What Employers Need to Know About the 2026 ACA Affordability Threshold
Every year, the Affordable Care Act affordability percentage determines how much an employer can charge employees for health coverage while remaining compliant. For 2026, the IRS has released the new affordability threshold, and employers must adjust their benefits strategy before the plan year begins.
Below is a clear overview of what the new threshold means, how it affects Applicable Large Employers, and the steps HR and benefits teams should take now to prevent IRS penalties.
What Is ACA Affordability?
Under the ACA, Applicable Large Employers must offer full-time employees affordable Minimum Essential Coverage that meets Minimum Value standards. Coverage is considered affordable if the employee’s cost for the lowest priced employee only plan does not exceed a specific percentage of their household income.
This percentage changes every year and directly affects employer contributions and premium structure.
The 2026 ACA Affordability Threshold
The IRS has set the 2026 affordability threshold at 9.96 percent of an employee’s household income.
This means the employee share of the lowest cost employee only plan cannot exceed 9.96 percent of what the IRS considers household income for affordability purposes.
Even a small increase or decrease in the annual limit changes employer contribution requirements and may affect how plans are priced for the year.
How Employers Determine Affordability
Because employers do not know each employee’s exact household income, the IRS provides three safe harbor methods that employers can use to calculate affordability with confidence.
W-2 Wages Safe Harbor
Affordability is based on the employee’s wages reported in Box 1 of their W-2 form.
Rate of Pay Safe Harbor
Affordability is determined using the employee’s hourly rate multiplied by 130 hours per month or the monthly salary for salaried employees.
Federal Poverty Line Safe Harbor
Affordability is calculated using the federal poverty line guidelines. This safe harbor often provides the most predictable maximum employee contribution.
Employers can use different safe harbors for different employee groups as long as they are applied consistently within each group.
Why the 2026 Threshold Matters
The annual affordability percentage is not a suggestion. It determines whether an employer meets the ACA requirement to offer affordable coverage. If employee premiums exceed the 2026 limit, the employer may face IRS Penalty B assessments for each full time employee who receives a subsidy on the Marketplace.
Even a single miscalculation can trigger significant exposure.
What Employers Should Review for 2026
Employers should evaluate several areas of their benefits strategy to stay compliant in the new plan year.
1. Employee Contribution Amounts
Review your lowest cost employee only premium to ensure it does not exceed the 9.96 percent threshold using your safe harbor of choice.
2. Pay Rates and Hours
Review hourly wages and ensure affordability calculations align with the correct safe harbor. Pay increases or schedule changes may shift affordability status.
3. Communication to Employees
Make sure employees understand what the lowest cost plan option is and how their share of the premium is calculated.
4. ACA Reporting Accuracy
Affordability must be reflected correctly on Forms 1094 and 1095. Incorrect coding can signal inaccurate offers of coverage and result in IRS questions.
5. Vendor and Administrator Alignment
Confirm that your benefits administration partner is using the correct affordability percentage for 2026 when setting rates, processing enrollments, and preparing reporting.
Common Mistakes Employers Should Avoid
Many employers unintentionally fall out of compliance due to simple errors in calculation or reporting. The most common issues include:
- Misidentifying which plan counts as the lowest cost employee only option
- Applying the wrong safe harbor across inconsistent employee groups
- Forgetting to update rates after wage changes
- Using outdated affordability percentages from prior years
- Incorrectly coding affordability on 1095 forms
These mistakes often lead to IRS Letter 226J assessments, which can be costly and time consuming to resolve.
Staying Compliant in 2026
The annual affordability update is one of the most important ACA adjustments employers face each year. Updating contributions, reviewing safe harbor calculations, and confirming reporting accuracy can prevent expensive penalties and keep your organization compliant.
If you want to ensure your 2026 affordability calculations are accurate and fully aligned with ACA requirements, reach out to our team.
