Recently, the Internal Revenue Service (IRS) released Rev. Proc. 2026-26, which sets the Affordable Care Act (ACA) affordability percentage to 10.22% for plan years beginning in 2027, up from 9.96% for 2026.
As a reminder, the ACA requires Applicable Large Employers (ALEs) to offer affordable, minimum value coverage to full-time employees and their dependents or risk potential employer mandate penalties. For plan years beginning January 1, 2027, through June 1, 2027, ALEs will automatically satisfy the affordability requirement under the federal poverty line safe harbor if they offer at least one self-only coverage option that costs employees no more than $135.92 per month.
Different rules apply for plan years beginning on or after July 1, 2027, as discussed below. We also outline alternative methods employers may use to satisfy the ACA affordability requirement.
Compliance Snapshot
- For plan years beginning in 2027, ALEs must offer at least one plan where the cost of self-only coverage does not exceed 10.22% of the employee’s household income.
- ALEs with plan years beginning January through June 2027 that offer at least one plan that costs employees no more than $135.92 per month for self-only coverage will meet 2027 affordability under the FPL safe harbor.*
- ALEs who use an affordability safe harbor other than the FPL (i.e., the W-2 or Rate of Pay safe harbors) may rely on the 10.22% rate.
*Employers may calculate affordability under the FPL safe harbor using the federal poverty guidelines in effect six months before the plan year begins. The 2027 federal poverty guidelines are expected in early 2027. Once released, employers with later-starting 2027 plan years may use the updated amount; employers with plan years beginning July through December 2027 must use the 2027 federal poverty amount. We discuss this timing rule further below and in our blog, 2026 Federal Poverty Level Announced: Impact on ACA Affordability.
Frequently Asked Questions
Which employers are considered Applicable Large Employers (ALEs) under the ACA?
ALEs are employers with 50 or more full-time and full-time equivalent employees, on average, in the prior calendar year. Non-ALEs are not subject to the ACA employer mandate and are not subject to the “affordability” requirement. Companies with a common owner (part of a controlled group) or that are otherwise related under IRC Section 414 are generally combined and treated as a single employer for determining ALE status. For additional information on how to determine ALE status, see this IRS webpage.
What type of coverage must an ALE offer under the ACA?
Under the ACA employer mandate (also known as the “pay or play mandate”), ALEs must offer affordable, minimum value coverage to full-time employees and their dependents, or potentially face a penalty.
What is minimum value coverage?
A group health plan meets the minimum value coverage requirement if it pays at least 60 percent of the total allowed cost of benefits that are expected to be incurred by the plan and substantially covers in-patient hospitalization or physician services.
How can employers determine whether their coverage is “affordable” under ACA?
For plan years starting in 2027, ALEs must offer at least one plan that costs employees no more than 10.22% of their household income. ALEs can utilize any one of the three following “safe harbors” to determine whether they meet the 2027 affordability requirement:
- Federal Poverty Level (FPL): Coverage will be affordable if the cost to employees for self-only coverage on the lowest-cost plan offered is no more than 10.22% of the federal poverty level (which is determined annually). For 2027, employers with plan years beginning January through June will meet the FPL safe harbor if they offer their full-time employees at least one plan that costs no more than $135.92 ($169.90 for Alaska, and $156.36 for Hawaii) for self-only coverage.
- Rate of Pay: This safe harbor will be met if the cost to employees for self-only coverage does not exceed 10.22% of their monthly salary (or hourly rate multiplied by 130).
- W-2: This safe harbor will be met if the cost to an employee for self-only coverage does not exceed 10.22% of that employee’s annual wages, as outlined on their W-2 at the end of the year. This approach is generally not recommended, as employers will not know the exact wages reported on employees’ W-2s until the end of 2027. As such, it is a bit less predictable than the other two methods.
For more on the affordability safe harbors, see the IRS Q&A on Affordability.
What is the simplest method for employers to meet affordability?
The FPL safe harbor is often the simplest way to satisfy affordability because it allows employers to use a single contribution amount that is deemed affordable for all employees. Further, it provides employers with a streamlined approach for completing their ACA reporting.
Under the FPL safe harbor, an employer must offer at least one plan with self-only coverage that costs employees no more than the FPL safe harbor amount. The 2027 FPL safe harbor amount is calculated based on the following formula:
Monthly 2027 Safe Harbor Amount = [10.22% x Federal Poverty Level (FPL)] / 12
Although the 2027 FPL is not released until early 2027, ALEs can rely on federal poverty guidelines in effect six months prior to the beginning of the plan year (i.e., the 2026 FPL guidelines) to calculate the safe harbor amounts for 2027, as mentioned above. Based on the 2026 FPL guidelines, ALEs with plan years beginning January through June 2027 will offer affordable coverage if they offer at least one plan that costs employees no more than $135.92 per month.
Note the FPL safe harbor calculation (10.22% x 2026 FPL $15,960 / 12) results in a monthly amount of $135.926. Although IRS rules often permit standard rounding, a conservative approach is to set the 2027 calendar-year FPL safe harbor at $135.92.
What about non-calendar year plans?
Employers with plan years beginning after the 2027 FPL guidelines are released (e.g., February through June 2027) may use the 2027 FPL guidelines to calculate affordability. Importantly, plan years beginning July through December 2027 are required to use the 2027 FPL guidelines to calculate affordability.
How can employers meet affordability?
If an ALE does not satisfy affordability under one of the three safe harbors, it must increase its employer contribution to reduce the employee cost for self-only coverage so that at least one medical plan option is affordable to avoid potential ACA employer mandate penalties.
The affordable plan must be offered to all full-time employees (those averaging at least 30 hours per week). ALEs offering different plans to different employee groups should confirm that each full-time employee group has access to an affordable option.
What are the penalties if ALEs do not offer affordable coverage?
An ALE who does not comply with the employer mandate and has at least one full-time employee that receives a premium subsidy for enrolling in coverage through the Marketplace Exchange may receive one of two potential penalties, as outlined below:
- Penalty A: If an ALE fails to offer minimum essential coverage to at least 95% of full-time employees in any calendar month, it may owe the “A” penalty. This penalty is triggered if at least one full-time employee enrolls in Exchange coverage and receives a premium subsidy. The penalty is calculated by multiplying the applicable penalty amount by the ALE’s total full-time employee count, reduced by the first 30 employees, regardless of how many employees enroll through the Exchange.
- Penalty B: If an ALE offers coverage to at least 95% of full-time employees but fails to offer affordable, minimum value coverage to one or more full-time employees, it may owe the “B” penalty. This penalty is triggered when a full-time employee who was not offered affordable, minimum value coverage enrolls in Exchange coverage and receives a premium subsidy for that month. Unlike the “A” penalty, the “B” penalty is calculated only for each full-time employee who receives subsidized Exchange coverage.
The 2027 penalties, as compared to the 2026 penalties, are as follows:
| 2026 | 2027 | |
| Penalty A | $278.33/month ($3,340 annualized) | $315/month ($3,780 annualized) |
| Penalty B | $417.50/month ($5,010 annualized) | $472.50/month ($5,670 annualized) |
How does the IRS determine whether an employer owes a penalty?
To determine whether an employer owes a penalty, the IRS compares the employer’s ACA reporting with the list of employees who received a government subsidy to purchase coverage through the Exchange. Penalties are triggered if an employer fails to offer a full-time employee proper coverage and that employee receives a government subsidy for Exchange coverage.
If an employer is subject to a penalty, the IRS will send the employer a 226J Notice letter outlining how much the IRS believes the employer owes.
Employer Action
- ALEs should be aware of the 2027 affordability rates when determining their group health plan offerings and contribution strategies for the upcoming 2027 plan year.
- ALEs should ensure their group health plan is affordable under one of the affordability safe harbors (FPL, Rate of Pay, or W-2).
Additional Resources
Connect with a Sequoia consultant to learn how Sequoia’s compliance services are integrated in our benefits services and tailored solutions. And if you’re already a Sequoia client, stay on top of your employer obligations with your Compliance Checklist that highlights important compliance dates, action items, and resources.
The information and materials on this blog are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided in this blog may not reflect the most current legal developments and may vary by jurisdiction. The content on this blog is for general informational purposes only and does not apply to any particular facts or circumstances. The use of this blog does not in any way establish an attorney-client relationship, nor should any such relationship be implied, and the contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction. The contributing authors expressly disclaim all liability to any persons or entities with respect to any action or inaction based on the contents of this blog.
