IRS Raises ACA Affordability Threshold for 2026

 When you’re running a business and offering health benefits, compliance with the ACA’s Employer Shared Responsibility (pay-or-play) rules means more than just picking a health plan. You must make sure the coverage you offer is affordable (and provides minimum value) — or risk IRS penalties. Taken from our partner Mineral’s excellent HR Resource Center and the IRS, we have put together a simple article that will hopefully help you understand affordability and safe harbors and what the raise in thresholds mean for you.

This guide walks you through:

  1. What “affordability” means under the ACA

  2. The three “safe harbor” tests you can use

  3. The 2025 and  updated 2026 rates & thresholds

  4. Best practices and pitfalls

1. What “Affordable” Means (from the Employer Viewpoint)

As an Applicable Large Employer (ALE) (i.e. you have 50 or more full-time equivalent employees), you must offer health insurance to your full-time employees (and their dependents) under the ACA. But that coverage must pass two tests:

  • Minimum Value – the plan must cover a sufficient share of expected medical costs (generally at least 60%) IRS

  • Affordability – the employee’s share for the lowest-cost, self-only coverage must not exceed a specified percentage of income (or its proxy)

If the coverage is not affordable and an employee instead obtains subsidized coverage through an exchange, your business could face a §4980H(b) penalty (for employees receiving a premium tax credit).

Because you ordinarily don’t know employees’ household incomes, the IRS allows you to use one of three Safe Harbor methods to determine affordability.

2. The Three Safe Harbors (Employer Tools)

You pick one (or a combination for different employee groups), but you must apply them consistently and properly. The three are:

 W-2 Safe Harbor

  • Use the employee’s Box 1 wages from the prior year (that is, taxable income reported on Form W-2).

  • The employee’s required contribution for the lowest-cost self-only coverage must not exceed the safe harbor percentage (e.g. 9.02% for 2025) of that Box 1 amount.

  • If that threshold is met, the coverage is considered affordable regardless of their full household income.

Rate of Pay Safe Harbor

  • For hourly employees: multiply the hourly rate by 130 (the assumed monthly full-time hours).

  • For salaried employees: use their monthly salary.

  • Then apply the safe harbor percentage (e.g. 9.02% in 2025) to that base to find the maximum allowed employee contribution.

Federal Poverty Line (FPL) Safe Harbor

  • This is the most conservative and often the easiest. You use the federal poverty line for a single individual and apply the safe harbor percentage to it.

  • If the employee’s share for self-only coverage is under that amount, the coverage is “affordable” for all employees — regardless of their income level.

  • It’s a fixed ceiling you can pre-calculate (especially useful for planning).

3. The 2026 Affordability Rates & Safe Harbor Thresholds

  • The affordability percentage is set to increase to 9.96% for plan years beginning in 2026.

  • Under the FPL Safe Harbor, the monthly cap for employee cost is $129.89/month in 2026 (for the mainland U.S.) for self-only coverage.

That means your lowest-cost self-only plan must charge employees no more than $129.89 per month (given the FPL safe harbor) for 2026 to automatically be considered affordable under that method.

4. Example Calculations (Employer View)

Example A: Hourly Employee in 2025

  • Hourly wage: $20/hr

  • Monthly equivalent = $20 × 130 = $2,600

  • Maximum employee contribution under Rate of Pay safe harbor = $2,600 × 9.02% = $234.52/month

If you offer your lowest-cost self-only plan for $230/month or less, it would be considered affordable for this employee under that method.

Example B: Use FPL Safe Harbor in 2026

  • FPL-based safe harbor monthly limit = $129.89/month

  • As the employer, you can ensure your lowest-cost self-only option for that year does not exceed $129.89.

If you structure your contributions accordingly, you’ll satisfy affordability under the FPL safe harbor for all employees (regardless of their personal income). Here is the official Revenue Procedure document from the IRS Revenue Procedure 2025-25

5. Best Practices & Things to Watch Out For

  • Choose your safe harbor method early. Once you begin using one reliably, switching retrospectively can cause reporting confusion or audit risks.

  • Document your assumptions and calculations. Keep records of what method you used, how you computed the thresholds, and how you set your employee contribution levels.

  • Account for non-calendar year plans. If your benefit plan year doesn’t align with the calendar year, the safe harbor percentage in effect at the start of your plan year applies for that entire plan year.

  • Watch for other factors. Things like employer health flex credits, cash in lieu, or other compensation can affect the “required contribution” calculation in some cases.

  • Stay updated. Rates, FPL numbers, and IRS guidance can shift. For example, the jump from 9.02% in 2025 to 9.96% in 2026 means your affordability planning must adjust accordingly.

  • Test multiple scenarios. Run affordability tests under different methods (W-2, rate of pay, FPL) to see which gives you the most flexibility while staying compliant.

 

This blog does not constitute formal HR or legal advice and does not address state or local laws. Our HR Resource Center by Mineral offers further guidelines for this and many other topics. For a small additional fee you can also speak to a live HR Specialist. Contact your friendly APlus Payroll CSS for further information (including login details) or login here. Want to know how we can help your Payroll or Time & Labor process? Please contact us here. Consultation is friendly and free!