ACA Employer Requirements in 2026: What Small Businesses Need to Know

The Affordable Care Act (ACA) employer mandate — officially known as the Employer Shared Responsibility Provision — requires certain larger employers to offer affordable health insurance to full-time employees or face significant penalties. For 2026, the penalty for not offering coverage can reach $2,900 per full-time employee beyond the first 30. Understanding whether your business is an Applicable Large Employer (ALE), what "affordable" coverage means, and how to file the required IRS forms is essential — especially in Connecticut, where state-level requirements add another layer of compliance.

What Is the ACA Employer Mandate?

Under Section 4980H of the Internal Revenue Code, employers with 50 or more full-time equivalent employees (FTEs) — called Applicable Large Employers (ALEs) — must offer minimum essential health coverage to at least 95% of their full-time employees (and their dependents up to age 26) or face tax penalties. This is commonly referred to as the "employer mandate" or "pay or play" provision.

The mandate does not require employers to pay for all of the coverage. It requires that employers offer coverage that meets minimum value requirements and that the employee's share of the premium is affordable (meaning it does not exceed a specified percentage of their household income).

Are You an Applicable Large Employer (ALE)?

You are an ALE for 2026 if you averaged 50 or more full-time equivalent employees during calendar year 2025. Here is how the determination works:

• A full-time employee is anyone who averaged 30 or more hours per week (or 130 hours per month) during the measurement period.
• Part-time employees count fractionally toward the FTE total (see the calculation below).
• All members of a controlled group or affiliated service group are combined. If you own multiple companies that share common ownership, their employees are aggregated.
• Seasonal workers are excluded from the 50-FTE threshold if they work 120 or fewer days during the year — but only if this exclusion would bring you below 50 FTEs.

How to Count Full-Time Equivalents

The FTE calculation is done monthly, then averaged over the year:

1. Count full-time employees: For each month, count the number of employees who averaged 30+ hours per week (or 130+ hours per month). Each counts as 1 FTE.
2. Calculate part-time FTEs: Add up all hours worked by part-time employees (those averaging fewer than 30 hours per week) during the month. Divide the total by 120. This gives you the part-time FTE count. Cap each individual part-time employee's hours at 120 per month.
3. Add them together: Full-time count + part-time FTE count = total FTEs for that month.
4. Average over 12 months: Add the monthly FTE totals for all 12 months and divide by 12. If the result is 50 or more, you are an ALE.

Example: Your company has 40 full-time employees year-round. You also employ 25 part-time workers who each average 24 hours per week (approximately 96 hours per month). Part-time FTEs = (25 × 96) / 120 = 20. Total FTEs = 40 + 20 = 60 FTEs. You are an ALE.

Penalty A: Not Offering Coverage (Section 4980H(a))

If you are an ALE and you fail to offer minimum essential coverage to at least 95% of your full-time employees (and their dependents), you face the "Penalty A" or "sledgehammer" penalty:

• 2026 amount: $2,900 per year for each full-time employee, minus the first 30 employees
• The penalty is assessed on a monthly basis: $2,900 ÷ 12 = approximately $241.67 per month per full-time employee (minus the 30-employee buffer)
• The penalty is triggered if at least one full-time employee receives a premium tax credit for purchasing coverage through the Marketplace

Example: An ALE with 80 full-time employees does not offer any health coverage. One employee buys Marketplace coverage and receives a subsidy. Penalty = (80 − 30) × $2,900 = $145,000 per year.

Penalty B: Coverage Not Affordable or Adequate (Section 4980H(b))

If you offer coverage but it is either not affordable or does not provide minimum value, you may face the "Penalty B" or "tack hammer" penalty:

• 2026 amount: $4,350 per year for each full-time employee who receives a premium tax credit from the Marketplace
• This penalty applies per employee who actually receives a subsidy — not per total headcount
• There is no 30-employee buffer for Penalty B
• However, Penalty B is capped: it can never exceed what Penalty A would have been

"Minimum value" means the plan pays at least 60% of the total allowed costs of covered benefits. "Affordable" means the employee's required contribution for self-only coverage does not exceed 9.02% of their household income (the 2026 affordability percentage — this is indexed annually).

Affordability Safe Harbors

Since employers generally do not know an employee's total household income, the IRS provides three safe harbor methods to determine affordability:

1. W-2 Safe Harbor: The employee's required contribution for the lowest-cost self-only plan does not exceed 9.02% of their W-2 Box 1 wages from your company.
2. Rate of Pay Safe Harbor: The contribution does not exceed 9.02% of the employee's monthly rate of pay (hourly rate × 130 hours, or monthly salary).
3. Federal Poverty Line (FPL) Safe Harbor: The contribution does not exceed 9.02% of the federal poverty line for a single individual divided by 12. For 2026, the FPL for a single person in the 48 contiguous states is approximately $15,650, so: ($15,650 × 9.02%) / 12 = approximately $117.63 per month.

You can use different safe harbors for different categories of employees (hourly vs. salaried, for example), but you must apply the same safe harbor consistently within each category.

Measurement and Stability Periods

For employees with variable or seasonal hours, the ACA allows employers to use a look-back measurement period to determine whether an employee is "full-time":

• Standard Measurement Period: A period of 3 to 12 consecutive months during which you track an employee's hours. Most employers use a 12-month period (e.g., October 15, 2024 through October 14, 2025).
• Administrative Period: A buffer of up to 90 days between the measurement period and the stability period, used for enrollment processing.
• Stability Period: If the employee averaged 30+ hours during the measurement period, you must offer them coverage for the entire stability period (at least 6 months or the length of the measurement period, whichever is longer) — even if their hours drop.

New variable-hour employees can be placed in an initial measurement period of 3 to 12 months starting from their hire date or the first of the following month.

1094-C and 1095-C Filing Requirements

ALEs must file two IRS forms annually:

Form 1095-C (Employee Statement)

One 1095-C must be prepared for each full-time employee who was employed at any point during the calendar year. The form reports:

• Whether coverage was offered, and to whom (employee only, employee + dependents, etc.)
• The employee's share of the lowest-cost monthly premium for self-only coverage
• Which safe harbor or other relief code applies
• For self-insured plans: the months each covered individual was enrolled

Deadline for employees: Furnish 1095-C to each employee by March 3, 2026 (for the 2025 tax year).

Form 1094-C (Transmittal)

This is the summary/transmittal form that accompanies all 1095-C filings to the IRS. It reports the employer's total employee count, whether coverage was offered, and which months coverage was available.

IRS filing deadline:

• Paper filing: February 28, 2026 (for the 2025 tax year)
• Electronic filing: March 31, 2026 (for the 2025 tax year) — electronic filing is mandatory if you file 10 or more returns

Small Business Exemption

If your business has fewer than 50 full-time equivalent employees, you are not subject to the employer mandate. You are not required to offer health insurance, and you will not face any penalties under Section 4980H. You also do not need to file Forms 1094-C or 1095-C.

However, there are still incentives for small employers to offer coverage:

• Small Business Health Care Tax Credit: If you have fewer than 25 FTEs, pay average annual wages below approximately $62,000 (indexed for 2026), and pay at least 50% of employee-only premium costs through SHOP, you may qualify for a tax credit of up to 50% of your premium contributions (35% for tax-exempt employers).
• Employee retention and recruitment: Offering health benefits helps attract and retain talent, especially in Connecticut's competitive labor market.

SHOP Marketplace

The Small Business Health Options Program (SHOP) is a health insurance marketplace specifically for employers with 1 to 50 employees (up to 100 in some states, including Connecticut through Covered Connecticut for Small Business). Key features:

• Employers choose a coverage level (Bronze, Silver, Gold, Platinum) and a contribution amount
• Employees can choose from available plans within the selected level
• The small business health care tax credit is only available through SHOP
• in Connecticut, Covered Connecticut for Small Business administers the SHOP program

Connecticut-Specific Rules

Connecticut adds its own layer of health care compliance on top of federal ACA requirements:

Connecticut Individual Mandate

Since 2020, Connecticut has enforced its own state individual mandate, requiring most residents to maintain qualifying health coverage or face a state tax penalty. While this is primarily an individual obligation (not an employer mandate), it increases the likelihood that your uninsured employees will seek Marketplace coverage — which could trigger ALE penalties if you are not offering affordable coverage.

Covered Connecticut Reporting

Connecticut's Franchise Tax Board (FTB) requires reporting under the state individual mandate. ALEs that are already filing 1095-C with the IRS generally satisfy Connecticut's information reporting requirement, but you should confirm your filing process covers both federal and state requirements.

San Francisco Health Care Security Ordinance (HCSO)

Employers with employees working in San Francisco must comply with the HCSO, which requires health care expenditures of $3.40 per hour for medium employers (20–99 employees) and $5.09 per hour for large employers (100+ employees) as of 2025 rates (2026 rates are typically updated mid-year). This is a local ordinance — separate from, and in addition to, the federal ACA.