How the (a) Penalty Compounds
The 4980H(a) payment is calculated on all full-time employees less the first 30, not only on those left out. Missing the 95% offer test is expensive because the base is the whole full-time workforce.
The three things to know.
The Formula
If an employer fails to offer coverage to at least 95% of full-time employees and their dependents, and at least one full-time employee receives a premium tax credit, the payment is the monthly amount times full-time employees minus 30.
A Worked Example
An employer with 120 full-time employees below the 95% threshold for all of 2027 owes (120 − 30) × $3,780 = $340,200. The 2027 annual amount is $3,780 per employee under Rev. Proc. 2026-22.
The 95% Test
Missing by one person can matter. At 95% the employer may miss up to 5% of full-time employees, or five people, whichever is greater, without triggering the payment.
Sources: 26 CFR § 54.4980H-4; 26 U.S.C. § 4980H. General information, not legal advice.
A worked example.
A Group That Misses by One
An employer has 100 full-time employees and offers coverage to 94 of them, a 94% offer rate. At least one of the six not offered gets a premium tax credit.
What the Rule Produces
The employer is below the 95% threshold, which for 100 employees means it could have missed five and still passed. The (a) payment is computed on 100 minus 30 = 70 employees for each month the test is failed, so the cost is large even though only six people were missed.
Four steps to apply it.
1. Count full-time employees
Use the monthly full-time count.
2. Check the 95% test
Compare offers made with full-time employees each month.
3. Find the gaps
Identify who was missed and why.
4. Fix it
Close the gap before the next month.
Where it goes wrong. Treating a few missed offers as a small problem, when missing the threshold changes the base for the entire workforce.
The questions that come up next.
Is the payment tax-deductible?
The payment is not deductible. Confirm treatment with your tax advisor.
Does one subsidized employee trigger it?
Only if the employer also failed the 95% test. If it passed, the (a) payment does not apply, though (b) may.
What is the 2026 amount?
$3,340 per employee, under Rev. Proc. 2025-26.
What if we miss by one person?
The test turns on the threshold, so one person can matter when you are at the edge.
Is the payment calculated monthly?
Yes. It is computed month by month using one-twelfth of the annual amount.
Plan-specific questions belong with ERISA counsel, and we will bring them in.
Related pages on the look-back method.
How the (b) Penalty Is Capped
The 4980H(b) payment applies only to the specific full-time employees who receive a subsidy, and the total can never exceed what the (a) payment would have been.
What the Forms Capture
For each full-time employee and each month, Forms 1094-C and 1095-C report whether an offer of coverage was made, what it cost the employee, and which relief applies.
The Full Look-Back Guide
Every rule, example and source behind this page, in one place.
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