Understanding the ACA employer mandate and the rising importance of ICHRAs

As group health insurance becomes more expensive and difficult to manage, it’s more important than ever for large employers to properly navigate the Affordable Care Act’s (ACA) employer mandate, also known as the pay or play provisions. Understanding your legal obligations is critical to staying compliant. But you also must be sure you’re offering your staff meaningful health coverage.

One innovative solution gaining traction for employers is the individual coverage health reimbursement arrangement (ICHRA). This modern, cost-effective health benefit allows employers to satisfy ACA requirements while offering employees more choice and flexibility.

This article will walk you through the employer mandate and how ICHRAs offer business owners a compliant alternative to group health plans.

In this blog post, you’ll learn:

• How to determine if your company qualifies as an applicable large employer (ALE) under the Affordable Care Act.
• What the ACA employer mandate requires and how to avoid potential penalties.
• How an ICHRA can help you meet ACA requirements while offering employees personalized health benefits.

What is an applicable large employer?

The first step in understanding the employer mandate is determining whether it applies to your organization or client.

If your company employs at least 50 full-time equivalent employees (FTEs), the federal government considers you an applicable large employer (ALE).

Full-time equivalent employees are different than a full-time worker. The ACA defines full-time employees as individuals who work at least 30 hours per week or 130 hours in a given month. But your FTE count includes more than just full-time employees. It includes your full-time staff and the combined hours of your part-time workforce.

You don’t need to have 50 FTE employees every month to be an ALE. In most cases, if you have a monthly average of 50 FTEs throughout one calendar year, the federal government will consider you an ALE for the following year. This is the case even if your employee headcount changes.

You’re not subject to ALE requirements like the employer mandate if you averaged fewer than 50 FTE employees per month during the previous year.

What is the employer mandate?

The employer shared responsibility provisions (ESRP) of the ACA are often called the employer mandate. The mandate only applies to ALEs and outlines specific rules around offering health insurance coverage.

Here’s a quick look at what the employer mandate requires:

1. ALEs must offer a health benefit that provides minimum essential coverage (MEC) to at least 95% of their full-time employees and their dependents.
2. The coverage must be “affordable.” In 2026, affordable coverage means the employee’s portion of the premium can’t cost more than 9.96% of their household income.
3. The employer-sponsored health plan must provide minimum value. This means the plan must pay for at least 60% of covered medical expenses for the standard population.

If your business has fewer than 50 full-time equivalent employees, you’re not required to provide health insurance under the ACA. However, doing so can help you attract and retain workers.

What are the employer mandate penalty payments in 2026?

ALEs are only subject to employer mandate penalties if at least one full-time employee buys health coverage on a public exchange with a federal subsidy, like a premium tax credit. The Internal Revenue Service (IRS) will fine noncompliant businesses the greater of the two tax penalty payments. So, you won’t have to pay both.

The 2026 employer shared responsibility payments are as follows¹:

1. Section 4980H(a) penalty. If you don’t offer minimum essential coverage to at least 95% of your full-time workers and their dependents, you could face a financial penalty of $3,340 annually (or $278.33 per month) per full-time employee.
1. When calculating this penalty amount, you can subtract the first 30 full-time employees. For example, if you have 80 full-time employees and don’t offer insurance coverage with MEC, you’ll only pay a penalty for 50 of the employees.
2. Section 4980H(b) penalty. If your employee coverage is unaffordable or doesn’t provide minimum value, the annual penalty amount is $5,010 (or $417.50 per month) per full-time employee.
1. You’ll pay this penalty for each employee without affordable insurance coverage or a health plan without minimum value. Alternatively, you may need to pay the 4980H(a) penalty if that penalty is greater than $1. You’ll pay whichever penalty is less. This way, employers don’t have to pay both penalties.

Do employers have to offer a traditional group health insurance plan?

A traditional group health plan isn’t the only option for large and enterprise employers.

An ICHRA is an alternative to traditional group health insurance for employers of all sizes and industries. With an ICHRA, you give your employees tax-free dollars to buy individual health insurance policies. This flexibility to choose their own coverage gives your staff more control over their medical care and finances without you overpaying for a comprehensive health benefit.

Here’s how it works:

1. The employer sets a tax-free monthly allowance that their W-2 employees can use to buy healthcare. There are no annual limitations on employee contributions. So, you can review your allowance amount and lower or raise it as needed at the end of the plan year.
2. Eligible employees choose and sign up for their preferred individual health insurance — either self-only coverage or a family plan — on a public or private marketplace. They must have a qualified individual health plan with MEC to participate in the ICHRA. Your staff’s spouses and other legal dependents can also use the benefit if you design your ICHRA to allow them to do so.
3. Employees pay for their health insurance plan’s monthly premiums with the tax-free allowance you provide.

You can offer an ICHRA if you have at least one W-2 employee. As an extra perk, ICHRA allowances are free from payroll tax for you and income tax for participating employees.

Get Remodel Health’s 2024 ICHRA Report to learn more about how this health benefit supports employers of all industries.

What are some advantages of the ICHRA?

Rising healthcare costs and limited plan options can make traditional group health insurance unrealistic for many business owners. If you’re facing a double-digit premium rate increase, you’re likely looking for a cost-controlled option. If you're self-funding a plan and seeing high claims volume, you’ll want to reduce your risk.

These reasons and more have helped the ICHRA gain traction as a more appealing solution for employers.

Below are four key benefits of the ICHRA:

1. There are no contribution limits or participation requirements. The ICHRA has no minimum or maximum contribution limits, allowing employers to set the best budget for their business. Additionally, many group health plans have a 70% minimum participation rate. But with an ICHRA, there’s no set number or percentage of employees that must enroll in the benefit for you to offer it.
2. It’s fully customizable. The ICHRA allows you to tailor contributions using 11 types of job-based employee classes. This flexibility can help you target specific groups to boost retention and satisfaction. You can also use employee classes to customize benefit eligibility rules. For example, you could offer an ICHRA to only part-time or only full-time employees. You can also differ allowances by employee age and family status.
3. It helps you control costs. ICHRAs are a fixed-cost health benefit. Your employees can’t spend more than their set allowance, and any unused funds stay with you. This makes the ICHRA more sustainable than other traditional benefits.
4. They can help you attract and retain top talent. Rather than committing to a one-size-fits-all group plan, employees with an ICHRA can shop for their own health plan and choose the services and providers they need, and better cover their medical bills.

How can the ICHRA help employers fulfill the employer mandate?

While traditional group health insurance is the most common way to satisfy the employer mandate requirements, the ICHRA is an alternative method that can save you time, money, and headaches.

Let’s go over the three ways the ICHRA satisfies the employer mandate:

1. Minimum essential coverage (MEC). The ICHRA allows employees to choose their own health plan. But, they must enroll in an individual health policy that meets MEC to participate in the benefit. Once they enroll in proper coverage, this part of the employer requirement is complete.
1. If you offer an ICHRA through Remodel Health, employees can compare and shop for a qualified health plan that meets MEC standards right from our platform. We also have one-on-one assistance available for those with complex medical situations.
2. Affordability standards. Your ICHRA allowance must enable at least 95% of your full-time employees to buy affordable healthcare coverage. This means an employee’s cost for coverage (after subtracting their ICHRA allowance amount) can’t be more than 9.96% of their annual household income. You must use the price of the lowest-cost silver plan for a non-tobacco user on the employee’s local public exchange to calculate affordability.
1. Since most employers don’t have access to their full-time employees’ total household income, the IRS allows you to use affordability safe harbors to run your calculations. When offering an ICHRA with Remodel Health, we’ll help you determine an affordable allowance to offer.
3. Minimum value. Most health plans that comply with the Affordable Care Act already meet minimum value standards. For example, all major health plans sold on the private or public exchanges meet this requirement. However, some plans — such as a short-term health plan, TRICARE, or a healthcare sharing plan — don’t provide enough value. However, the ICHRA only works with ACA-compliant individual plans and Medicare.
1. Offering an ICHRA opens a special enrollment period for your staff. If they want to participate in the benefit, employees with inadequate coverage can shop for a qualified plan on a health insurance exchange.

What reporting requirements apply to ALEs who offer an ICHRA?

ALEs that offer an ICHRA must meet specific IRS and ACA reporting requirements. Because these filings can be complex, it’s a good idea to consult a tax professional for assistance with Forms 1094-C, 1095-C, and 8809.

To stay compliant, large employers must do the following:

• File Form 1094-C with the IRS. This form summarizes the health coverage offered to your workforce during the tax year.
• Report all employees who were eligible for or enrolled in the ICHRA, including both full-time and part-time staff.
• Provide Form 1095-C to your employees, outlining the details of the coverage offered and how you determined affordability.
• Distribute the 1095-C form to all full-time employees who worked at least one month during the year by January 31 of the following year. Since December 2022, the IRS has issued a permanent 30-day extension from January 31 for furnishing the form to employees².
• Submit all required forms together. Employers filing 10 or more total aggregate returns, including other forms like W-2s, must do so electronically, with a deadline of March 31.

If you need more time with your ACA reporting requirements, you can request a 30-day extension by filing Form 8809.

Conclusion

As healthcare costs continue to rise, employers need flexible solutions to meet their ACA compliance requirements without sacrificing quality. If you’re an ALE looking to manage costs, the ICHRA can provide a powerful alternative to group health coverage. You’ll not only satisfy the employer mandate but also empower your employees to take control of their healthcare outcomes.

Remodel Health makes it easy for every employer to offer a personalized ICHRA. No matter your budget, staff size, or employee demographics, our team will work with you to help you craft the best health benefit for your company’s needs.

If you’re ready to design an ICHRA to comply with the employer mandate, contact us, and we’ll get you started!

This article was originally published on September 1, 2023. It was last updated on May 4, 2026.

References

1. IRS - Rev. Proc. 2025-26

2. IRS - Instructions for Forms 1094-C and 1095-C