Small and medium-sized business (SMB) leaders already manage hiring, payroll, daily operations and employee benefits. Adding Affordable Care Act (ACA) rules to that list can feel overwhelming. The ACA sets standards for employer-sponsored health coverage, and understanding the basics helps SMBs avoid penalties and stay compliant.
This guide breaks down the essentials in plain language, with real examples to clarify what matters most. It also explains how PrestigePEO supports ACA compliance behind the scenes, so you do not have to become an ACA specialist.
In this article, you’ll learn:
- The ACA employer mandate applies to businesses that meet the IRS definition of an Applicable Large Employer (ALE).
- ALEs must offer affordable, quality employee benefits that meet ACA standards.
- The ACA uses safe harbors that make it easier for employers to determine affordability.
- Penalties can be significant when coverage is not offered or does not meet standards.
- PrestigePEO helps SMBs stay compliant year-round so you can focus on running your business.
What Is the ACA Employer Mandate?
The ACA employer mandate requires certain employers to offer health coverage to full-time employees and their dependents. These rules apply to businesses classified as Applicable Large Employer (ALEs).
A business is considered an ALE if it had 50 or more full-time employees, including full-time equivalents, in the previous year. If you are an ALE, you must offer:
- Minimum Essential Coverage (MEC) – This refers to coverage that meets the ACA’s basic standards for employer plans.
- Minimum Value (MV) – The plan must cover at least 60% of expected costs.
For example, if your company has 55 full-time employees but your health plan only covers half of the expected medical costs, the plan does not meet MV. This can trigger financial penalties.
What Does Affordable Coverage Really Mean?
Affordability is one of the top areas where SMB employers look for clarity. Under the ACA, coverage is considered affordable when the employee’s share of the premium for the lowest-cost self-only option does not exceed a set percentage of income.
The IRS updates this percentage each year.
- 2025: less than 9.02%
- 2026: less than 9.96%
Because employers do not know each employee’s household income, the ACA provides safe harbors you can use to determine affordability:
- W-2 Safe Harbor: Premium does not exceed 9.02% of the employee’s W-2 wages.
- Rate of Pay Safe Harbor: Premium does not exceed 9.12% of the monthly salary or the hourly wage × 130 hours.
- Federal Poverty Line Safe Harbor: Premium does not exceed 9.12% of the federal poverty line for a single individual.
For instance, a business may use the Rate of Pay Safe Harbor for hourly staff and the W-2 Safe Harbor for salaried employees to stay compliant without making separate calculations for each person.
Penalties: Types A and B, and How They Are Calculated
The ACA includes two primary penalty categories for ALEs. Knowing the difference can help SMB leaders understand why accurate tracking and compliant employee benefits matter.
Penalty A:
Not Offering Coverage
Penalty A applies when an ALE does not offer MEC to at least 95% of full-time employees and their dependents, and one full-time employee receives a premium tax credit through the Marketplace.
2026 Penalty: $3,340 per full-time employee, minus the first 30 employees.
Example: A business with 100 full-time employees that fails to offer coverage could face:
(100 – 30) × $3,340 = $233,800
Penalty B:
Offering Coverage That Is Unaffordable or Does Not Provide MV
Penalty B applies when coverage is offered, but it is either unaffordable or does not meet minimum value, and at least one full-time employee receives a premium tax credit.
2026 Penalty: $5,010 per full-time employee receiving the credit, not to exceed Penalty A.
How Businesses Can Stay ACA Compliant
Staying compliant with the Affordable Care Act does not require legal expertise, but it does require consistent attention to a few key areas. These steps help SMBs reduce risk, avoid penalties and maintain clear, accurate ACA documentation throughout the year.
Identify ALE Status Early Each Year
To understand whether the ACA employer mandate applies to your business, you must confirm your status as an ALE. This includes:
- Reviewing your full-time and full-time equivalent counts from the previous year.
- Monitoring staffing changes, including seasonal or variable-hour employees, that may shift your ALE status.
- Confirming ALE status early so your business has time to prepare for required coverage and reporting responsibilities.
Review Employee Benefits for MEC, MV, and Affordability
If your business qualifies as an ALE, your employee benefits must meet MEC, MV and affordability standards. Important actions include:
- Reviewing your plan design each year to confirm it meets MEC and MV requirements.
- Checking affordability using the appropriate safe harbor for your workforce.
- Monitoring premium and plan changes that may affect affordability in the next plan year.
Maintain Accurate Year-Round Records
Accurate tracking and documentation support ACA reporting and help prevent compliance issues. These tasks include:
- Tracking employee hours, eligibility, full-time status, new hires, and offers of coverage.
- Maintaining consistent documentation to avoid errors that may trigger IRS notices or penalties.
- Storing required records securely so your team has reliable information at filing time.
Communicate Clearly With Employees
Clear, consistent communication helps employees understand their coverage and reduces confusion that could create compliance challenges. Effective communication includes:
- Providing simple, timely information about coverage options and eligibility.
- Explaining affordability and plan requirements in easy-to-understand language.
- Reinforcing key deadlines and enrollment steps so employees make informed choices.
Seek Expert Support When Needed
Expert guidance helps SMBs stay ahead of ACA updates and avoid avoidable mistakes. Support strategies include:
- Consulting with specialists to confirm compliance decisions before the plan year begins.
- Requesting help when interpreting regulations or safe harbor requirements.
- Partnering with PrestigePEO to access ongoing ACA monitoring, yearly updates, and guidance that helps your business stay compliant and focused on operations.
How PrestigePEO Simplifies ACA Compliance for Your SMB
ACA compliance comes with detailed rules and yearly updates, but you do not have to manage any of it by yourself. PrestigePEO acts as your compliance safeguard by combining employee benefits expertise with built-in regulatory oversight. Our team handles the details so your SMB can stay focused on daily operations.
Here is how we support your business:
Employee Benefits That Meet ACA Requirements
We work directly with national insurance carriers to offer high-quality employee benefits that meet MEC and MV standards. Our team confirms affordability each plan year using the appropriate IRS safe harbors.
Eligibility and Enrollment Management
We track employee hours and full-time status, manage eligibility windows and ensure timely offers of coverage so your SMB stays aligned with ACA standards.
Ongoing Compliance Monitoring
We monitor ACA rule changes, updated IRS thresholds, and yearly requirements, helping your business stay compliant throughout the year.
Accurate Payroll Integration
Our payroll team ensures your wages, hours and employee classifications remain accurate and consistent with ACA safe harbor calculations and reporting needs.
Form 1094/1095 Reporting and Filing Support
We prepare and submit your 1094-C and 1095-C forms, ensuring accuracy and timely filing. If IRS notices occur, we support the resolution process.
Clear Employee Communication
We provide simple, easy-to-understand materials explaining coverage, affordability and how the employer plan works, helping reduce confusion and unnecessary questions.
Risk Mitigation and Human Resource Consulting
We help prevent common compliance risks such as miscounting full-time employees or misapplying measurement methods. Our Human Resource specialists advise on staffing and classification changes that may affect ACA compliance.
PrestigePEO Is Your Partner for Simple, Confident ACA Compliance
Understanding the Affordable Care Act doesn’t need to feel overwhelming. When SMB leaders have a clear view of what the ACA requires, it’s much easier to offer employees quality coverage and stay on the right track throughout the year.
With the right support, ACA compliance becomes a predictable, manageable part of your employee benefits strategy instead of a yearly challenge.
PrestigePEO provides the guidance, tools and day-to-day support your business needs to remain compliant. Our team helps your SMB by:
- Monitoring ACA updates and yearly regulatory changes
- Managing employee eligibility and enrollment throughout the year
- Ensuring your coverage meets MEC and MV standards
- Preparing required IRS forms, including 1094-C and 1095-C
- Helping identify and address issues before they become costly
You gain peace of mind knowing your employee benefits remain aligned with ACA requirements while you stay focused on running your business.
Connect with us today to learn how our experts can simplify ACA compliance for your SMB and support your long-term growth.
