In a welcome change for employers facing rising health plan costs, the IRS has raised the Affordable Care Act (ACA) affordability threshold for employer-sponsored health coverage for plan years beginning in 2026 from 9.02% to 9.96% of an employee's household income. This adjustment, formally issued under IRS Revenue Procedure 2025-25 in July 2025, reflects annual inflation indexing and provides employers with a modest increase in cost flexibility without sacrificing compliance.
Below, we unpack the nature of the affordability increase, explore safe-harbor mechanisms for employers, explain associated IRS penalty adjustments, and outline practical action steps for HR and payroll teams heading into the 2026 plan year.
What Changed in the 2026 ACA Affordability Threshold
Under the ACA's employer mandate (often called "play or pay"), Applicable Large Employers (ALEs), typically those with 50 or more full-time or equivalent employees, must offer minimum essential coverage that is both affordable and meets minimum value, or face potential IRS penalties. "Affordable" means that the employee's share of the premium for self-only coverage must not exceed a certain percentage of the employee's household income, indexed annually.
For plan years beginning in 2026, that threshold is set at 9.96%, an increase from 9.02% in 2025.
- Calendar-year plans starting January 1, 2026, will fall under the new 9.96% threshold immediately.
- Non-calendar year plans must use the affordability percentage in effect at the start of their plan year. For example, if a plan began November 1, 2025, it will use the 9.02% threshold for the full year and then shift to 9.96% when the next plan year starts in November 2026.
This increase allows employee payroll deductions for health insurance to be slightly higher while still falling below the affordability standard, potentially easing employer premium contribution burdens. Yet employers must remain cautious, as affordability remains a federal compliance requirement.
Safe Harbor Rules for Employers in 2026
Because employers rarely know employees' household income, the IRS offers three safe-harbor approaches to determine affordability using known data:
1. Federal Poverty Level (FPL) Safe Harbor
Simplest to administer, this method sets a monthly maximum contribution based on 9.96% of the FPL for a single individual. For mainland U.S., using the 2025 FPL of $15,650, the math is:
$15,650 × 9.96% ÷ 12 = $129.90 per month (rounded)
Therefore, for 2026 calendar-year plans, if the employee-only premium is at or below $129.90/month, the coverage is affordable under the FPL safe harbor.
Special rates apply for Alaska ($162.27/month) and Hawaii ($149.32/month)
2. Rate-of-Pay Safe Harbor
This method caps affordability based on the employee's pay:
- Hourly workers: hourly rate × 130 hours × 9.96%.
- Example: $20/hour × 130 = $2,600 monthly salary × 9.96% = $258.96 max contribution.
- Salaried workers: (annual salary ÷ 12) × 9.96%.
- Example: $36,000/year ÷ 12 = $3,000 × 9.96% = $298.80 max contribution.
3. Form W-2 Safe Harbor
Post-year-end option using Box 1 wages:
- Coverage is affordable if the employee's share doesn't exceed 96% of their W-2 Box 1 wages.
- Because this is retrospective, it offers less planning certainty and is often less preferred.
IRS ACA Penalties for 2026
Alongside the affordability increase, IRS Revenue Procedure 2025-26 adjusts ACA employer-mandate penalties for 2026 upward:
Section 4980H(a) "A-Penalty" (Failure-to-Offer Penalty)
If an employer fails to offer minimum essential coverage (MEC) to at least 95% (or all but 5, if greater) of full-time employees and their dependent children in any given month, a penalty applies if even one full-time employee enrolls through a public Marketplace and qualifies for a premium tax credit. The penalty is multiplied by the total full-time employee count minus the first 30, regardless of how many employees were actually offered coverage.
2026 penalty calculation: (Full-time employee count – 30) × $278.33 for each month of non-compliance.
Section 4980H(b) "B-Penalty" (Unaffordability/Minimum Value Penalty)
If an employer meets the §4980H(a) requirement but fails to offer minimum-value, affordable coverage to one or more full-time employees, a penalty may still apply for each employee who instead enrolls through a public Marketplace and qualifies for a premium tax credit. Unlike the "A Penalty," this is calculated on a per-employee basis.
2026 penalty calculation: $417.50 per month for each full-time employee who qualifies for a premium tax credit due to lack of minimum-value, affordable coverage.
These increases heighten financial risk for non-compliance and spotlight the importance of leveraging the increased affordability threshold properly.
Why the 2026 Affordability Threshold Matters for Employers & HR
Flexibility, But With Strategy
The raised threshold allows slightly higher employee contributions while maintaining compliance. It's a welcome buffer, particularly helpful amidst ongoing healthcare cost increases.
However, employers shouldn't interpret this as permission to dramatically hike premiums. Doing so might suppress benefit attractiveness or strain recruitment/retention.
Plan Design & Budgeting
HR and benefits teams must model various affordability scenarios. Is the employer planning to keep employee contributions flat, effectively reducing employer cost burden relative to the threshold? Or could they raise contributions modestly to offset premium inflation while staying compliant?
This balancing act underscores the importance of strong benefits brokerage support. With Inova Benefits Brokerage services, employers gain expert guidance in structuring plans that both meet compliance obligations and resonate with employees. Inova's integrated approach ensures health plan strategies align seamlessly with payroll and HR, reducing administrative complexity and strengthening overall workforce satisfaction.
Compliance Monitoring
Employers also need to track safe-harbor usage, apply the correct threshold for each plan year, and document decisions transparently to withstand audits. Non-calendar plans complicate planning, and eligibility between 2025 vs. 2026 affordability thresholds requires careful attention.
This is where technology can make a big difference. Inova HCM's ACA Manager helps HR teams automate compliance monitoring and reporting by tracking measurement periods, employee hours, and benefits eligibility in real time. With proactive alerts, a robust rules engine, and an ACA dashboard with real-time reports, HR professionals can spot compliance risks before they become penalties. The system also auto-populates IRS forms 1094-C and 1095-C for electronic or hard copy delivery, streamlining the year-end filing process and reducing administrative burden.
Communication Strategy
Notifying employees about how benefits remain affordable under the ACA, and what that means for their financial responsibility, can foster transparency and trust.
Simplify ACA Compliance with Inova's ACA Manager
With the ACA affordability threshold increasing to 9.96% in 2026, employers gain a bit more flexibility, but compliance obligations remain front and center. This adjustment creates an opportunity to revisit contribution strategies, test safe harbor calculations, and align health plan design with both financial goals and employee expectations.
For organizations seeking expert guidance, our Benefits team helps you ensure compliance and navigate complex regulations like the ACA with ease. Through Inova Benefit Brokerage services, you can simplify plan design, balance costs, and deliver benefits packages that resonate with your employees. And with the ACA Manager built into Inova HCM, HR and payroll teams can automate eligibility tracking, safe-harbor testing, and IRS reporting to reduce administrative burden while minimizing compliance risk.
