IRS Releases ACA Affordability Threshold and ESRP Penalties for 2026
The IRS released Rev. Proc. 2025-25, announcing an increase in the ACA Affordability Contribution Rate from 9.02% in 2025 to 9.96% for the 2026 plan year.
Under the ACA, Applicable Large Employers (ALEs), employers with 50 or more full-time and/or full-time equivalent employees, are required to offer affordable minimum value coverage to all full-time employees and their dependents. The contribution percentage is used to determine whether the employer-sponsored health coverage is “affordable” under the ACA’s employer shared responsibility provisions. A plan will be considered affordable under the ACA if the employee’s contribution level for self-only coverage does not exceed the specified percentage of the employee’s household income. Failure to offer affordable coverage may result in employer shared responsibility penalties, which can be substantial. The IRS recognizes that it is difficult for an employer to determine an employee’s household income, so employers are able to use one of three “safe harbors” to ensure the affordability threshold is met: Rate of Pay, W-2, or Federal Poverty Level (FPL).
The IRS also released Rev. Proc. 2025-26, outlining the penalty amounts under the Employer Shared Responsibility Payment (ESRP) provisions. Effective January 1, 2026, the penalty amount for failures under Code § 4980(H)(a) will be $3,340 per full-time employee, and for failures under Code § 4980H(b) will be $5,010 per full-time employee that receives a premium subsidy through the Exchange.
In light of the recent ruling in Faulk Co. v. Becerra, it is unclear how ESRP penalties will be assessed. The Court in Faulk ruled the ACA does not authorize HHS to delegate its duty to certify to an employer that an ESRP penalty is owed to the IRS. Currently there is not a nationwide injunction related to assessing the penalties, so noncompliant employers are still at risk of being subject to a penalty.
As open enrollment season quickly approaches for many employers, it is important to be mindful of the affordability threshold to ensure their health plan is affordable under the ACA. Employers should review their plan offerings and payroll deduction strategy to determine how the increase affects the affordability for their employee population. Reach out to Innovative Benefit Planning to learn more.
