PEO Employee Benefits

The Memorial Hermann health plan closing affects commercial employer groups across Houston and southeast Texas. Memorial Hermann is winding down three products — its HMO, PPO, and self-funded administration platform — and every employer group will lose coverage at its next renewal date through 2027. If your company relies on a Memorial Hermann commercial plan today, you have a defined deadline and a clear set of steps to protect your employees.

This post covers exactly what is ending, the timeline that applies to your group, what to verify before you switch carriers, and the replacement options available to Houston-area employers with five to one hundred employees.

What Is the Memorial Hermann Health Plan Closing?

Memorial Hermann is exiting the commercial employer health insurance market entirely, discontinuing its HMO, PPO, and self-funded administration products. Three entities are involved in the wind-down: Memorial Hermann Commercial Health Plan (the HMO), Memorial Hermann Health Insurance Company (the PPO), and Memorial Hermann Health Solutions (the self-funded administration platform). According to the Memorial Hermann employer Program Closing page, groups renewing before December 1, 2026 may elect one final plan year, and each group’s coverage ends with that plan year. No new groups are being written.

This is not a merger or an acquisition. The commercial book of business is simply closing. That means your current network, your negotiated rates, and your plan design all go away at renewal. There is no automatic transition to another carrier.

Which Employers Are Affected?

Any employer in Texas currently enrolled in a Memorial Hermann commercial group health plan is affected. That includes fully insured HMO and PPO groups as well as self-funded groups administered through Memorial Hermann Health Solutions. The wind-down is specific to commercial employer plans; it does not affect the Memorial Hermann health system’s hospital and clinic operations, which continue as normal.

What Is the Timeline?

The timeline is renewal-driven. Groups with a renewal date before December 1, 2026 may take one additional plan year, meaning their last day of coverage could fall as late as November 30, 2027. Groups renewing on or after December 1, 2026 should expect coverage to end at that renewal. Confirm your specific end date with your broker or directly with Memorial Hermann’s employer services team, because the cutoff is tied to your group’s anniversary date, not a single industrywide termination date.

How Does Network Continuity Work When a Health Plan Closes?

Network continuity means ensuring your employees can keep seeing the same doctors, specialists, and facilities after switching carriers. When a commercial plan closes, that obligation does not transfer automatically to a new carrier — your team needs to verify in-network status under whatever replacement plan you choose.

Steps to Protect Employee Care

Start by collecting a list of the providers your highest-utilization employees currently see, including primary care physicians, specialists, and any ongoing therapists or behavioral health providers. Then run each provider through the network directories of your shortlisted replacement carriers before you sign anything. The Texas Department of Insurance maintains guidance on continuity of care rights during plan transitions, which may apply during the gap between termination and new coverage effective date.

For employees in active treatment — mid-chemotherapy, post-surgical recovery, or high-risk pregnancy — continuity of care is a legal and HR priority. Most Texas-regulated carriers are required to honor continuity of care for a defined transition period under state law. Confirm the specific terms with each carrier you are evaluating.

Memorial Hermann Hospitals and Clinics After the Plan Closes

It is worth repeating: the Memorial Hermann health system — its hospitals, emergency rooms, and outpatient clinics — is not closing. What is closing is the insurance entity that administered employer group coverage. Many replacement carriers in the Houston market already include Memorial Hermann facilities in their networks. Verifying that the system remains in-network under your replacement plan is one of the most important steps a Houston employer can take right now.

What Are the Replacement Options for Houston Employers?

Houston-area employers in the five-to-one-hundred-employee range have four primary paths: buying a fully insured group plan directly from a carrier, moving to a level-funded arrangement, joining a Multiple Employer Welfare Arrangement (MEWA), or working through a Professional Employer Organization (PEO) that provides group health benefits as part of a co-employment model.

How Does a PEO Work as a Replacement Option?

A Professional Employer Organization enters a co-employment relationship with your business, putting your employees on a large shared employer group for benefits purposes. Because PEOs aggregate employees across many client companies, they negotiate health insurance as a large employer — which typically means richer plan designs and more stable rates than a small group can access independently. According to NAPEO, PEO clients grow 7–9% faster than comparable non-PEO businesses, and employee turnover is 10–14% lower. Based on our analysis of 40+ vetted PEOs, businesses that move to a PEO model often reduce operation and benefit costs by 20–40%.

The tradeoff is that the PEO selects the health carrier, so you give up some control over plan design. For many small and mid-size employers, the access to large-group networks — which in Houston often include Memorial Hermann facilities — more than offsets that limitation. You can explore how different PEOs compare on benefits and pricing at our guide to the best PEOs for small business or use the Benefits Benchmark tool to see what companies your size are paying in your industry.

Carriers Active in the Houston Market for 2027

Several fully insured and level-funded carriers actively write small and mid-size group business in the Houston metro area, including Blue Cross Blue Shield of Texas, Aetna, UnitedHealthcare, Cigna, and Oscar Health. Network breadth varies by plan tier, so a plan that lists Memorial Hermann in its directory at a broad tier is not the same as one that lists it only in a premium or buy-up tier. Request network tiering detail — not just a provider directory — when you shop.

The IRS HSA contribution limits, out-of-pocket maximums, and other cost-sharing figures that govern plan design for 2027 are set by IRS guidance issued in 2026. Confirm current figures at IRS.gov before finalizing plan selections. ACA employer shared responsibility thresholds for 2027 follow SSA cost-of-living adjustment announcements; check SSA.gov for updated figures once published.

How to Plan the Switch by Your Renewal Date

Planning the switch means working backward from your coverage end date to build a decision timeline with enough room for underwriting, enrollment, and employee communication. Rushing this process is the primary way employers end up with a gap in coverage or a plan their employees do not understand.

A Practical Transition Checklist

Start ninety days before your Memorial Hermann end date. Confirm your exact termination date in writing. Collect provider lists from your top benefits users. Issue a request for proposals to at least three alternatives — including at least one PEO quote if you have not evaluated that model before. Narrow to two finalists, verify network status for key providers, and confirm continuity of care terms for employees in active treatment. Finalize your decision sixty days out, complete enrollment, and issue employee communications no later than thirty days before the new effective date.

If your renewal falls in the first quarter of 2027, that means your RFP process should be underway now. Comparing multiple options side by side is the most effective way to avoid overpaying — see how leading platforms compare and review the Insperity cost comparison if you are evaluating larger national PEOs.

NAPEO provides additional resources on the PEO co-employment model at NAPEO.org. The Department of Labor’s Employee Benefits Security Administration offers guidance on group health plan rights and continuation coverage at DOL.gov/agencies/ebsa.

How PEO Marketplace Helps Houston Employers Through This Transition

PEO Marketplace is a licensed insurance agency that matches employers with vetted benefit and HR solutions. Our network includes 40+ vetted PEOs, and our matching process is built around your industry, headcount, location, and benefit priorities — not a commission incentive to push one provider. The problem with the employer benefits buying process is that most business owners see only one or two options at a time, often from a single agent representing a single carrier. Seeing several options side by side, with apples-to-apples cost and network data, produces better decisions.

Use the Find Your PEO tool to begin a structured comparison, or book a call below to walk through your Memorial Hermann transition with an advisor who works across multiple carriers and PEO platforms.

Frequently Asked Questions

When exactly does Memorial Hermann health plan coverage end for my group?

Your coverage ends at the conclusion of your current plan year. Groups renewing before December 1, 2026 may elect one final plan year, so the latest possible end date for most affected groups is in late 2027. Confirm your specific termination date in writing with Memorial Hermann’s employer services team, because the date is tied to your group’s anniversary date.

Will my employees still be able to use Memorial Hermann hospitals after the plan closes?

Yes. The Memorial Hermann health system — its hospitals, emergency rooms, and outpatient clinics — is not closing. Only the commercial insurance entities are winding down. Employees can continue using Memorial Hermann facilities as long as those facilities are in-network under your new replacement plan, so verifying network status before you switch carriers is a critical step.

Is there a COBRA continuation option when the plan terminates?

Federal COBRA rules generally apply when group health plan coverage ends, but COBRA continuation is tied to the original plan, which will no longer exist after termination. Employees will need to enroll in a new group plan through your replacement carrier or explore individual marketplace coverage. The Department of Labor’s guidance on group health continuation rights is available at DOL.gov/agencies/ebsa.

How much does it cost to switch to a new carrier or PEO?

Direct carrier replacement costs vary by plan design, employee demographics, and the carrier’s small-group rating methodology; 2027 benchmark figures have not been universally published yet, so request quotes specific to your group. Employers who move to a PEO co-employment model often see operation and benefit costs reduce by 20–40%, based on our analysis of 40+ vetted PEOs, primarily because PEOs access large-group underwriting that small employers cannot reach independently.

How far in advance should Houston employers start shopping for a replacement plan?

Start the replacement process at least ninety days before your Memorial Hermann coverage end date. That window allows time for underwriting, network verification, enrollment, and employee communication without creating a gap in coverage. Employers with complex workforces or employees in active treatment may need to start earlier to address continuity of care requirements.

When your headcount crosses 50 full-time equivalent employees, the IRS classifies you as an Applicable Large Employer (ALE) under the Affordable Care Act — and the compliance costs that come with that label catch most growing businesses completely off guard. The affordability requirements, variable-hour tracking, and IRS reporting obligations represent a significant hidden cost that does not show up in a simple hiring plan. Understanding ACA compliance costs before you cross that threshold is the difference between a smooth growth year and a five-figure penalty bill.

Why 50 Employees Is a Legal Turning Point

The 50-employee threshold under the ACA is not a suggestion — it is a hard federal trigger. Under IRS Code Section 4980H, once you average 50 or more full-time equivalent (FTE) employees over the prior calendar year, you become an Applicable Large Employer. That status brings a set of mandatory obligations that simply do not exist for smaller employers.

Here is what changes overnight:

• You must offer health coverage to at least 95% of your full-time employees (those working 30+ hours per week) and their dependents up to age 26.
• That coverage must meet affordability standards — in 2026, an employee’s share of the lowest-cost single plan cannot exceed 9.02% of their household income (using IRS safe harbors).
• Coverage must meet minimum value — the plan must cover at least 60% of total allowed costs.
• You must file IRS Forms 1094-C and 1095-C annually, reporting health coverage details for every full-time employee.

Most business owners at 42 or 47 employees think they have time. The reality: the ACA counts your prior-year average, meaning you could already be an ALE right now without realizing it. According to the IRS ALE guidance, part-time and seasonal workers are converted into FTE equivalents and counted — which means a 38-person company with heavy part-time staff could already be above 50 FTEs on paper.

Breaking Down the Real ACA Compliance Costs

ACA compliance costs are not just about buying health insurance. They are about the operational infrastructure you need to stay legally protected. Here is where the money actually goes.

1. Variable-Hour Employee Tracking

The ACA requires you to track and measure hours for every variable-hour, part-time, and seasonal employee to determine whether they qualify as full-time. This is done through a formal measurement period — either a standard or initial measurement period lasting 3 to 12 months — followed by an administrative period and a stability period during which you must offer (or not offer) coverage based on what you measured.

If your payroll system is not built for this, you are looking at manual spreadsheet tracking, which introduces error risk — and errors lead to penalties. Upgrading to an ACA-compliant HR and payroll system typically costs $3,000 to $8,000 per year for a company your size, depending on the platform.

2. Affordability Calculation and Plan Design

The 2026 affordability threshold is 9.02% of an employee’s W-2 wages (one of three IRS safe harbors). You need someone — an HR professional or benefits advisor — to calculate the maximum employee contribution for every plan you offer, then verify your plans qualify as minimum value. Get this wrong and the IRS can assess a penalty of $4,460 per employee per year (2026 indexed amount) for plans that fail affordability — even if you offered coverage.

3. IRS Reporting: Forms 1094-C and 1095-C

Every ALE must file Form 1094-C (the transmittal) and a Form 1095-C for each full-time employee by the March 31 deadline for electronic filers. This is not a simple form — each 1095-C requires you to accurately code Line 14 (offer of coverage), Line 15 (employee required contribution), and Line 16 (safe harbor codes) for every month of the year.

Outsourcing this reporting to a CPA or benefits firm typically runs $2,000 to $6,000 annually for a 50-employee company. Doing it in-house requires significant staff time — industry estimates put it at 80 to 120 hours per year when you include data gathering, coding, employee distribution, and IRS filing.

4. ACA Penalty Exposure

The IRS enforces ACA compliance through Employer Shared Responsibility Payments (ESRP). There are two categories:

• 4980H(a) Penalty — “A” Penalty: Triggered if you fail to offer coverage to 95% of full-time employees and even one employee gets a premium tax credit on the marketplace. The 2026 penalty is approximately $2,900 per full-time employee (minus the first 30), annually.
• 4980H(b) Penalty — “B” Penalty: Triggered if you offer coverage but it fails affordability or minimum value and an employee gets a marketplace subsidy. The 2026 penalty is approximately $4,460 per affected employee annually.

For a 52-employee company, an “A” penalty would run roughly $63,800 per year. That is not a theoretical number — the IRS is actively issuing Letter 226-J notices to employers who undercounted their FTEs or missed filing deadlines. According to the Department of Labor, ACA enforcement activity has increased significantly heading into 2026.

DIY vs. PEO: What ACA Compliance Actually Costs You

Let us put real numbers on the table. Based on our analysis of 100+ PEO providers and the companies we have helped match, here is a realistic cost comparison for a 50-employee business managing ACA compliance.

The cost of a PEO often comes out close to or below what you would spend managing compliance in-house — without the liability exposure. According to NAPEO research, businesses that use a PEO grow 7 to 9 percent faster and have 10 to 14 percent lower employee turnover than those that do not. The compliance infrastructure is one big reason why.

What Is a PEO and How Does It Handle ACA Compliance?

A Professional Employer Organization (PEO) is a company that co-employs your workforce alongside you, taking on the administrative and legal responsibilities of being an employer — including ACA compliance. You keep full control of your day-to-day operations and who you hire. The PEO handles payroll, benefits, HR compliance, tax filings, and reporting.

When it comes to ACA compliance costs specifically, a PEO:

• Tracks variable-hour employees through their platform automatically
• Calculates affordability for your workforce and flags issues before they become penalties
• Files 1094-C and 1095-C under their EIN in many arrangements, absorbing the filing obligation
• Provides access to large-group health insurance rates that can be 10 to 30 percent cheaper than what a 50-person company can negotiate directly
• Responds to IRS Letter 226-J notices on your behalf if they arise

If you are not familiar with PEOs yet, our guide to the best PEOs for small businesses is a good starting point. You can also see how specific providers handle these compliance layers in our comparison of Gusto and Justworks or our Insperity cost breakdown.

When Should You Start Preparing?

The answer is before you hit 50 employees — ideally when you are at 40 to 45. Here is why timing matters so much:

• The ACA looks at your prior calendar year average, so if you cross 50 FTEs this year, your obligations start January 1 of next year — but the measurement period that determines who gets coverage offers starts now.
• Setting up a compliant tracking system after the fact is expensive and creates retroactive risk.
• Health plan design needs to happen during open enrollment, which means you need your affordability calculations done months in advance.
• If you plan to use a PEO, onboarding takes 4 to 6 weeks — you want that done before the compliance clock starts ticking.

In our experience matching hundreds of businesses, the companies that call us at 42 employees have a smooth transition. The ones who call us at 52 employees — already in ALE status with no systems in place — are scrambling. Use our free PEO matching service to get ahead of it.

Bottom Line: The 50-Employee Threshold Is a Business Decision, Not Just an HR Problem

Crossing 50 employees is an exciting milestone. It means your business is growing, your team is expanding, and you are building something real. But the ACA compliance costs that come with that milestone are significant, concrete, and enforceable. The good news is that the infrastructure to handle them does not have to be built from scratch inside your company. A PEO can absorb the complexity, reduce your liability, and often lower your total cost at the same time.

You have built too much to let a compliance gap become a six-figure problem.

Frequently Asked Questions

How does the ACA count employees to determine if I am an Applicable Large Employer?

The ACA counts full-time employees (averaging 30+ hours per week) plus full-time equivalents, which are calculated by adding all part-time hours in a month and dividing by 120. If your total averaged 50 or more FTEs across the prior calendar year, you are an ALE subject to ACA employer mandate requirements for the current year.

What is the ACA affordability threshold for 2026?

For 2026, a health plan is considered affordable under ACA rules if the employee’s required contribution for the lowest-cost single-coverage plan does not exceed 9.02% of their household income. Employers typically use one of three IRS safe harbors — W-2 wages, rate of pay, or federal poverty line — to establish affordability without knowing each employee’s actual household income.

What happens if I miss filing Forms 1094-C and 1095-C?

Failure to file or furnish correct 1095-C forms to employees can result in penalties of $310 per return in 2026, with a maximum annual penalty of $3,783,000 for large filers. Intentional disregard of the filing requirement raises the per-return penalty significantly higher, with no annual cap.

Can a PEO actually take on my ACA compliance liability?

Yes — in a co-employment arrangement, many PEOs file ACA reporting under their own EIN and assume responsibility for the accuracy of that filing, which shifts significant compliance liability away from you as the client employer. However, the specifics vary by PEO, so it is important to review the contract terms carefully, which is something PEO Marketplace helps clients do during the matching process.

Is it cheaper to manage ACA compliance in-house or through a PEO?

Based on our analysis of 100+ PEO providers and the businesses we match, most 40-to-55-employee companies spend $15,000 to $44,000 per year managing ACA compliance in-house when you account for software, staff time, outside advisors, and penalty risk — while a PEO typically costs $12,000 to $24,000 annually and includes compliance as part of the service. Use our free PEO cost calculator to run the numbers for your specific situation.

A 30-person company can absolutely offer the same caliber of health insurance, retirement plans, and ancillary benefits as a 5,000-employee corporation — the mechanism is called group pooling, and it levels the playing field entirely. The traditional benefits gap between small and large employers is real, but it is not permanent. With the right structure in place, your team of 30 can access the same carrier networks, the same plan tiers, and the same employer contribution rates that Fortune 500 HR departments have been quietly leveraging for decades.

Why Small Company Benefits Cost More (And Cover Less)

The core problem is actuarial math. Insurance carriers price group health plans based on risk, and risk is calculated across a pool of lives. The larger the pool, the more predictable the claims, and the lower the per-person premium. When you have 30 employees, your pool is tiny — one cancer diagnosis, one premature birth, or one chronic condition can send your renewal rates soaring 30% to 50% in a single year.

This is not speculation. According to the Kaiser Family Foundation 2023 Employer Health Benefits Survey, small firms (under 200 employees) pay meaningfully more per employee in premiums than large firms — and they cover a smaller share of dependent costs. The average annual premium for employer-sponsored family coverage was $23,968 in 2023. But the employer contribution percentage drops significantly at smaller firms. Large employers covered roughly 73% of family premiums; small employers averaged closer to 63%. That gap comes directly out of your employees’ paychecks.

The disparity goes beyond raw premium dollars. Small group plans also tend to offer narrower networks, higher deductibles, fewer plan options, and less favorable pharmacy formularies. When a candidate with three job offers is comparing benefits side by side, your small group plan often loses before the conversation about salary even begins.

The Hidden Cost of Small Group Insurance

Small group rates are set by state-regulated small group markets, which cap the risk pool at your headcount. Carriers also apply age-rating factors more aggressively in small groups, meaning a team with several employees in their 50s can face dramatically higher base rates than a younger team of identical size. You have almost no negotiating leverage — you are a single client representing a negligible fraction of a carrier’s book of business. Large employers, by contrast, negotiate custom plan designs, onsite clinics, and wellness credits that simply are not available to you at 30 lives.

What Your Employees Are Actually Comparing

Your team knows what benefits look like elsewhere. Per BLS data from 2023, 96% of workers at large private firms have access to medical care benefits, compared to 53% at small firms. Even among small firms that do offer coverage, the plan quality gap is significant. Employees talk to former colleagues, compare LinkedIn profiles, and make decisions based on total compensation — and benefits are increasingly the deciding factor, especially for workers over 35 with families.

How Group Pooling Eliminates the Size Disadvantage

Group pooling is the mechanism by which a Professional Employer Organization (PEO) aggregates the employees of hundreds or thousands of client companies into a single master health plan. Instead of your 30 employees forming their own tiny risk pool, they join a pool that may contain 50,000, 100,000, or even 500,000 covered lives. The carrier now prices the plan against that massive, diversified pool — and your employees get the same rates and plan design as if they worked for a company with thousands of employees.

This is not a loophole. This is precisely how the PEO industry is structured and why, according to NAPEO, businesses that use PEOs grow 7 to 9 percent faster and have 10 to 14 percent lower employee turnover than comparable businesses that do not. The benefits advantage is a primary driver of that retention edge.

What Gets Unlocked When You Join a PEO Group Plan

In our experience matching hundreds of businesses to PEO providers at PEO Marketplace, the benefits upgrade that clients experience when moving from small group to a PEO group plan typically includes several meaningful improvements across the board:

• Lower premiums: Because the pool is large and stable, base rates are typically 10% to 30% lower than comparable small group plans in the same market.
• Richer plan options: PEO master plans often offer multiple tiers — PPO, HMO, HDHP with HSA — giving employees genuine choice rather than a single take-it-or-leave-it option.
• Broader networks: Large group plans negotiate directly with major carrier networks. Your employees get the same in-network access as corporate employees at large companies.
• Stable renewal rates: Because your claims are diluted across tens of thousands of members, one bad claims year does not crater your renewal. Your rate is tied to the pool’s experience, not yours alone.
• Ancillary benefits at scale: Dental, vision, life, disability, and even mental health benefits are bundled into the group plan at rates a standalone 30-person company could never negotiate independently.

Retirement Benefits: The Other Half of the Gap

Health insurance gets the headlines, but retirement is where the small company benefits gap quietly damages your recruiting. Large employers offer 401(k) plans with institutional investment options, lower expense ratios, and meaningful employer match structures. Small companies often either skip the 401(k) entirely or offer plans with limited fund menus and higher administrative fees that eat into employee returns.

PEOs solve this too. Most established PEOs offer access to a multiple employer plan (MEP) or pooled employer plan (PEP) 401(k), which again aggregates assets across many employers to unlock institutional pricing and fiduciary protection. Per IRS guidance on Pooled Employer Plans, the SECURE Act expanded access to these structures specifically to help small businesses compete on retirement benefits. A PEO is the most efficient delivery vehicle for that access.

The Real Competitive Advantage: What Your Benefits Package Now Says About You

There is a talent narrative embedded in every benefits package. When a candidate opens your enrollment guide and sees a choice of three health plans, a $500 wellness stipend, mental health parity coverage, a 4% 401(k) match, and employer-paid dental and vision — they do not see a 30-person company. They see an employer who takes care of people. That perception is worth more than a marginal salary bump in most cases, and it costs you significantly less to deliver when you are operating inside a PEO’s group structure.

Based on our analysis of 100+ PEO providers at PEO Marketplace, the businesses that make the biggest talent gains after switching are not necessarily the ones who were paying the least before. They are the ones who were paying market rate for mediocre small group coverage and then discovered they could pay the same or less for a genuinely competitive benefits package. The math surprises people every time.

What This Looks Like in Practice

Consider a 30-person professional services firm in Texas. Before joining a PEO, they offered a single BCBS small group PPO with a $1,800 individual deductible and covered 60% of employee-only premiums — about average for their size. After moving to a PEO group plan, they offered three plan options (including an HDHP with HSA employer seed), dropped the individual deductible on the PPO tier to $1,200, and increased employer contribution to 80% of employee premiums — all at a total monthly cost within 5% of what they had been paying before. Employee satisfaction scores on benefits jumped 40 points in the first annual survey.

That is not an outlier. That is a representative outcome. You can use our PEO cost calculator to model what a comparable shift might look like for your headcount and current spend.

How to Evaluate Your Options

Not every PEO group plan is built the same. Before you commit, you need to understand the carrier behind the master plan, the actuarial basis for the rates you are being quoted, and what your renewal exposure looks like if the overall pool has a bad claims year. You should also understand whether the PEO is quoting you on a fully-insured or self-funded master plan — the risk and flexibility profiles are different.

Our guide to the best PEOs for small businesses breaks down which providers have the strongest benefits programs for companies under 50 employees, and our Benefits Benchmark Report shows you what companies your size in your industry are actually spending on health, dental, vision, and retirement — so you have a real baseline before you start any comparison.

If you want to see how specific providers stack up on benefits quality and cost, our breakdowns of Insperity’s cost vs. competitors and Gusto vs. Justworks are good starting points for understanding where different PEOs land on the benefits quality spectrum.

Your Employees Deserve the Same Coverage — Full Stop

The benefits gap between small and large employers is a structural artifact of how insurance markets are organized — it is not a reflection of how much you value your team. Your employees have the same health needs, the same family obligations, and the same financial futures as employees at companies 100 times your size. They should not be penalized for working at a growing company rather than an established one.

Group pooling through a PEO is the most practical, well-tested mechanism available to close that gap today. It does not require you to be large. It requires you to make a smart structural decision about how your HR and benefits are administered. That decision, in our experience, is one of the highest-ROI moves a growing company can make — both in dollars saved and in talent retained.

The first step is understanding what you are currently spending and what you could be getting instead. Tell us about your company and we will match you with vetted PEO providers whose benefits programs fit your headcount, industry, and budget.

Frequently Asked Questions

Why do small companies pay more for health insurance than large companies?

Small companies are rated on their own claims experience, which is volatile and unpredictable with a small headcount. Large companies are rated across a massive, diversified pool of lives, which smooths out individual high-cost claims and results in lower per-member premiums. The larger the pool, the more predictable the risk — and predictability is what carriers reward with lower rates.

What is group pooling and how does it help small businesses?

Group pooling is the practice of combining employees from multiple small companies into a single large group health plan, typically administered through a PEO. By pooling hundreds of thousands of covered lives together, small businesses access large-group carrier rates, broader plan options, and more stable renewal pricing that would be impossible to negotiate on their own.

Will switching to a PEO group plan actually save my company money?

In many cases, yes — particularly for companies that currently have older workforce demographics, a history of high claims, or are renewing in a tight small group market. Based on our analysis of 100+ PEO providers, most companies see either cost neutrality or meaningful savings when moving from small group to a PEO master plan, while simultaneously improving plan quality. The free PEO calculator at PEO Marketplace lets you model your specific scenario before making any commitment.

Are PEO benefits plans available to companies with fewer than 50 employees?

Yes. Most PEOs serve companies starting at five employees, and many specialize in the 10-to-100 employee range where the benefits gap is most acute. There is no minimum headcount requirement to access PEO group health benefits, which is precisely why this model exists — to serve businesses that would otherwise be stuck in the small group market.

What happens to our benefits if we leave the PEO later?

When a company exits a PEO, they transition back to the small group market or another arrangement for health benefits. Employees typically have COBRA rights during the transition, and most businesses that exit PEOs do so by moving to a different PEO rather than returning to standalone small group plans. It is worth discussing transition terms and benefits continuity with any PEO before signing an agreement.

What Is ACA Affordability and Why It Matters in 2026?

Under the Affordable Care Act, an employer-sponsored health plan is considered affordable if the employee’s required contribution for self-only coverage does not exceed a specific percentage of their household income for the year. For 2026, the IRS publishes the exact affordability threshold annually — employers should confirm the current-year percentage directly on IRS.gov before running their calculations, as it adjusts each plan year. Businesses approaching or already over 50 full-time equivalent employees (FTEs) need to get this right: failure to offer an affordable plan can trigger significant Employer Shared Responsibility Payments (ESRPs) under IRC Section 4980H(b).

Affordable Care Act compliance is not just a large-company problem. If your headcount is anywhere near the 50-FTE threshold, you are likely an Applicable Large Employer (ALE) or will be soon — and ALE status means the affordability rules apply to you. This guide walks through exactly how the affordability test works, the three IRS-approved safe harbors you can use, and what happens if a plan fails the test.

How Does the ACA Affordability Test Work?

The affordability test compares what an employee pays for the lowest-cost, self-only plan you offer to that employee’s household income. Because employers almost never know an employee’s actual household income, the IRS created three safe harbors — calculation methods that, if used correctly, protect employers from ESRP exposure even if an employee’s actual household income turns out to be different.

Here is the core logic: if the employee’s required monthly premium contribution for self-only minimum essential coverage (MEC) does not exceed the IRS threshold percentage of the applicable income figure under the safe harbor you choose, your plan is deemed affordable for that employee. The test applies to the lowest-cost self-only option you make available — not the plan the employee actually enrolls in.

Why the Lowest-Cost Plan Is the Benchmark

Many employers offer tiered plan options — bronze, silver, gold. For affordability purposes, what matters is whether the cheapest self-only MEC plan you offer passes the test. If an employee can access an affordable option but chooses a more expensive tier, you are still compliant for that employee. This means your benefit design strategy and your affordable-tier pricing are directly linked to your ACA exposure.

The Three ACA Safe Harbors Every Employer Should Know

Because employers cannot realistically verify each employee’s household income, the IRS established three safe harbors for 2026. Each one uses a different income proxy, and each has practical trade-offs. You can use different safe harbors for different classes of employees, as long as you apply each one consistently within that class.

1. The W-2 Safe Harbor

Under the W-2 safe harbor, a plan is affordable if the employee’s required contribution for self-only coverage does not exceed the IRS threshold percentage of the employee’s W-2 wages (Box 1) from the prior calendar year. This is the most straightforward method for salaried employees with predictable, stable pay. However, it creates a potential timing mismatch: you need to set contribution amounts for the upcoming plan year before the W-2 is finalized. Employers typically use the prior year’s W-2 as a proxy and adjust plan pricing accordingly. This safe harbor can also be tricky for new hires or employees whose hours vary significantly, since their W-2 wages may not yet reflect a full year of earnings.

2. The Rate of Pay Safe Harbor

The rate of pay safe harbor is generally the most employer-friendly option for hourly workers. For hourly employees, multiply the employee’s hourly rate as of the first day of the plan year by 130 hours (the IRS-defined full-time hours threshold per month) to get a monthly income proxy. For salaried employees, use their monthly salary. If the required contribution does not exceed the IRS percentage of that monthly figure, the plan is affordable under this safe harbor. The key advantage: you can calculate affordability before the year begins, because you are using current rates rather than looking back at W-2 data. The limitation is that it cannot be used if an employee’s hourly rate dropped during the year — you must use the lowest rate in that scenario.

3. The Federal Poverty Line (FPL) Safe Harbor

The FPL safe harbor is the simplest to administer and the one most likely to result in a passing test — but it may require the lowest employee contribution, meaning higher employer cost. Under this method, a plan is affordable if the required contribution for self-only coverage does not exceed the IRS threshold percentage of the Federal Poverty Line for a single individual (published annually by HHS). Because the FPL is a fixed, publicly available number, every employee is treated the same regardless of their individual wages. This safe harbor works especially well for employers with a large hourly workforce, high turnover, or complex payroll structures where tracking individual rates is administratively difficult. Check the current FPL figures at HHS.gov each plan year.

What Happens When a Health Plan Fails the Affordability Test?

When a plan fails the ACA affordability test, the consequences fall under Section 4980H(b) of the Internal Revenue Code — sometimes called the “B Penalty” or the “affordability penalty.” An employer is only exposed to this penalty if at least one full-time employee receives a premium tax credit (PTC) through a Marketplace plan. The IRS does not automatically assess the penalty — it is triggered by employee Marketplace enrollments and the subsequent IRS matching process.

How the ESRP Penalty Is Calculated

The 4980H(b) ESRP is assessed monthly, per full-time employee who actually receives a PTC through the Exchange. The penalty amount is set by the IRS and adjusted annually — confirm the current dollar figure for 2026 on IRS.gov. The key distinction from the 4980H(a) penalty (for failing to offer coverage at all) is that the (b) penalty only applies to employees who actually go to the Marketplace and receive a subsidy — not to your entire workforce. That said, even a handful of employees triggering PTC claims can result in tens of thousands of dollars in annual exposure for a mid-size employer.

The IRS Notification Process

The IRS identifies potential ESRP liability through the ACA information reporting employers file — Forms 1094-C and 1095-C. The agency matches those filings against individual tax returns where employees claimed PTCs, then issues Letter 226-J to employers with proposed ESRP assessments. Employers have a defined window to respond and dispute the proposed assessment. Accurate, timely 1094-C/1095-C filing is your first line of defense — errors or missing data make it harder to challenge an incorrect penalty notice.

How a PEO Can Take ACA Compliance Off Your Plate

For employers near or over the 50-FTE threshold, ACA tracking, safe harbor calculations, and 1094-C/1095-C reporting represent a significant administrative burden — especially if your workforce includes a mix of full-time, part-time, and variable-hour employees. This is one area where a Professional Employer Organization (PEO) delivers measurable value beyond payroll processing.

A PEO takes on co-employer responsibilities for your workforce, which typically includes managing ACA measurement periods, running affordability calculations, and filing ACA reporting on your behalf. In our experience matching hundreds of businesses through PEO Marketplace, ACA compliance administration is one of the top three reasons employers in the 40–100 FTE range decide to move to a PEO. According to NAPEO, businesses that use a PEO grow 7–9% faster and have 10–14% lower employee turnover than comparable companies that do not — and reduced compliance risk is a core driver of that outcome.

If you are evaluating PEO options, it is worth understanding how different providers handle ACA reporting as part of their service model. Some fully absorb it; others treat it as an add-on. Our guide to the best PEOs for small business breaks down what to look for. You can also review our Insperity cost comparison to see how one of the larger PEOs structures its compliance services relative to competitors.

What to Ask a PEO About ACA Before You Sign

Not all PEOs handle ACA the same way. Before committing, ask specifically: Does the PEO file 1094-C and 1095-C under their own EIN or yours? Who runs the measurement period tracking for variable-hour employees? What happens if an affordability calculation error results in a penalty — who bears that liability? The answers to these questions will tell you a lot about how serious a given provider is about ACA compliance versus treating it as a checkbox.

2026 ACA Affordability: Key Takeaways for Employers

ACA affordability in 2026 comes down to a clear framework: know your IRS threshold percentage (confirm it at IRS.gov), choose the right safe harbor for each employee class, price your lowest-cost plan accordingly, and file accurate 1094-C/1095-C reports on time. If you are managing this manually across a workforce of 50 or more employees, the administrative complexity compounds quickly — especially when you layer in variable-hour workers, seasonal staff, and mid-year new hires.

Whether you handle ACA compliance in-house or explore a PEO partnership, the math matters. Use our free PEO cost calculator to see what employers your size are actually paying for HR and benefits administration — including ACA compliance services — so you have a real benchmark before making any decisions.

Frequently Asked Questions About ACA Affordability

What is the ACA affordability percentage for 2026?

The IRS adjusts the ACA affordability percentage annually and publishes it in a revenue procedure each fall. Employers should confirm the exact 2026 figure directly on IRS.gov before calculating employee contributions, as guessing or using a prior-year number can result in a plan that technically fails the test.

Does the affordability test apply to dependent or family coverage?

No — the ACA affordability test applies only to the employee’s required contribution for self-only coverage, not to the cost of adding dependents or a spouse. However, starting in 2025, the “family glitch” fix from the IRS means dependents’ eligibility for Marketplace tax credits is also affected by the affordability of family-tier coverage, which is a separate but related compliance consideration.

Can I use different safe harbors for different groups of employees?

Yes, employers may use different safe harbors for different employee classifications — for example, the rate of pay safe harbor for hourly workers and the W-2 safe harbor for salaried employees. The IRS requires that each safe harbor be applied consistently to all employees within a reasonable classification, so document your methodology clearly for each group.

What is Form 1095-C and who needs to file it?

Form 1095-C is the ACA information return that Applicable Large Employers must furnish to full-time employees and file with the IRS alongside Form 1094-C. It reports whether coverage was offered, the employee’s required contribution, and the safe harbor code used — this is the data the IRS uses to identify potential ESRP liability. ALEs must file these forms annually, with deadlines set by the IRS for each reporting year.

Does a PEO file ACA forms on my behalf?

Many PEOs do file Forms 1094-C and 1095-C as part of their co-employment service, though the specific arrangement varies by provider — some file under their own EIN, others file under the client employer’s EIN. Before selecting a PEO, confirm exactly who bears filing responsibility and what liability the PEO accepts if an error leads to a proposed ESRP assessment. Our comparison of leading PEOs covers how different providers approach this.