Staying abreast of changes to the Affordable Care Act’s (ACA) Employer Shared Responsibility Provisions (ESRP) under Internal Revenue Code (IRC) Section 4980H is crucial for advising applicable large employers (ALEs). The Internal Revenue Service (IRS) recently released Rev. Proc. 2025-26, providing the indexing adjustments for the upcoming calendar year 2026. This article will detail the foundational elements of the ESRP, outline the recent adjustments, and discuss other key administrative considerations.

The Employer Shared Responsibility Payment Framework

IRC Section 4980H imposes an assessable payment on certain employers who fail to offer minimum essential coverage to their full-time employees, or who offer coverage that is unaffordable or does not provide minimum value, leading employees to receive premium tax credits or cost-sharing reductions. These payments are commonly referred to as Employer Shared Responsibility Payments (ESRPs).

There are two primary scenarios under which an ESRP may be assessed:

Failure to Offer Minimum Essential Coverage (IRC Section 4980H(a)): An ESRP is triggered if an applicable large employer (ALE) fails to offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan for any month. This scenario also requires that at least one full-time employee of that ALE has been certified as having enrolled in a qualified health plan for which an applicable premium tax credit or cost-sharing reduction is allowed or paid. The assessable payment in this instance is equal to the product of the "applicable payment amount" and the total number of individuals employed by the employer as full-time employees during that month. The "applicable payment amount" is defined as 1/12 of $2,000, subject to inflation adjustment [IRC Section 4980H(c)(1)].
Offering Coverage with Employees Qualifying for Premium Tax Credits or Cost-Sharing Reductions (IRC Section 4980H(b)(1)): An ESRP also arises if an ALE offers minimum essential coverage to its full-time employees (and their dependents) for any month, but one or more full-time employees are certified as having enrolled in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid. This typically occurs if the offered coverage is not affordable, does not provide minimum value, or if the employee is not offered coverage (e.g., dependents). The payment for this scenario is equal to the product of the number of full-time employees who qualified for such credits or reductions and an amount equal to 1/12 of $3,000, also subject to inflation adjustment [IRC Section 4980H(b)(1)]. There is an important overall limitation under this provision: the aggregate amount of tax determined under Section 4980H(b)(1) for any month cannot exceed the product of the applicable payment amount (1/12 of the $2,000 indexed amount) and the total number of individuals employed by the employer as full-time employees during that month [IRC Section 4980H(b)(2)].

Defining Key Terms for ESRP Calculation

For purposes of IRC Section 4980H, several definitions are critical for proper application and calculation:]

Applicable Large Employer (ALE): An employer is generally considered an ALE for a calendar year if they employed an average of at least 50 full-time employees, including full-time equivalents, on business days during the preceding calendar year [IRC Section 4980H(c)(2)(A), IRC Section 4980H(c)(2)(E)]. Special rules apply for employers not in existence for the full preceding year, basing the determination on reasonably expected employment [IRC Section 4980H(c)(2)(C)(ii)]. Additionally, employers may not be considered to employ more than 50 full-time employees if their workforce exceeds 50 for 120 days or fewer during the calendar year, and the excess employees during that period were seasonal workers [IRC Section 4980H(c)(2)(B)]. Individuals with medical coverage under TRICARE or VA healthcare programs are not counted as employees for determining ALE status [IRC Section 4980H(c)(2)(F)].
Full-Time Employee: For any given month, a full-time employee is defined as an employee who is employed on average at least 30 hours of service per week [IRC Section 4980H(c)(4)(A)].
Employer Size and Assessable Penalties: For purposes of calculating the assessable payment under Section 4980H(a) or the overall limitation under Section 4980H(b)(2), the number of individuals employed by an ALE as full-time employees during any month is reduced by 30 [IRC Section 4980H(c)(2)(D)(i)]. If multiple persons are treated as one employer under aggregation rules (e.g., IRC Section 414(b), (c), (m), or (o)), only one 30-employee reduction is allowed and must be allocated ratably among such persons [IRC Section 4980H(c)(2)(C)(i), IRC Section 4980H(c)(2)(D)(ii)].

Rev. Proc. 2025-26: Key Indexing Adjustments for 2026

Rev. Proc. 2025-26 specifically addresses the inflation adjustments to the applicable dollar amounts under IRC Sections 4980H(c)(1) and 4980H(b)(1) for the 2026 calendar year. Per IRC Section 4980H(c)(5), for any calendar year after 2014, the $2,000 and $3,000 amounts are increased by a product of the dollar amount and the premium adjustment percentage as defined in Section 1302(c)(4) of the Patient Protection and Affordable Care Act [IRC Section 4980H(c)(5)(A)]. Any increase that is not a multiple of $10 is rounded to the next lowest multiple of $10 [IRC Section 4980H(c)(5)(B)].

For the 2026 calendar year, the Department of Health and Human Services (HHS) published the premium adjustment percentage on June 25, 2025. This percentage is derived from the most recent National Health Expenditure Accounts (NHEA) data and projections. Specifically, for 2026, the premium adjustment percentage is the ratio by which the 2025 NHEA projection of per enrollee premiums for private health insurance ($7,885) exceeds the 2013 NHEA estimate ($4,714). This calculation yielded a premium adjustment percentage of 1.6726771319.

Applying this percentage, the indexed amounts for calendar year 2026 are:

The adjusted $2,000 amount under §4980H(c)(1) is $3,340. This is calculated as $2,000 multiplied by 1.6726771319, resulting in $3,345.3542638, which is then rounded down to the next lowest multiple of $10.
The adjusted $3,000 amount under §4980H(b)(1) is $5,010. This is calculated as $3,000 multiplied by 1.6726771319, resulting in $5,018.0313957, which is also rounded down to the next lowest multiple of $10.

Effective Date and Administrative Considerations

Rev. Proc. 2025-26 is effective for taxable years and plan years beginning after December 31, 2025. This means these adjusted dollar amounts will apply for ESRP calculations pertaining to the 2026 calendar year.

From an administrative standpoint, any assessable payment under IRC Section 4980H is paid upon notice and demand by the Secretary of the Treasury and is assessed and collected in the same manner as an assessable penalty [IRC Section 4980H(d)(1)]. The Secretary has the discretion to provide for payment on an annual, monthly, or other periodic basis [IRC Section 4980H(d)(2)]. It is also important to note that the tax imposed by IRC Section 4980H is nondeductible [IRC Section 4980H(c)(7)]. Furthermore, the IRS will allow an ALE at least 90 days to respond to a proposed ESRP assessment letter before taking further action [IRC Section 4980H(d)(4)]. The Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes) is the principal author of this revenue procedure.

Understanding these updated figures and the underlying mechanics of the ESRP is essential for CPAs and EAs in guiding their ALE clients toward compliance and avoiding potential penalties. These adjustments reflect the ongoing impact of the premium adjustment percentage on the cost of non-compliance with the ACA’s employer shared responsibility provisions.

Prepared with assistance from NotebookLM.