ACA Affordability Threshold Increases to 9.96% for 2026

The IRS announced that the Affordable Care Act (ACA) benchmark to calculate the affordability of employer-sponsored health coverage will increase for plan years beginning in 2026 to 9.96% of an employee’s household income—up from 9.02% in 2025.

This percentage plays a key role in determining:

• Whether employees qualify for subsidized coverage through a public exchange.
• Whether an employer may face shared-responsibility (“play or pay”) penalties.

Understanding ACA Affordability Standards

Under the ACA, an employer’s offer of minimum essential coverage (MEC) is considered affordable if the employee’s required contribution for the lowest-cost, self-only plan that meets minimum value does not exceed the applicable percentage of household income. Since employers typically do not have access to household income data, the IRS permits use of one of three safe harbor alternatives to assess affordability:

1. Federal Poverty Line (FPL) Safe Harbor

The FPL safe harbor is often the simplest to administer.

In 2026, the plan will be deemed affordable under this safe harbor if an employer offers a medical plan that meets minimum value and costs no more than $129.90 per month for employee-only coverage.

• This amount is based on the 2025 FPL for a single individual in the continental U.S.:
  $15,650 x 9.96% ÷ 12 = $129.90/month (rounding up to the nearest penny).
• Higher FPLs apply for Alaska ($162.27/month) and Hawaii ($149.32/month).
• For non-calendar-year plans, employers may use the FPL in effect up to six months before the plan year starts, providing flexibility to select the most advantageous threshold.

2. Rate of Pay Safe Harbor

Employers who do not meet the FPL affordability test may use the rate of pay safe harbor, which calculates affordability based on employee wages.

Hourly Employees:

• Hourly wage x 130 hours = Monthly wage x 9.96% = maximum contribution
  Example: $20/hour x 130 = $2,600 monthly wage x 9.96% = $258.96/month maximum premium

Salaried Employees:

• · Annual salary ÷ 12 = Monthly salary x 9.96% = maximum contribution
  Example: $36,000/year ÷ 12 = $3,000 monthly salary x 9.96% = $298.80/month maximum premium

This approach is more customizable based on workforce compensation but requires accurate payroll data and consistent application.

3. Form W-2 Safe Harbor

This method uses Box 1 wages from the employee’s year-end W-2.

• It is generally less predictable and only confirmed retrospectively after year-end, making it a less preferred method.
• Coverage is affordable if employee premiums for the lowest-cost, self-only plan do not exceed 9.96% of W-2 wages.

ACA Penalties and Liability

Two penalties may apply under the ACA’s employer mandate:

• Section 4980H(a) “A Penalty” applies if an employer fails to offer MEC to at least 95% of full-time employees. In 2026, the penalty will be $3,340 per full-time employee (excluding the first 30 employees).
• Section 4980H(b) “B Penalty” applies when coverage is unaffordable, not offered, or lacks minimum value. In 2026, the penalty is $5,010 per affected employee receiving a subsidy on the exchange.

Both penalties are indexed annually.

Next Steps for Employers

To prepare for 2026, employers should review and model employee contribution strategies using the new 9.96% threshold. Reach out to your Stephens team if you have any questions. See IRS Rev. Proc. 2025-25: https://www.irs.gov/pub/irs-drop/rp-25-25.pdf