On July 18, 2025, the IRS issued Revenue Procedure 2025-25, announcing the 2026 indexed contribution percentage amount for determining the affordability of an Applicable Large Employer’s plan under the Affordable Care Act (ACA). The IRS also announced the 2026 inflationary adjustment to the employer shared responsibility payment amounts a few days later. Employers should be aware of the significant increase in both the affordability percentage and the employer shared responsibility payment amounts for 2026.

Employer Shared Responsibility Payment Amounts

Applicable Large Employers (ALEs) may be subject to two types of ACA penalties, often referred to as the “(a) penalty” under IRC Section 4980H(a) and the “(b) penalty” under IRC Section 4980H(b). ALEs need to evaluate their exposure to each penalty. These penalties are adjusted each year based on the annual inflationary adjustment amounts published by the IRS. The two potential penalties are detailed below.

Penalty for Failure to Offer Substantially All Full-Time Employees Minimum Essential Coverage

The first penalty (i.e., the (a) penalty) under the employer mandate is triggered when an ALE fails to offer “substantially all” (defined as at least 95%) of their full-time employees minimum essential coverage (MEC) and at least one full-time employee purchases coverage from the Marketplace/Exchange and receives a premium tax credit. A full-time employee is defined as an employee that has, or is expected to have, at least 30 or more hours of service a week or 130 or more hours of service a month.

The Internal Revenue Service (IRS) recently released an annual inflationary adjustment to this penalty amount for the 2026 calendar year (see Rev. Proc. 2025-26).

For 2026, the annual penalty amount associated with an ALE that fails to offer MEC to substantially all full-time employees (and at least one full-time employee goes to the Marketplace/Exchange and receives a premium tax credit) is $3,340 ($278.33 per month) per full-time employee, minus the first 30 full-time employees. This is an increase from $2,900 ($241.67 per month) in 2025.

Penalty for Failure to Offer Affordable and Minimum Value Coverage to a Full-Time Employee

Even if an ALE offers substantially all of its full-time employees MEC, an ALE could still be subject to penalties under the (b) penalty for failing to offer affordable and minimum value (MV) coverage to any full-time employee who receives a premium tax credit to purchase coverage in the Marketplace/Exchange.

For 2026, the annual penalty amount associated with an ALE failing to offer affordable and minimum value coverage to a full-time employee is $5,010 ($417.50 per month) for each full-time employee who was not offered either affordable or minimum value coverage who receives a premium tax credit to purchase coverage in the Marketplace/Exchange. This is an increase from the 2025 penalty amount of $4,350 ($362.40 per month).

2026 Indexed Affordability of Coverage Percentage Amount

ALEs may not always be aware of what each employee’s household income is for purposes of calculating the affordability of the health plan for each employee. To resolve this issue, the IRS allows ALEs to calculate the affordability of the health plan based upon certain safe harbors that allow employers to assume that the plan at a certain employee contribution rate is affordable to their employees. The affordability safe harbors are discussed below and apply to an employee’s self-only coverage premium contribution for the lowest-cost plan offered by the employer that provides minimum value (MV).

The affordability of coverage percentage amounts are indexed for inflation annually, and therefore, ALEs should review their employee premium contributions and whether they are considered affordable under the applicable safe harbor percentage amount annually. In doing so, the ALE helps to protect itself from potential (b) penalties under the Employer Mandate.

For plan years beginning in 2026, employer-sponsored coverage will be considered affordable for purposes of the employer shared responsibility payment (ESRP) if the employee’s required contribution for self-only coverage under the lowest-cost medical plan option that provides minimum value (MV) does not exceed:

• 9.96% of the employee’s household income for the calendar year (a significant increase from the affordability contribution percentage of 9.02% in 2025).
• Due to the increase in the affordability of coverage percentage amount in 2026, ALEs may want to consider increasing their employee contribution amounts to provide some potential cost-savings to the employer/plan sponsor for the 2026 plan year.

The updated affordability percentage amount is effective for tax and plan years beginning January 1, 2026.

As previously mentioned, optional safe harbors may be used by an employer to determine the affordability of its coverage. The applicable affordability safe harbors provided by the IRS include:

• The Box 1, W-2 Safe Harbor: Under this safe harbor, the offer of coverage is affordable if the employee’s contribution for the lowest-cost self-only MV coverage option does not exceed the applicable percentage of the employee’s Box 1, W-2 earnings.
• The Rate of Pay Safe Harbor: This applies the affordability percentage amount to the employee’s base hourly rate of pay at 130 hours a month or the monthly salary of a salaried employee.
• The Federal Poverty Level (FPL) Safe Harbor: The FPL affordability safe harbor is based upon multiplying the applicable affordability percentage amount by the mainland (or Hawaii/Alaska, if applicable) federal poverty line that is in effect within six (6) months before the start of the plan year.
  • The 2025 federal poverty line amount was $15,650. Accordingly, for plan years beginning on January 1, 2026, an Applicable Large Employer (ALE) would be considered as offering affordable coverage under the federal poverty line safe harbor if it offers full-time employees self-only coverage for its lowest cost MV plan, if it has an employee contribution of no greater than $129.89 per month ($15,650 ÷ 12 X 9.96% = $129.89).¹

¹ A different calculation applies with respect to employees residing in Alaska or Hawaii.

Regulatory and Legislative Strategy Group