2026 Play or Pay Affordability Percentage Released

July 24, 2025

Overview

The IRS released Revenue Procedure 2025-25 on July 18, 2025, announcing the applicable affordability percentage for the 2026 plan year at 9.96%, a substantial increase over 2025’s 9.02% affordability percentage. The affordability percentage is the maximum permitted employee premium contribution percentage an employer may charge an eligible employee for self-only coverage, respecting the employer’s lowest-cost Affordable Care Act (“ACA”) qualifying minimum essential coverage option. The ACA’s affordability percentage is annually adjusted for the effects of inflation.

Action Items

• Assess participant contribution requirements. As a result of this increase, many applicable large employers (“ALEs”) under the ACA may want to take advantage of the flexibility to increase their required employee contribution thresholds in alignment with the recently announced 2026 federally adjusted affordability percentage.
• Consider and assess premium contribution offsets when assessing affordability. Employers should evaluate applicable well-being programs to identify and assess participation-based or outcome-related participation incentives, as well as any applicable spousal premium surcharges, as these funding strategies may factor into the affordability of an offer of ACA qualifying health coverage. 
• Evaluate opt-out & cash-in-lieu arrangements when assessing affordability. Further, ALEs should consider conducting an evaluation of any opt-out and cash-in-lieu arrangements affecting either participation eligibility and/or participant premium contribution requirements, under the terms of their ACA-qualifying minimum essential coverage options.

Summary

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 ALEs subject to the ACA’s employer mandate (commonly known as the “pay or play” mandate) for purposes of assessing the affordability of health plans offered to their full-time employees. Failure by an ALE to offer at least one “affordable” health plan option could result in a penalty assessment under IRC Section 4980H(b), respecting each full-time employee who obtains coverage in the Marketplace and qualifies for a premium subsidy in lieu of enrolling in the employer-sponsored coverage that was offered to such employees.

In addition, the IRS updated IRC Section 36B’s Applicable Percentage Table for 2026. The table is used to determine an individual’s eligibility for coverage subsidies.   

1. General Overview of Affordability Safe Harbors

Because an ALE generally will not know an employee’s household income, the IRS has provided three optional affordability safe harbors that may be used to determine affordability based on information that is available to the sponsoring employer:

1. The Form W-2 safe harbor;
2. The Rate of Pay safe harbor; and,
3. The 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 qualifying 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 individual employee. 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’s qualifying offer of coverage requirement. The safe harbors do not affect an employee’s eligibility for a subsidy in the Marketplace, which is instead based upon the affordability of employer-sponsored coverage relative to an employee’s household income.

2. Understanding the Form W-2 Safe Harbor

Consistent with the Form W-2 safe harbor, an ALE may assess the affordability of its health coverage by reference only to the employee’s wages received from such ALE (rather than by reference to the employee’s household income). For this purpose, “wages” is defined as the dollar amount representing the cash value required to be reported in Box 1 of the underlying 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, minimum value coverage option offered during the entire calendar year does not exceed 9.5% (as adjusted for the applicable year) of that employee’s Form W-2 wages from the employer for the particular calendar year.

To be eligible for the Form W-2 safe harbor, the employee’s required contribution must remain a consistent amount or percentage respecting all Form W-2 reportable wages earned during the calendar year at issue (or during the plan year for plans with non-calendar year plan years). Thus, an ALE may not make discretionary adjustments to an employee’s required premium contribution amount during any pay period. However, a periodic contribution that is based on a consistent percentage of all Form W-2 wages may be subject to a dollar limit specified by the employer.

An ALE determines whether the Form W-2 safe harbor applies upon the last day of the effective calendar year and on an employee-by-employee basis, taking into account Form W-2 reportable wages, as well as employee contribution activities.

3. 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 of service. For hourly employees, the Rate of Pay safe harbor allows an ALE to:

• Take the lower of the employee’s hourly 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 a calendar month; then,
• Multiply such rate by 130 hours per month (the benchmark for full-time status for a month); and then,
• Determine affordability for such calendar month, based upon 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 9.5% (as adjusted for the applicable year) of the employee’s applicable hourly rate of pay, multiplied by 130 hours. The final regulations for the ACA’s Employer Shared Responsibility Provisions (“ESRPs”) permit an ALE to utilize the Rate of Pay safe harbor even to the extent an hourly employee’s rate of pay is reduced during the plan year.

For salaried employees, their monthly salary as of the first day of the coverage period would be utilized, rather than hourly salary multiplied by 130 hours. However, if the monthly salary is reduced during the coverage period, including due to a reduction in work hours, the Rate of Pay safe harbor may not be 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 9.5% (as adjusted for the applicable year) 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 2025 FPL for the 48 contiguous states and the District of Columbia is $15,650 (for a one-person household). Thus, for a plan with a 2026 calendar year plan year, to satisfy the FPL safe harbor, the monthly contribution cannot exceed $129.90 [$15,650 x 9.96% ÷12], rounded to the nearest penny. This is an increase of $16.70 in allowed employee contributions compared to the 2025 calendar year.

The FPL safe harbor allows ALEs to disregard certain employees in determining the affordability of health coverage (that is, employees who are eligible for Marketplace subsidies because of their income level, or respecting eligibility for Medicare, and therefore cannot trigger an ALE’s liability for an employer mandate penalty). The FPL safe harbor also provides ALEs with a predetermined maximum employee premium contribution that will always result in such underlying coverage being deemed affordable.

Additional Information & Related Resources

• IRS Revenue Procedure 2025-25:
  https://www.irs.gov/pub/irs-drop/rp-25-25.pdf

• Questions and answers about employer shared responsibility:  https://www.irs.gov/affordable-care-act/employers/questions-and-answers-on-employer-shared-responsibility-provisions-under-the-affordable-care-act#Affordability
  
  

For questions regarding this alert or any other related compliance issues, please contact your Baldwin Group client experience team.