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On July 21, 2026, the IRS issued Revenue Procedure 2026-26 announcing that the Affordable Care Act (ACA) affordability threshold is increased from 9.96% in 2026 to 10.22% in 2027. Additionally, on May 4, 2026, the IRS issued Revenue Procedure 2026-22, which provides indexing adjustments for penalties under the ACA employer mandate.
Due to these increases, employers subject to the ACA employer mandate must be aware that the cost for plan participants under its lowest cost, self-only coverage option may have to be adjusted to avoid the possibility of a penalty on the employer. In addition, if subject to the employer mandate penalty amounts, employers face greater penalties in 2027.
The ACA Employer Mandate and ACA Affordability Requirement
The ACA “formula” provides that an applicable large employer must offer each full-time employee and his/her dependents the opportunity to enroll in minimum essential coverage that satisfies a “minimum value” standard and is “affordable” or be potentially exposed to penalties.
ACA affordability is based on the lowest-cost, self-only coverage option under a health plan. This requires an analysis of the employee-required contribution for the lowest-cost, self-only coverage to make sure it does not exceed a specified amount. Please remember that employers must take into account wellness plan incentives and opt-out payments for purposes of ACA affordability.
Under the ACA, the specified amount is a percentage based on the employee’s household income (initially set at 9.5% in 2014, and adjusted for inflation). In response to employers’ concerns about having to obtain the household income of their employees, the IRS provided three safe harbors for employers. These safe harbors include the following:
- Federal Poverty Line Safe Harbor. An employer satisfies this safe harbor if the employee’s required contribution for the lowest-cost, self-only coverage that provides minimum value does not exceed the IRS-specified percentage of the federal poverty line for a single individual for the year.
- Rate of Pay Safe Harbor. Coverage will be deemed affordable if the employee’s monthly contribution is equal to or less than the IRS-specified percentage of monthly wages. For hourly employees, monthly wages are determined by multiplying the employee’s hourly rate by 130. For salaried employees, an employee’s monthly salary is used.
- W-2 Safe Harbor. Generally, an employer meets this safe harbor if the lowest-cost, self-only coverage that provides minimum value during the entire calendar year does not exceed the annual IRS-specified percentage of the employee’s W-2 wages from the employer for the calendar year.
| ACA Safe Harbors | 2027 | 2026 |
| Federal Poverty Line | Maximum contribution 10.22% of federal poverty line on monthly basis ($135.93/month if mainland U.S.) | Maximum contribution 9.96% of federal poverty line on monthly basis ($129.89/month if mainland U.S.) |
| Rate of Pay | Maximum contribution 10.22% of monthly wages | Maximum contribution 9.96% of monthly wages |
| W-2 | Maximum contribution 10.22% of W-2 wages | Maximum contribution 9.96% of W-2 wages |
Penalties
If an Applicable Large Employer (ALE) fails to offer affordable coverage for one or more full-time employees, the employer is subject to the Employer Shared Responsibility Payment for each full-time employee for whom coverage is not affordable and who obtains subsidized Marketplace coverage. Like the affordability threshold, this penalty amount is indexed for inflation. The initial penalty amount of $3,000 (in 2015) is now $5,670 for 2027, an increase from 2026’s annualized penalty of $5,010 per affected employee.
Relatedly, if an ALE fails to offer minimum essential coverage to 95% of all full-time employees and their dependents, and at least one full-time employee purchases Marketplace coverage and receives a premium tax credit, then the employer is subject to the Employer Shared Responsibility Payment for the total number of full-time employees (not counting the first 30 employees). The penalty amount is also indexed for inflation. The penalty amount is now $3,780 for 2027, an increase from 2026’s annualized penalty of $3,340 per each counted full-time employee.
While the penalties are stated as annual amounts, they are determined on a monthly basis.
Practice Pointer
Plan sponsors should take immediate action to determine if their 2027 plan design for premium cost-sharing does not create an issue with the new affordability threshold. Presumably, plan sponsors have already determined if their group health plan(s) offer minimum essential coverage; however, considering the increased penalty amounts, it may be advantageous to confirm that aspect of plan design as well.
If you have any questions about ACA compliance, including the new ACA affordability and/or penalty provisions, please contact any member of our Employee Benefits and Executive Compensation practice group.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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