase a reporting problem.

The Two ACA Penalty Tracks: Mandate Penalties vs. Filing Penalties

Think of ACA enforcement as running on two tracks.

Track 1: Employer mandate penalties. Section 4980H looks at whether an ALE offered enough full-time employees coverage and whether that coverage was affordable and provided minimum value. These are the familiar A penalty and B penalty.

Track 2: Information-reporting penalties. Sections 6721 and 6722 look at whether required information returns were accurately and timely filed with the IRS and furnished as required.

The tracks are independent.

That means choosing not to file because you already know you failed the employer mandate does not limit your exposure. It can create another one.

For example, an ALE that fails to file Forms 1094-C and 1095-C could potentially face information-return penalties. Once the IRS obtains enough information to determine that the employer also failed its coverage obligations, the employer may separately face a Section 4980H assessment.

We explain that interaction in more detail in Two Strikes? Why Skipping ACA Filing Could Land You Double Penalties.

The larger lesson is simple: never treat filing as optional because you think the ACA damage has already been done.

The 4980H(a) Penalty: The “A Penalty”

Section 4980H(a) is the big one. It can apply when an ALE fails to offer minimum essential coverage to at least 95% of its full-time employees and their dependents, and at least one full-time employee receives a premium tax credit for Marketplace coverage.

In 2026, the annualized penalty is $3,340 for each full-time employee, after subtracting 30 employees. The actual employer shared responsibility payment is calculated monthly.

ERISA attorney, Stacy Barrow, described it during Selerix’s ACA Fundamentals webinar using the nickname many benefits professionals know well: the “sledgehammer penalty.”

The name makes sense because the penalty is not limited to the employees who missed an offer of coverage. It can multiply across almost the entire full-time workforce.

A 4980H(a) Example

Suppose an employer has 300 full-time employees and fails the 95% offer test throughout 2026. At least one full-time employee obtains Marketplace coverage and receives a premium tax credit.

The simplified annualized calculation is:

• 300 full-time employees − 30 = 270
• 270 × $3,340 = $901,800
• $901,800 in potential 4980H(a) exposure for the year.

For controlled groups, the 30-employee reduction is allocated among the applicable ALE members rather than automatically giving every EIN its own full 30-person reduction.

And because Section 4980H is applied month by month, an employer that failed the test only during part of the year would not automatically owe the full annualized amount.

Still, the example shows why 95% is not a percentage you want to discover you missed during year-end reporting.

If you are uncertain whether your organization is actually subject to the employer mandate, start with the Selerix Applicable Large Employer calculator.

The 4980H(b) Penalty: The “B Penalty”

The Section 4980H(b) penalty works differently.

An employer may pass the 95% offer test and still have exposure if a particular full-time employee was not offered coverage that was affordable and provided minimum value, and that employee received a Marketplace premium tax credit.

Instead of multiplying across nearly the whole workforce, the B penalty applies only to affected full-time employees.

For 2026, the annualized amount is $5,010 per affected full-time employee.

So imagine our 300-employee employer does pass the 95% test, but 10 full-time employees receive Marketplace premium tax credits because the employer coverage available to them was unaffordable for all 12 months.

The simplified annual exposure would be: 10 × $5,010 = $50,100. That is far less than the $901,800 A-penalty example, even though the per-employee B amount is higher.

This is why the B penalty is sometimes called the more targeted penalty.

There is also an important cap. An ALE cannot owe both a Section 4980H(a) and 4980H(b) payment for the same month, and aggregate B-penalty exposure cannot exceed what the A penalty would have been for that month. IRS guidance describes the B payment as one that “can never be larger” than the corresponding A exposure.

Affordability is therefore one of the most important proactive controls employers have. Coverage affordability is 9.96% for 2026 plan years and 10.22% for 2027, and employers can use the Form W-2, rate-of-pay, or federal-poverty-line safe harbors to determine affordability using information they actually possess.

Our ACA affordability guide walks through those safe harbors and the 2027 change in detail.

ACA Penalty Amounts by Year

Both 4980H penalty amounts are indexed, which means employers need to check the applicable year rather than relying on an old ACA cheat sheet.

Year	4980H(a) per full-time employee, minus 30	4980H(b) per affected employee	Affordability percentage
2027	$3,780	$5,670	10.22%
2026	$3,340	$5,010	9.96%
2025	$2,900	$4,350	9.02%
2024	$2,970	$4,460	8.39%

For 2026, the IRS established the $3,340 and $5,010 amounts in Revenue Procedure 2025-26. For 2027, Revenue Procedure 2026-22 raises them to $3,780 and $5,670, while Revenue Procedure 2026-26 sets the 2027 affordability percentage at 10.22%.

One slightly counterintuitive point in the table: the 2025 amounts were lower than 2024. These figures are indexed to the statutory premium-adjustment methodology; they do not simply increase by a fixed amount each year.

Filing Penalties: Sections 6721 and 6722

The employer shared responsibility penalties get most of the attention because they can produce very large assessments.

But Forms 1094-C and 1095-C create another category of exposure.

Section 6721 generally applies to failures to file correct information returns with the IRS.

Section 6722 generally applies to failures to furnish correct statements when required.

The IRS expressly treats these as separate penalties.

For returns and statements required in 2026, the current amounts are:

When corrected	Penalty per return or statement	Standard annual maximum	Small-business maximum*
Within 30 days	$60	$683,000	$239,000
More than 30 days late, but by Aug. 1	$130	$2,049,000	$683,000
After Aug. 1 or not correctly filed/furnished	$340	$4,098,500	$1,366,000
Intentional disregard	$680 minimum	No maximum	No maximum

*The reduced annual caps apply under the applicable $5 million gross-receipts test.

The same basic tier structure applies separately to filing and furnishing failures. For intentional disregard, the IRS rules can produce penalties greater than the table’s $680 floor, and there is no annual cap.

This is another reason corrections matter: Finding an error does not mean every penalty is inevitable. How quickly the employer corrects the problem can materially change the statutory penalty tier.

And where an employer can demonstrate reasonable cause rather than willful neglect, penalty relief may be available. The IRS looks at whether the filer acted responsibly before and after the failure and whether significant mitigating factors or events beyond the filer’s control contributed to it.

How ACA Penalties Are Assessed: Letters, Deadlines, and Your Response Window

The IRS does not usually leap directly from “something looks wrong” to “pay us immediately.”

Different types of compliance issues generate different correspondence.

IRS correspondence	What it generally means
Letter 5699	The IRS believes an employer may have been required to file ACA information returns but cannot locate them.
Notice 972CG	Proposed information-return penalties related to late, missing, or incorrect information reporting.
Letter 226-J	Initial proposed Employer Shared Responsibility Payment under Section 4980H.
Letter 227 series	IRS response to the employer’s 226-J response; may confirm, reduce, eliminate, or continue the proposed assessment.
CP220J	Formal notice and demand after an ESRP has been assessed.

Letter 226-J is particularly important because it is a proposed assessment, not a bill. The IRS calculates potential liability using the employer’s Forms 1094-C and 1095-C together with information showing whether full-time employees received premium tax credits.

That gives the employer an opportunity to review the data behind the proposed assessment and explain why it is wrong.

Under the Employer Reporting Improvement Act, enacted in December 2024, ALEs must now receive at least 90 days from the first letter proposing a Section 4980H assessment to respond before the IRS takes further action. The law also establishes a six-year assessment period for Section 4980H payments, measured from the Section 6056 return due date or, if later, the date the return was actually filed, for returns due after December 31, 2024.

That is a meaningful improvement over the old response framework. It is 100% not permission to put the letter in a drawer for 89 days.

The records behind a 226-J can involve employee hours, coverage offers, affordability calculations, payroll records, enrollment data, ACA codes, and Marketplace premium-tax-credit information. The faster the responsible team begins reviewing them, the more time there is to build a complete response.

If the IRS accepts the employer’s explanation, the Letter 227 process can close the matter or reduce the proposed assessment — Letter 227-K, for example, reflects that an ESRP has been reduced to zero. If the IRS ultimately assesses a liability, it issues CP220J.

For the full sequence, see our guide to ACA penalty letters, our explanation of what triggers Letter 226-J, and the IRS Penalty Letter Playbook.

What About Reasonable Cause?

Information-reporting penalties have their own defense process. If an employer receives Notice 972CG and believes reasonable cause applies, the response needs more than “this was an accident.”

IRS standards look for evidence that the filer acted responsibly and that the failure resulted from significant mitigating factors or events beyond its control. Previous Selerix guidance also emphasizes documenting those circumstances in a written reasonable-cause statement and supporting the facts behind the request.

In other words: 

• Document the problem. 
• Document what caused it. 
• Document what you did to fix it.

How to Estimate Your ACA Penalty Exposure

If someone asks Finance, “How bad could this be?” you can get to a useful first-pass estimate without pretending you already know what the IRS will ultimately assess.

First, confirm whether the organization was actually an ALE for the year at issue. ACA status is based on the previous year’s average full-time and full-time-equivalent workforce, so use the ALE calculator if that threshold is in question.

Next, determine the number of full-time employees, not FTEs, during the affected months. Full-time equivalents help determine whether you are an ALE; the 4980H penalty calculations themselves use full-time employees. If your workforce includes variable-hour employees, make sure you are applying the ACA’s measurement rules rather than internal payroll labels. Our employee-hours guide explains that distinction.

Then calculate the potential A-penalty worst case. For a simplified full-year 2026 estimate: (Full-time employees − 30) × $3,340

Finally, estimate B-penalty exposure based on the number of full-time employees who could actually trigger it:

Affected subsidized full-time employees × $5,010

Remember that both calculations are fundamentally monthly. If the problem existed for three months rather than twelve, the assessment should reflect that timeframe. And the B amount remains subject to the A-penalty cap.

This estimate tells you the scale of the issue. It does not tell you whether the proposed penalty is correct. That takes a review of what actually happened.

What ACA Penalties Look Like in Practice

That distinction matters because proposed IRS penalties can differ dramatically from the amount an employer ultimately owes.

Selerix has seen that firsthand.

For example, an automotive manufacturing support company with more than 22,000 employees received an IRS notice proposing over $1.8 million in penalties for an allegedly late ACA filing. Selerix confirmed the filing had been submitted before the deadline, provided the documentation needed for the appeal, and the IRS ultimately assessed no penalty.

Selerix’s ACA team has helped prevent more than $40 million in proposed IRS fines in one year alone. Those outcomes do not mean every penalty can disappear. They do show why employers should investigate before they concede.

Sometimes the employer genuinely failed to offer compliant coverage. Sometimes a filing was late. But sometimes the IRS is working from incorrect codes, incomplete data, an inaccurate employee count, or information that does not tell the full story.

Selerix Director of ACA Services Ashley Pope summed it up during our ACA Fundamentals webinar:

“Most ACA penalties come from preventable errors.”

Preventable before filing is best. Correctable after a letter is still considerably better than simply paying an incorrect assessment.

If you already have an IRS notice in hand, Selerix ACA Penalty Reduction Services can help your team review the assessment and determine the right response.

How to Avoid ACA Penalties

The most effective way to reduce penalty exposure is not a heroic response in year three.

It is boring, consistent compliance in year one.

Track employee hours and ACA full-time status continuously. Test affordability before the plan year begins. Reconcile HR, payroll, benefits, and eligibility data instead of assuming the systems agree. Validate Forms 1094-C and 1095-C before transmission. Review AIR errors and correct them. Keep the documentation behind offers of coverage and safe-harbor decisions. And route IRS correspondence immediately to someone who knows what it is.

There is also a wider set of benefits notice requirements worth including in your compliance hygiene. These obligations do not all create a Section 4980H penalty, but missed notices create avoidable compliance exposure:

• Provide the Health Insurance Marketplace Coverage Options notice to new hires within 14 days; DOL notes that while the notice is required for covered employers, there is currently no specific fine under that provision for failing to provide it.
  
• Provide the Summary of Benefits and Coverage (SBC) at the required enrollment, renewal, special-enrollment, and request points.
  
• Provide the COBRA general notice to covered employees and spouses within the first 90 days of coverage, subject to the applicable COBRA timing rules.

For a broader look at these and other avoidable compliance traps, see ACA Pitfalls and Penalties.

The point is not to give HR another hundred-item checklist. But rather to make compliance routine enough that missing one requirement becomes unusual.

An ACA Penalty Letter Is a Starting Point, Not a Verdict

Seeing a six- or seven-figure number on an IRS letter will get anyone’s attention.

It should.

But the number at the top of the page is not the first question to answer. Start with: What does the IRS think happened? Then: What actually happened?

Did the employer pass the 95% offer test? Was the employee really full-time? Was coverage actually unaffordable? Was the correct safe harbor applied? Were Lines 14 and 16 coded accurately? Did the IRS have the right employee count? Were forms filed and accepted? Do the underlying payroll and benefits records support the employer’s position?

That is where ACA penalty work is won or lost. And ideally, those are the same questions your ACA process has already been answering throughout the year.

Keep ACA Risk Quiet Before It Becomes Expensive

Selerix combines year-round ACA compliance technology with experienced specialists who help employers track eligibility, test affordability, validate reporting, file accurately, correct errors, and respond when an IRS notice does arrive.

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