# 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.

Source: https://lopifi.com/learn/does-a-startup-have-to-offer-health-insurance
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**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](https://lopifi.com/md/glossary/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](https://lopifi.com/md/glossary/full-time-equivalent-employee). Below that line there is no federal penalty for offering nothing. Above it, the company owes an [employer shared responsibility payment](https://lopifi.com/md/glossary/employer-shared-responsibility-payment) when it fails to offer [minimum essential coverage](https://lopifi.com/md/glossary/minimum-essential-coverage) and a full-time employee ends up with a subsidized Marketplace plan instead.

> “If— (1) any applicable large employer fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan (as defined in section 5000A(f)(2) ) for any month, and (2) at least one full-time employee of the applicable large employer has been certified to the employer under section 1411 of the Patient Protection and Affordable Care Act as having enrolled for such month in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee, then there is hereby imposed on the employer an assessable payment”

— [IRC §4980H(a), (c)(2), (c)(4)](https://www.law.cornell.edu/uscode/text/26/4980H), Shared responsibility for employers regarding health coverage

**Northwind — A choice, not a mandate.** Northwind has two employees — Priya and Marcus on the [payroll track's](https://lopifi.com/md/learn/payroll) register — and two founders who drew no salary in September. It is 48 people short of the line, so it may offer health insurance or not; either is lawful. From October 1, 2026 it chooses to, because in a hiring market a plan is part of the offer. The rest of this track follows that plan.

## 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](https://lopifi.com/md/glossary/worker-classification) question, not a label.

> “has at least 50 full-time employees, including full-time equivalent employees, on average during the prior year”

— [IRS — Determining if an employer is an applicable large employer](https://www.irs.gov/affordable-care-act/employers/determining-if-an-employer-is-an-applicable-large-employer), Applicable large employer: 50 full-time employees, FTEs included, in the prior year

*[Figure: w2 vs 1099]*

Who counts toward the 50 is decided by the same common-law test as payroll. Illustrative weights.

**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](https://lopifi.com/md/learn/does-a-startup-have-to-offer-health-insurance/employer-mandate-penalties) page.

> “For calendar year 2026, the adjusted $2,000 amount under § 4980H(c)(1) is $3,340 ($2,000 x 1.6726771319 = $3,345.3542638 rounded down to $3,340), and the adjusted $3,000 amount under § 4980H(b)(1) is $5,010 ($3,000 x 1.6726771319 = $5,018.0313957 rounded down to $5,010).”

— [Rev. Proc. 2025-26, §2](https://www.irs.gov/pub/irs-drop/rp-25-26.pdf) (PDF), The 2026 employer shared responsibility payment amounts

## 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.

> “For California purposes, federal Forms 1094-C and 1095-C must be filed by March 31 of the year following the calendar year to which the return relates.”

— [FTB Pub. 3895C (2025), General Information](https://www.ftb.ca.gov/forms/2025/2025-3895c-publication.pdf) (PDF), California's individual mandate, and filing 1094-C and 1095-C with the FTB

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](https://lopifi.com/md/glossary/small-business-health-options-program) Marketplace, for two consecutive years, claimed on Form 8941. An average-wage cap applies and is indexed every year.

> “Have fewer than 25 full-time equivalent employees”

— [IRS — Small Business Health Care Tax Credit and the SHOP Marketplace](https://www.irs.gov/affordable-care-act/employers/small-business-health-care-tax-credit-and-the-shop-marketplace), The small business health care tax credit (Form 8941)

**Offer nothing**
- Pro: No federal penalty under 50 FTEs
- Pro: No plan to administer
- Con: Harder hiring against companies that offer a plan
- Con: Employees buy individual coverage with after-tax money
- Best for: Pre-hire teams, or a team all covered elsewhere

**A group health plan**
- Pro: Premiums excluded from employees' income
- Pro: Employee share can be paid pre-tax under §125
- Con: A carrier's participation rules
- Con: 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)**
- Pro: A fixed dollar budget the employer sets
- Pro: Reimbursements are tax-free
- Con: Employees must buy their own coverage
- Con: QSEHRA is capped and only for non-ALEs with no group plan
- Best for: Distributed teams in many states, or a fixed benefits budget

A company under 50 has three honest choices.

> **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

- [Counting to 50: full-time equivalents](https://lopifi.com/md/learn/does-a-startup-have-to-offer-health-insurance/counting-full-time-equivalents) — 8 min. How do you count full-time equivalent employees for the ACA?
- [The employer mandate penalties and affordability](https://lopifi.com/md/learn/does-a-startup-have-to-offer-health-insurance/employer-mandate-penalties) — 8 min. What is the ACA employer mandate penalty for 2026?

## Where this lesson's rules come from

- [IRC §4980H(a), (c)(2), (c)(4)](https://www.law.cornell.edu/uscode/text/26/4980H) — Shared responsibility for employers regarding health coverage (statute)
- [IRS — Determining if an employer is an applicable large employer](https://www.irs.gov/affordable-care-act/employers/determining-if-an-employer-is-an-applicable-large-employer) — Applicable large employer: 50 full-time employees, FTEs included, in the prior year (irs)
- [Rev. Proc. 2025-26, §2](https://www.irs.gov/pub/irs-drop/rp-25-26.pdf) (PDF) — The 2026 employer shared responsibility payment amounts (irs)
- [FTB Pub. 3895C (2025), General Information](https://www.ftb.ca.gov/forms/2025/2025-3895c-publication.pdf) (PDF) — California's individual mandate, and filing 1094-C and 1095-C with the FTB (state)
- [IRS — Small Business Health Care Tax Credit and the SHOP Marketplace](https://www.irs.gov/affordable-care-act/employers/small-business-health-care-tax-credit-and-the-shop-marketplace) — The small business health care tax credit (Form 8941) (irs)
- [Wikipedia, “Affordable Care Act”](https://en.wikipedia.org/wiki/Affordable_Care_Act) — Affordable Care Act (reference)

## Read further

- https://lopifi.com/md/startups/contractor-vs-employee
- https://lopifi.com/md/startups/startup-compliance-calendar
- https://lopifi.com/md/accounting/worker-classification
- https://lopifi.com/md/docs/domain/11-lexicon

- **Track:** [Health & benefits](https://lopifi.com/md/learn/benefits)
- **Lesson:** Lesson 1 of 10 — 10 min
- **Terms taught:** [Applicable large employer](https://lopifi.com/md/glossary/applicable-large-employer), [Full-time equivalent employee](https://lopifi.com/md/glossary/full-time-equivalent-employee), [Employer shared responsibility payment](https://lopifi.com/md/glossary/employer-shared-responsibility-payment), [Minimum essential coverage](https://lopifi.com/md/glossary/minimum-essential-coverage)
- **Previous:** [The annual compliance calendar, 2026–2027, Compliance · Lesson 10](https://lopifi.com/md/learn/startup-annual-compliance-calendar)
- **Next:** [Counting to 50: full-time equivalents](https://lopifi.com/md/learn/does-a-startup-have-to-offer-health-insurance/counting-full-time-equivalents)
- **The course:** https://lopifi.com/md/learn