The IRS recently released Rev. Proc. 2025-26, providing the indexing adjustments for the upcoming calendar year 2026. These indexing adjustments affect applicable large employers (ALEs) starting next year. ALEs are defined as entities having 50 or more employees. Such organizations must either offer minimum essential coverage that is affordable (i.e., provides minimum value to full-time employees and their dependents) or make an employer shared responsibility payment to the IRS, all part of the Affordable Care Act’s employer shared responsibility provisions.
Nonprofit status does not matter in the context of this law; it’s the number of full-time employees that counts. If your organization employs 50 or more full-time employees, it’s important to understand the indexing adjustments to ensure full compliance with the ACA and avoid potential penalties.
What Is an Employer Shared Responsibility Payment?
The Employer Shared Responsibility Payment is a financial penalty imposed by the IRS on ALEs who fail to meet specific health coverage obligations under the Affordable Care Act.
To avoid the ESRP, an ALE must offer its full-time employees and their dependents health insurance that:
- Qualifies as minimum essential coverage
- Is affordable based on IRS standards and
- Provides minimum value, meaning it covers at least 60% of expected healthcare costs
If an ALE does not offer coverage to at least 95% of its full-time employees, or if the coverage offered is unaffordable or inadequate, and at least one employee receives a premium tax credit through the Health Insurance Marketplace, the employer may owe one of two types of ESRPs:
- A penalty for not offering coverage to enough employees
- A penalty for offering coverage that fails the affordability or value tests
These payments are calculated monthly and assessed annually, with amounts indexed for inflation. Importantly, ESRPs are non-deductible and apply regardless of an employer’s tax-exempt status.
IRS Implements Updated Penalty Amounts in 2026
Beginning in 2026, the IRS will implement updated penalty amounts under the Employer Shared Responsibility Provisions of the Affordable Care Act. Nonprofit organizations classified as Applicable Large Employers (ALEs) must be especially mindful of these changes. If an ALE does not offer minimum essential coverage to its full-time employees, it may face a penalty of $3,340 per employee annually. Alternatively, if coverage is offered but is deemed unaffordable or does not meet minimum value standards, the penalty rises to $5,010 for each affected employee. These penalties are indexed for inflation and apply to plan years starting after December 31, 2025.
ESRPs are non-deductible expenses, meaning nonprofits cannot offset them through tax savings. This can pose a significant financial strain, especially for organizations operating on tight budgets or relying heavily on grant funding and donations.
Avoid the Penalty and Stay in Compliance
To avoid the Employer Shared Responsibility Payment, companies must first determine whether they qualify as an Applicable Large Employer, which generally means having 50 or more full-time employees or full-time equivalents in the previous calendar year. If they meet this threshold, they are required to offer minimum essential health coverage to at least 95 percent of their full-time employees and their dependents. This coverage must be affordable according to IRS safe harbor standards. It must also provide minimum value, meaning it covers at least 60 percent of expected healthcare costs.
Employers should also accurately track employee hours to determine full-time status and use IRS-approved methods for measurement. In addition, they must report coverage information to both the IRS and employees using the appropriate forms, such as Form 1095-C and Form 1094-C. If contacted by the IRS regarding a potential penalty, employers have a 90-day window to respond and provide documentation. Monitoring and meeting these requirements can help your organization avoid steep penalties from the IRS.
Preparing Nonprofits for ACA Compliance: Why Early Action Matters
As the 2026 updates to the Employer Shared Responsibility Payment take effect, nonprofit organizations must recognize that compliance affects them too. These provisions apply equally to tax-exempt employers as well as for-profit companies. If you don’t follow the IRS rules, your organization will face a steep penalty.
By understanding the rules, evaluating coverage, and proactively preparing for the new thresholds, nonprofits can protect their budgets and continue focusing on their mission. Early planning and informed decision-making will ensure your organization remains compliant and avoids costly penalties in the years ahead.
Welter Consulting
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.
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