Does a startup have to offer health insurance?
Only an applicable large employer — 50 or more full-time employees and equivalents — faces the ACA's employer mandate. Below it, a health plan is a choice.
No federal law makes a small company offer health insurance. The rule founders hear about — the ACA's employer mandate — reaches only an applicable large employer: a company that averaged at least 50 full-time employees over the prior calendar year, counting part-timers as full-time equivalents. Below that line there is no federal penalty for offering nothing. Above it, the company owes an employer shared responsibility payment when it fails to offer minimum essential coverage and a full-time employee ends up with a subsidized Marketplace plan instead.
Who counts
A full-time employee averages 30 hours of service a week, or 130 hours in a month. Everyone else contributes hours: capped at 120 each, summed, divided by 120. Twelve months of full-time plus FTEs, averaged and rounded down, is the count. Companies under common control are counted together, so a second entity does not reset the clock. Contractors are not employees — but only if they really are contractors, which is a worker classification question, not a label.
Wrong
44 full-time employees = 44: "we're under 50"
Right
44 full-time + 9 part-timers at 80 hours = 50 for the year: an ALE
The test is a twelve-month average of full-time employees plus FTEs. A company can be under 50 heads every month and still be an applicable large employer.
What it costs to get wrong
For 2026 the payment is $3,340 a year for every full-time employee, less the first 30, when an ALE does not offer coverage to 95% of its full-time staff. A 60-person company that offers nothing owes $100,200 once one employee buys subsidized coverage. Offering coverage that is unaffordable instead costs $5,010 for each employee who gets a credit. The deep dive is the employer mandate penalties page.
The states, and a credit for the smallest employers
Some states add rules of their own. California has required its residents to carry minimum essential coverage since January 1, 2020, and has every employer that provides coverage file its federal 1095 forms with the Franchise Tax Board. That mandate is on the individual, not the employer, but it is one more reason employees ask for a plan. Check the state where each employee lives, not only where the company is incorporated.
Very small employers that do offer coverage may get some of it back. The small business health care tax credit is up to 50% of the premiums the employer pays, for an employer with fewer than 25 FTEs that pays at least half of employee-only premiums and buys through the SHOP Marketplace, for two consecutive years, claimed on Form 8941. An average-wage cap applies and is indexed every year.
Offer nothing
- Good at
- No federal penalty under 50 FTEs
- No plan to administer
- Watch for
- Harder hiring against companies that offer a plan
- Employees buy individual coverage with after-tax money
- Best for
- Pre-hire teams, or a team all covered elsewhere
A group health plan
- Good at
- Premiums excluded from employees' income
- Employee share can be paid pre-tax under §125
- Watch for
- A carrier's participation rules
- ERISA, COBRA (at 20+) and the books to run
- Best for
- Teams that want one shared network and a familiar benefit
An HRA (QSEHRA or ICHRA)
- Good at
- A fixed dollar budget the employer sets
- Reimbursements are tax-free
- Watch for
- Employees must buy their own coverage
- QSEHRA is capped and only for non-ALEs with no group plan
- Best for
- Distributed teams in many states, or a fixed benefits budget
Under 50 full-time employees and equivalents, a plan is a choice. At 50, it is a choice with a price.
In this lesson: counting full-time equivalents month by month, and the two §4980H payments with the affordability test that decides the second.
Pages in this lesson
2 pages go deeper, about 16 minutes in all. Read them in order, or open the one you need.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Federal statute
- IRC §4980H(a), (c)(2), (c)(4) (opens in a new tab)Shared responsibility for employers regarding health coverageFree to read
- IRS guidance
- IRS — Determining if an employer is an applicable large employer (opens in a new tab)Applicable large employer: 50 full-time employees, FTEs included, in the prior yearFree to read
- Rev. Proc. 2025-26, §2 (opens in a new tab)The 2026 employer shared responsibility payment amountsPDF · Free to read
- IRS — Small Business Health Care Tax Credit and the SHOP Marketplace (opens in a new tab)The small business health care tax credit (Form 8941)Free to read
- State authority
- FTB Pub. 3895C (2025), General Information (opens in a new tab)California's individual mandate, and filing 1094-C and 1095-C with the FTBPDF · Free to read
- Background reading — not an authority
- Wikipedia, “Affordable Care Act” (opens in a new tab)Affordable Care ActFree to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Applicable large employerAn employer that averaged at least 50 full-time employees, full-time equivalents included, over the prior calendar year — the employers the ACA's employer mandate and Form 1095-C reporting apply to. Companies under common control are counted together
- Full-time equivalent employeeFor the ALE count, a month's hours of every employee who was not full-time, each capped at 120, divided by 120. A full-time employee averages 30 hours a week, or 130 hours in a month
- Employer shared responsibility paymentWhat an ALE owes the IRS when a full-time employee gets a premium tax credit on the Marketplace: under §4980H(a), for not offering coverage to 95% of full-time employees, $3,340 a year for 2026 per full-time employee minus 30; under §4980H(b), for coverage that was unaffordable or not minimum value, $5,010 a year for 2026 per credited employee, capped at the (a) amount
- Minimum essential coverageThe health coverage that satisfies the ACA — including an eligible employer-sponsored plan. An ALE must offer it to avoid the §4980H(a) payment, and California requires its residents to have it
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- LexiconOne word per concept, used the same way in code, UI copy, and docs. Call one thing by two names and the accountants using your product notice first, then stop trusting the numbers.
- Contractor or employee? Classification for startupsContractor or employee depends on control, not the contract. The IRS test, state rules, 1099s, payroll registration and the cost of getting it wrong.
- First-year compliance calendar for a Delaware C-corpDelaware franchise tax, 1099s, the federal return, payroll filings, state annual reports and sales tax: the deadlines a young C-corp misses most, by month.