The penalties for not providing health benefits depend 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, when Congress set the penalty to zero. Employers still face real financial penalties under the Affordable Care Act (ACA), and several states plus the District of Columbia have 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, and you could owe an IRS penalty.
Two Types of ACA Penalties
- Penalty A: The "No Coverage" Penalty. Fail to offer minimum essential coverage to at least 95% of your full-time employees (and their dependents), and one of them gets a premium tax credit from the Marketplace? You'll pay $3,340 per full-time employee (minus the first 30) for 2026. 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 9.96% of household income for employee-only coverage in 2026) or it lacks minimum value (the plan pays less than 60% of total allowed costs). Then you owe $5,010 per employee who gets a tax credit from the Exchange.
Avoiding Penalty B: The Three Affordability Safe Harbors
You don't need to know each employee's household income to avoid the $5,010 Penalty B. The IRS lets employers prove affordability with one of three safe harbors, applied consistently: the federal poverty line (self-only coverage costs no more than 9.96% of the mainland FPL), the rate of pay (9.96% of the hourly rate times 130 hours, or of the monthly salary), or W-2 Box 1 wages (9.96% of the employee's annual W-2 wages). Meeting any one of them makes your coverage affordable for that employee under the ACA, even if the employee's actual household income is lower.
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 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 zero nationwide, but several states and the District of Columbia run 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. For the 2025 tax year, the penalty is $950 per adult and $475 per dependent child, or 2.5% of income above the filing threshold, whichever is higher.
- Massachusetts: Has had a mandate since 2007. Penalties scale with income. For households above 500% of the federal poverty level, the penalty is half the lowest-priced individual Bronze plan premium ($187 per month for 2025).
- New Jersey: Mirrors the pre-2019 federal structure: the greater of $695 per adult or 2.5% of household income, capped at the statewide average Bronze plan premium.
- 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, capped at the average Bronze plan premium.
If you don't offer coverage, or you offer unaffordable coverage, you could face ACA penalties while your employees get hit with state tax penalties. That's a double hit to your brand and their financial wellness.
3. Local Mandates: San Francisco's Health Care Security Ordinance
Beyond the ACA, some cities run their own requirements. San Francisco's Health Care Security Ordinance (HCSO) requires covered employers (20 or more employees; 50 or more for nonprofits) to spend a minimum amount on health care each quarter for each covered employee who works at least 8 hours a week in the city. Employers that fall short face enforcement by the city's Office of Labor Standards Enforcement, which can require back payments plus penalties. The minimum expenditure rates are updated each year and vary by employer size.
4. Penalties Under ERISA and COBRA
Even if you sponsor a plan, noncompliance with the surrounding rules 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 for missing notices, and the IRS can add a separate excise tax of $100 per day per affected beneficiary ($200 per day for more than one family member).
- ERISA reporting penalties: Miss filing the annual Form 5500 (required for most ERISA plans)? The DOL can assess up to $2,739 per day, and the IRS adds $250 per day up to a $150,000 cap.
5. The Strategic Risk (Not Just a Legal One)
The headline risk is monetary penalties, but the bigger cost is lost talent and productivity. When employees can't afford care, they delay treatment, drain their HSAs and FSAs, and eventually file larger claims. That's the idea behind the WellthCare 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 $3,000 per employee per year. For smaller employers, it's more about state mandates and competitive disadvantage. A benefits strategy that integrates preventive care and wealth-building, like the WellthCare model, turns compliance into a competitive advantage: healthier employees, lower claims, and automatic retirement savings. WellthCare, the first Health-to-Wealth Benefit System, rewards verified preventive actions with store dollars and automatic retirement contributions, all while lowering claims with no new employer out-of-pocket cost.
This article is for general information only and is not legal, tax, or medical advice. Employers should consult their own advisors.