The penalties for not providing health benefits? It depends — on the law, your business size, and where you operate. The most famous penalty, the individual mandate, was effectively eliminated at the federal level in 2019. But employers still face real financial penalties under the Affordable Care Act (ACA). Several states have also enacted their own individual mandates with tax penalties. Compliance matters — for your budget, your employees, and your peace of mind.
1. The Federal Employer Mandate (ACA "Pay or Play" Penalties)
The biggest penalty for employers comes from the ACA's Employer Shared Responsibility Payment (ESRP) — the "pay or play" mandate. It applies to Applicable Large Employers (ALEs) — businesses with 50 or more full-time equivalent employees (FTEs). Miss the mark on coverage? You could owe a hefty IRS penalty.
Two Types of ACA Penalties
- Penalty A — The "No Coverage" Penalty: Don't offer MEC to at least 95% of your full-time employees (including dependents) and one of them gets a premium tax credit from the Marketplace? You'll pay $2,970 per full-time employee (minus the first 30). That number adjusts for inflation each year.
- Penalty B — The "Unaffordable or Insufficient" Penalty: You offer coverage, but it's too expensive (costing more than 9.12% of household income for employee-only coverage in 2025) or doesn't provide "minimum value" (plan pays less than 60% of total allowed costs). Then you're on the hook for $4,460 per employee who gets a tax credit from the Exchange.
These penalties only trigger if an employee actually receives a subsidy from a Marketplace. The IRS enforces this based on Forms 1094-C and 1095-C. A solid benefits system that tracks affordability and value can help you avoid these surprise costs.
2. State-Level Individual Mandate Penalties
The federal individual mandate penalty is gone (except in D.C.). But several states have their own mandates with tax penalties. Employers in these states need to know their employees could face penalties without coverage — a real retention and recruitment risk.
- California: Individuals must have qualifying insurance or pay a penalty on state taxes — $850 per adult in 2023 or 2.5% of income above the threshold, whichever's higher.
- Massachusetts: Has had a mandate since 2006. Penalties depend on income and the cheapest available plan. In 2023, the max was half the cost of the lowest "affordable" plan.
- New Jersey: Mirrors the old federal structure — $850 per adult, $425 per dependent, or 2.5% of income above a threshold.
- Rhode Island: Penalty equals the federal shared responsibility payment amount.
- Vermont: Has a mandate but no financial penalty.
- District of Columbia: Penalty mirrors the old federal structure, with max based on the Bronze plan premium.
So if you don't offer coverage — or offer unaffordable coverage — you could face both ACA penalties and employees hit with state tax penalties. That's a double hit to your brand and their financial wellness.
3. The Employer "Free Rider" Surcharge (San Francisco)
Beyond the ACA, some local governments have their own mandates. The most prominent is San Francisco's Health Care Security Ordinance (HCSO). If you have 20+ employees, you must make a minimum health care expenditure for each covered employee. Fail to do so? You'll face a "Free Rider" surcharge of about $1,000 per employee per quarter, plus legal liability. The city's Office of Labor Standards Enforcement handles enforcement.
4. Penalties Under ERISA and COBRA
Even if you sponsor a plan, non-compliance with related laws can cost you.
- COBRA Violations: Fail to provide required COBRA notices or coverage after a qualifying event? The DOL can fine you up to $110 per day per violation. Willful or class-action violations can mean much higher fines.
- ERISA Reporting Penalties: Miss filing the annual Form 5500 (for 100+ participant plans)? That's up to $2,400 per day. Even missing summary plan description deadlines can bring scrutiny.
5. The Strategic Risk (Not Just a Legal One)
The headline risk is monetary penalties. But the bigger cost? Lost talent and productivity. When employees can't afford care, they delay treatment, drain their HSAs/FSAs, and eventually file large claims. That's the idea behind WellthCare's model: healthcare that pays you back prevents waste. Companies that skip affordable, high-value benefits may avoid fines, but they'll face higher turnover, lower engagement, and bigger claims as preventive care gets deferred until it's acute.
For employers with 50+ FTEs, the big risk is the ACA's Pay or Play penalty — which can exceed $2,000 per employee per year. For smaller employers, it's more about state mandates and competitive disadvantage. A modern benefits strategy — one that integrates preventive care and wealth-building, like the WellthCare model — avoids penalties and turns compliance into a competitive advantage: healthier employees, lower claims, and automatic retirement savings. That's the difference between avoiding a fine and building a better business. WellthCare, the first Health-to-Wealth Benefit System, turns compliance into a competitive advantage by rewarding verified preventive actions with store dollars and automatic retirement contributions — all while lowering claims with no new out-of-pocket cost.