As employers increasingly struggle with rising health plan costs, the IRS has provided some good news. Recently, the IRS announced that the Affordable Care Act (ACA) affordability threshold will increase to 9.96% of household income for plan years starting in 2026. This is an increase from the 9.02% that applied to 2025. This significant increase means employers have more room to potentially increase the employee portion of premiums for 2026.
The ACA affordability percentage is used to determine if ACA employer penalties may apply to employer-provided coverage. An employer’s health coverage will be considered affordable as long as the employee’s required contribution for the lowest-cost, self-only coverage does not exceed 9.96% of their income (or an IRS-approved safe harbor equivalent, such as the W-2, rate-of-pay, or federal poverty line methods). For example, under the federal poverty line safe harbor, monthly employee contributions will need to remain below approximately $129.89 in 2026.
In addition to increasing the affordability percentages, the IRS also increased the penalties for failing to meet those percentages. For plan years beginning in 2026, both of the ACA penalties related to employer-provided health insurance will rise significantly.
For 2026, the penalty for not offering minimum essential coverage (MEC) to at least 95% of full-time employees (known as the §4980H(a) penalty) increases to $3,340 per full-time employee after the first 30 employees. That is an increase from $2,900 in 2025. Meanwhile, the §4980H(b) penalty, triggered when coverage is either unaffordable or lacks minimum value and a full-time employee receives a subsidy on the exchange, will rise to $5,010 per affected employee, up from $4,350. These penalties are indexed annually based on the premium adjustment percentage, which reflects projected growth in health insurance premiums.
With penalties reaching historic highs and the affordability threshold increasing, employers should carefully review their health plan contributions and eligibility policies to ensure compliance. These updates underscore the importance of regular benefits audits and accurate ACA reporting to avoid costly IRS assessments.
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