ACA Penalties Decrease for 2025 – What Employers Need to Know

The IRS has announced 2025 indexing adjustments for the determination of the pay or play penalties under the Affordable Care Act (“ACA”). The resulting adjustments mean that any penalties assessed for the failure of an applicable large employer (“ALE”), i.e., one that has 50 or more full-time employees or the equivalent, to offer qualifying medical coverage to its FTEs will be lower than they would be this year. That is a little surprising, but hardly any reason to ignore the penalties, which remain substantial.   

ACA Penalties Background - The potential penalties have two tranches – sometimes referred to as the “sledgehammer” tax and the “tack hammer” penalty. 

The sledgehammer penalty under IRC §4980H(a) is assessed if an ALE fails to offer “minimum essential coverage” (“MEC”) to 95% or more of its FTEs and includes coverage for dependents up to age 26 (although not for spouses or domestic partners) and a single full-time employee receives subsidized coverage through an ACA Exchange. 

The tack hammer penalty under IRC §4980H(b) is assessed if 

• (1) an ALE offers MEC to enough full-time employees and their dependents but coverage is not both a) “minimum value” (meaning the plan pays 60% or more, in the aggregate, of claims under the plan) and (b) “affordable” (meaning the cost of individual coverage in the lowest cost MEC option is less than 9.5% - adjusted annually and is 8.39% in 2024 - of the employee’s household income); and
• (2) one of the full-time employees or dependents obtains subsidized coverage on an ACA Exchange. 

The adjusted penalties for 2025 – the sledgehammer penalty will be $2,900 ($70 less than in 2024) multiplied by all the ALE’s full-time employees (less the first 30) if even a single full-time employee or dependent receives subsidized coverage on an ACA Exchange (and even if the other employees have qualifying coverage). 

The tack hammer penalty will be $4,350 ($110 less than in 2024) for each full-time employee, if any, that receives subsidized coverage through an ACA Exchange. Unlike the sledgehammer penalty, it is only assessed on an individual-by-individual basis and does not extend beyond the specific affected full-time employee.  

Conclusion  

Employers have annual filing obligations with the IRS and reporting obligations to employees, so they are likely aware of the responsibility. While the reduction in the penalty is surprising, the stakes are still significant. Employers with 50 or more FTEs or the equivalent should remain diligent in their review of their healthcare coverage.

This Legal Update is not intended to be exhaustive, nor should any discussion or opinion be construed as legal advice. Readers should contact legal counsel for legal advice. All rights reserved.