The Internal Revenue Service said Tuesday that it will increase two figures that could be used to calculate employers’ health-benefits-related “pay or play” penalty payments by 15.2%.
The agency is changing one of the penalty-calculation factors to $3,340 in 2026, from $2,900 this year, and the other factor to $5,010, from $4,350, according to IRS Revenue Procedure 2025-26.
The factors are inflation-adjusted updates of factors that were set at $2,000 and $3,000 in 2013.
The ACA employer penalty backdrop: The federal Affordable Care Act frees small employers from having to provide health coverage, but it may impose “employer shared responsibility” penalties on “applicable large employers” that fail to provide affordable “minimum essential coverage,” or solid major medical coverage, with a minimum value.
An “ALE” could face two different penalties if full-time employees apply for health coverage through HealthCare.gov or another Affordable Care Act public exchange program, such as Covered California, and end up qualifying for federal premium tax credit subsidies.
An employer could pay the “$2,000 penalty” — the one that’s increasing to $3,340 — if a low-income, full-time employee qualifies for a subsidy and the employer has failed to provide health coverage for “substantially all” of its full-time employees. The total 2026 penalty for failures that last a full year could be equal to $3,340 multiplied by the number of full-time employees, after subtracting 30 from the number of full-time employees.
An employer could pay the “$3,000 penalty” — which will be increasing to $5,010 — if an employee who qualifies for an exchange subsidy has not received an offer of affordable coverage with minimum value from the employer. In theory, in 2026, the total penalty for failures that last a full year could be $5,010 times the number of full-time employees who get exchange subsidies. In practice, the maximum amount for this type of penalty is capped at $2,000 multiplied by the number of full-time employees, after subtracting 30 from the number of full-time employees.
The thinking: Congress created the penalty system because of reports that some large employers were refusing to provide health coverage for employees.
Critics argued that the employers were shifting responsibility for employees’ health care costs onto state Medicaid programs and charity care programs.
The ACA employer penalty factor math: The government thinks employers will spend an average of $7,885 per employee on health insurance premiums this year, up 10.9% from $7,110 in 2024.
The ACA penalty calculation factors are increasing 15.2%, instead of 10.9%, because the government uses an “applicable premium adjustment percentage” — the ratio of current-year spending to 2013 spending — to update the penalty factors.
Government economists have now cut what they think employers spent on health insurance in 2013 to $4,714, from an estimate of $4,897 used to calculate the 2025 penalty factors.
Because of the cut in the estimated 2013 average, the government’s “applicable premium adjustment percentage” has increased to 1.67, from 1.45, or 15.2%.