July 2026
Stephanie Hall, Associate Director Benefits Compliance
The Internal Revenue Service (“IRS”) released Revenue Procedure 2026-26 on July 21, 2026, announcing that the affordability percentage for the 2027 plan year has increased to 10.22% (as adjusted for 2027).
The affordability percentage is officially referred to as the “Section 36B Required Contribution Percentage” under Internal Revenue Code (“IRC”) Section 36B. The affordability percentage is used by employers subject to the Affordable Care Act’s (“ACA”) employer mandate (commonly known as the “pay or play” mandate) to assess the affordability of health plans offered to their full-time employees. Large employers subject to the employer mandate are referred to as applicable large employers (“ALEs”). Failure by an ALE to offer at least one “affordable” health plan option could result in a penalty assessment under IRC Section 4980H(b) for each full-time employee who obtains coverage in the Marketplace and qualifies for a subsidy in lieu of enrolling in the employer-sponsored coverage offered to such employee.
General overview of affordability safe harbors
Because an ALE generally will not know an employee’s household income, the IRS has provided three optional safe harbors that may be used to determine affordability based on information that is available to them:
- Form W-2 safe harbor;
- Rate of pay safe harbor; and
- Federal poverty line safe harbor.
An employer may use one or more of the affordability safe harbors if it offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (“MEC”) under a health plan that provides minimum value (“MV”) with respect to the self-only coverage offered to the employees. Note that the affordability safe harbors are only used to determine whether an employer’s coverage satisfies the affordability test for purposes of the employer mandate. These safe harbors do not affect an employee’s eligibility for a subsidy in the Marketplace, which is based on the affordability of employer-sponsored coverage relative to an employee’s household income. In addition, an ALE may not pick and choose a safe harbor on an employee-by-employee basis. However, an ALE may choose to apply these safe harbors for any reasonable category of employees (i.e. specified job categories, hourly/salary, geographic location and bona fide business criteria), so long as it does so on a uniform and consistent basis for all employees in a category.
Form W-2 safe harbor
Under the Form W-2 safe harbor, an ALE may determine the affordability of its health coverage by reference only to an employee’s wages from that ALE, instead of by reference to the employee’s household income. For this purpose, “wages” is the amount that is required to be reported in Box 1 of the employee’s Form W-2. An ALE satisfies the Form W-2 safe harbor with respect to an employee if the employee’s required contribution for the calendar year for the ALE’s lowest-cost, self-only coverage that provides minimum value during the entire calendar year does not exceed 10.22% (as adjusted for 2027) of that employee’s Form W-2 wages from the employer for the calendar year. An ALE may not make any discretionary adjustments to the required employee contribution for a pay period. The application of this safe harbor is determined at the end of the calendar year and on an employee-by-employee basis.
Rate of pay safe harbor
The rate of pay safe harbor was designed to allow an ALE to prospectively satisfy affordability without the need to analyze each employee’s wages and hours. For hourly employees, the rate of pay safe harbor allows an ALE to:
- Take the lower of the hourly employee’s rate of pay as of the first day of the coverage period (generally, the first day of the plan year) or the employee’s lowest hourly rate of pay during the calendar month;
- Multiply that rate by 130 hours per month (the benchmark for full-time status for a month); and
- Determine affordability for the calendar month based on the resulting monthly wage amount.
Specifically, the employee’s monthly contribution amount (for the self-only premium of the employer’s lowest-cost coverage that provides minimum value) is affordable for a calendar month if it is equal to or lower than 10.22% (as adjusted for 2027) of the employee’s applicable hourly rate of pay multiplied by 130 hours. For salaried employees, their monthly salary as of the first day of the coverage period is used.
Federal poverty line safe harbor
An ALE may also rely on a design-based safe harbor using the federal poverty line (“FPL”) for a single individual. Employer-provided coverage is considered affordable under the FPL safe harbor if the employee’s required contribution for the calendar month for the lowest-cost self-only coverage that provides minimum value does not exceed 10.22% (as adjusted for 2027) of the FPL for a single individual for the applicable calendar year, divided by 12.
As the FPL for the year is not made available until January each year, the final regulations allow ALEs to use the poverty guidelines in effect within six months before the first day of the plan year for purposes of this safe harbor. The 2026 FPL for the 48 contiguous states and the District of Columbia is $15,960 (for a one-person household). Thus, for a plan with a 2027 calendar year plan year, to satisfy the FPL safe harbor, the monthly contribution cannot exceed $135.93 ($15,960 x 10.22% ÷ 12). This is an increase of $6.30 in allowed employee contributions compared to the 2026 calendar year.
In essence, the FPL safe harbor provides ALEs with a predetermined maximum amount of employee contribution that in all cases will result in the coverage being deemed affordable.
Employer action items
Applicable large employers should review their required employee contributions for plans starting in 2027 to determine whether any adjustments should or can be made to keep those contributions affordable. As a result of this increase, many employers may have some flexibility to increase their employee contributions in line with the increased threshold.
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