The IRS is breaking away from old trends and setting new ones all the time now, it seems. The latest development comes regarding 2025 ACA penalties, which are decreasing for the first time in the last decade.
Every year since the ACA’s Employer Mandate was first enforced in 2015, the 4980H(a) and 4980H(b) penalties have increased slightly, until now.
In recent IRS correspondence, the agency breaks down the annual calculation for determining the penalty amounts for failing to comply with the ACA’s Employer Mandate.
As a reminder, the Employer Mandate requires Applicable Large Employers, those with 50 or more full-time and full-time equivalent employees to offer affordable Minimum Essential Coverage that meets Minimum Value to at least 95% of their full-time work and their dependents.
2025 4980H(a) Penalty
Beginning in 2025, the 4980H(a) penalty amount per employee will be $241.67 a month or $2,900 annualized. This is a decrease from the 2024 amount of $2,970.
Still, employers that fail to offer Minimum Essential Coverage to at least 95% of their full-time staff and their dependents can receive a sizable penalty.
This is because the 4980H(a) penalty is known as the “hammer penalty” and applies on a pass/fail scenario. If an organization does not offer sufficient coverage to 95% of its full-time employees, the penalty applies across the entire full-time workforce, minus the 30 exemption.
2025 4980H(b) penalty
For the 2025 tax year, the 4980H(b) penalty is $362.50 per month, or an annualized $4,350, per employee. This is also a decrease from 2024’s annualized amount of $4,460.
Unlike the 4980H(a) penalty, the IRS assesses 4980H(b) penalties on a per-violation basis. Essentially, an employee must first receive inadequate coverage and then subsequently obtain a Premium Tax Credit from a state or federal marketplace.
Each instance of this will trigger a 4980H(b) violation and a Letter 226J penalty may follow.
The IRS imposes a 4980H(b) penalty when an employer provides full-time employees with coverage that is either unaffordable, does not meet Minimum Value, or both.
Similar to the 4980H(a) penalty, at least one employee must obtain a Premium Tax Credit (PTC) from a state or federal health exchange, to signal to the IRS that an employer is not complying with the ACA’s Employer Mandate.
2025 ACA Penalty Examples
The 4980H(a) and 4980H(b) penalties may seem similar in their amount, but their application and the way they are triggered are quite different.
At first glance, the 4980H(a) penalty might seem minor due to its lower per-employee amount. However, because the violation applies across the entire workforce, the penalty amount can increase exponentially.
For instance, if an organization in 2025 has 300 full-time employees and an employer fails to offer Minimum Essential Coverage to at least 95% of its full-time staff and their dependents and has at least one of the employees obtain a PTC for 12 months, the penalty would be $801,900.
Here’s the formula: $2,970 x (300-30) = $801,900.
The 4980H(b) penalty, with its higher amount, may seem more ominous, but the way the penalty compounds typically results in a lower penalty.
For example, if an employer in 2025 has 10 full-time employees, each receiving a Premium Tax Credit (PTC) for six months, the penalty would be $21,750.
Here’s the formula: ($362.50 x 6) x 10 = $21,750.
The 4980H(b) penalty only applies to the 10 employees who received a PTC for the six-month timeframe, whereas the 4980H(a) penalty applies across the entire full-time workforce, minus the 30 exemption allotted by the IRS.
Rules Regarding ACA Penalties
While developments around ACA non-compliance continue to emerge, it’s important to note that some things have remained consistent over the years.
For instance, employers cannot be penalized under both the 4980H(a) and 4980H(b) provisions for the same tax year.
If an organization violates both requirements, the penalty amount will be the higher of the two. The IRS issues both 4980H(a) and 4980H(b) penalties through Letter 226J, which the tax agency is currently issuing for the 2021 tax year.
Expect the Unexpected
When it comes to the IRS and ACA compliance, expect the unexpected. The latest IRS activity is nothing like we’ve seen in the past.
Since the agency is also increasing the rate at which it identifies and assesses instances of ACA non-compliance, and now lowering penalty amounts, it’s hard to say what the agency will do next.
To further demonstrate the severity of the situation, the agency has also removed previous safeguards, like good-faith transition relief. Moreover, it is requesting additional details in penalty correspondence, and is enhancing its systems for accepting and processing ACA submissions.
One thing’s for certain. ACA compliance with the Employer Mandate is more important now than ever before.
If you compound these developments with the fact that access to Premium Tax Credits is on the rise and ACA marketplace coverage is improving, you have a recipe for greater penalty risk — and organizations should prepare accordingly.
Navigate ACA Compliance with Confidence
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