IRS Releases ACA Affordability Threshold and ESRP Penalties for 2027
The IRS released Rev. Proc. 2026-26,announcing an increase in the ACA Affordability Contribution Rate from 9.96% in2026 to 10.22% for the 2027 plan year.
Under the ACA, Applicable Large Employers (ALEs), employerswith 50 or more full-time and/or full-time equivalent employees, are requiredto offer affordable minimum value coverage to all full-time employees and theirdependents. The contribution percentage is used to determine whether theemployer-sponsored health coverage is “affordable” under the ACA’s employershared responsibility provisions. A plan will be considered affordable underthe ACA if the employee’s contribution level for self-only coverage does notexceed the specified percentage of the employee’s household income. Failure tooffer affordable coverage may result in employer shared responsibilitypenalties, which can be substantial. The IRS recognizes that it is difficultfor an employer to determine an employee’s household income, so employers areable to use one of three “safe harbors” to ensure the affordability thresholdis met: Rate of Pay, W-2, or Federal Poverty Level (FPL).
Safe Harbors
· Rate of Pay: For 2027, the Rate of Pay safeharbor affordability is based on the employee’s hourly rate x 130 hours x10.22% for hourly employees, or monthly salary x 10.22% for salaried employees.
· W-2: For 2027, the W-2 safe harbor is limited to10.22% of the employee’s Box 1 wages.
· Federal Poverty Level: For 2027, the FPL safeharbor may use the 2026 mainland single-person poverty guidelines to determineaffordability.
The IRS also released Rev. Proc. 2026-22,outlining the penalty amounts under the Employer Shared Responsibility Payment(ESRP) provisions. Effective January 1, 2027, the penalty amount for failuresunder Code § 4980(H)(a) will be $3,780 per full-time employee, and for failuresunder Code § 4980H(b) will be $5,670 per full-time employee that receives apremium subsidy through the Exchange.
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.
