Affordability

403 October 1, 2025
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Under the ACA’s Employer Shared Responsibility provisions, Applicable Large Employers (ALEs) must offer affordable, minimum value coverage to their full-time employees and must also offer coverage to their dependents. However, affordability is always measured based on the employee-only cost of the lowest-cost MEC/MV plan offered, and does not consider the cost of dependent or family coverage.

Affordability is a core standard used to determine whether an ALE may be subject to Penalty B under IRC §4980H(b).

If the coverage offered is not affordable, and a full-time employee instead purchases Marketplace coverage and receives a Premium Tax Credit (PTC), the employer may face a Penalty B assessment for that employee.

Affordability is measured based on the employee’s required contribution for the lowest-cost Minimum Essential Coverage (MEC) plan that provides Minimum Value (MV) available to them (plan offered) at the employee-only rate. It is not based on:

  • The plan the employee actually enrolls in, or
  • Family/spousal premium amounts.

ACA Affordability Threshold

Each year, the IRS publishes the ACA affordability percentage, which determines how much an employee can be required to contribute toward coverage (employee contribution) without it being deemed unaffordable.

For individuals purchasing coverage through the Exchange, affordability is based on household income and other factors. Employers, however, generally do not know and are not entitled to know employees’ household incomes.

To address this, the ACA allows ALEs to use alternative methods – known as affordability safe harbors based on information the employer does know – to determine whether their offers of coverage are considered affordable for ACA purposes.

The IRS sets the annual affordability percentage on a calendar year basis, but employers apply it by plan year. It only aligns perfectly for calendar-year plans.

  • 2025 plan years: 9.02%
  • 2026 plan years: 9.96%

ALEs with non–calendar year plans must adjust their calculations as necessary at renewal and reflect the changing percentages during annual ACA reporting.

Affordability Safe Harbors

Because employers cannot rely on employees’ household incomes to determine affordability, the ACA provides three affordability safe harbors employers can use. If an offer of coverage meets affordability under any one of these methods, it is considered affordable for ACA purposes.

Employers may apply different safe harbors to reasonable categories of employees (such as job class), but must apply each chosen method consistently within that category. They may not pick and choose safe harbors for individual employees. These safe harbors are reported on the ALE’s annual ACA IRS reporting form 1094-C.

Affordability Safe Harbors are:

  • Rate of Pay
  • W-2 Box 1 Income for the Corresponding Calendar Year
  • Federal Poverty Level

Rate of Pay Safe Harbor

Under the Rate of Pay (ROP) Safe Harbor, affordability is based on an employee’s hourly rate (× 130 hours per month) or monthly salary as of the first day of the plan year.

  • Hourly employees: Hourly rate × 130 hours × the applicable affordability percentage
  • Important: The calculation for hourly employees always uses 130 hours per month, even if full-time employees typically work more. This standardization simplifies affordability determinations and provides a predictable monthly threshold.
  • Salaried employees: Monthly salary × the applicable affordability percentage

This calculation produces the maximum monthly employee contribution for the lowest-cost self-only MEC/MV plan that will be considered affordable under this safe harbor.

For example, using the 2026 affordability percentage (9.96%):

  • $17/hour × 130 hours = $2,210/month
  • $2,210 × 9.96% = $220.11

As long as the employee’s monthly contribution for the lowest-cost self-only MEC/MV plan does not exceed $220.11, the coverage is considered affordable under the ROP safe harbor for the 2026 Plan Year.

In practice, many ALEs use the ROP safe harbor to set affordability prospectively, ensuring contribution rates stay within the affordability limits during the plan year. However, when it comes time to complete ACA IRS reporting, many choose to use the W-2 safe harbor instead. W-2 Box 1 wages reflect the employee’s actual income for the year (including pay for hours worked beyond 130/month), and employers have these numbers readily available when preparing Forms 1095-C. This often eliminates the need to recalculate ROP thresholds at reporting time. Some ALEs, however, do choose to use ROP for reporting as well. It is permissible to use either method, as long as it’s applied consistently to the applicable employee category

W-2 Safe Harbor

Under the W-2 Safe Harbor, affordability is determined based on each employee’s actual taxable wages (Box 1) reported on their W-2 for that calendar year. This makes it a “look-back” method rather than a forward-looking calculation.

Because W-2 wages are not known in advance, employers cannot use this method to set contribution rates prospectively for an upcoming plan year. For example, when setting 2026 contribution amounts, employers do not yet know what employees’ 2026 Box 1 wages will be – and prior-year W-2 wages (e.g., 2025) cannot be used for this purpose.

However, this method is often favored at ACA reporting time, because by then W-2 data is finalized and easily accessible. For employees who work more than 130 hours per month, Box 1 wages often reflect higher annual earnings, which can make coverage appear more affordable than under the Rate of Pay method. Many ALEs set contribution rates prospectively using the ROP safe harbor to ensure compliance, and then apply the W-2 safe harbor at reporting time because it can be simpler and sometimes more favorable

Federal Poverty Level (FPL) Safe Harbor

The FPL Safe Harbor is attractive because it allows employers to set a single, uniform monthly employee contribution for self-only coverage that is automatically deemed affordable for all employees — removing the need for individualized affordability calculations.

Many employers like the simplicity and generosity of this method, as it provides employees with a lower cost for baseline coverage. However, it’s not always practical for ALEs, since the contribution limit under FPL is often quite low and can require a significant employer contribution.

Some ALEs adopt this safe harbor by offering a low-cost bronze ACA-compliant plan to establish affordability under the FPL standard, even though many employees “buy up” to a more robust plan for actual enrollment. In this way, the employer can meet ACA affordability requirements while still giving employees the option to choose richer coverage if they prefer

How the FPL Safe Harbor Works

Employers use the federal poverty level for a household of one (published by HHS in January each year) and the applicable ACA affordability percentage to calculate the maximum employee contribution. Employers must use the FPL in effect six months prior to the start of the plan year.

For example:

  • 2025 FPL for a household of one: $15,600
  • 2025 ACA affordability percentage: 9.02%
  • Annual contribution limit = $15,600 × 9.02% = $1,407.11
  • Monthly contribution limit = $1,407.12 ÷ 12 = $117.25

For plan years beginning in 2025, if an employer sets the employee contribution for the lowest-cost self-only MEC/MV plan at $117.25/month or less, the offer of coverage will be deemed affordable for all employees under the FPL Safe Harbor.

Historical FPL Context

The federal poverty level for a household of one has increased steadily in recent years, which slightly raises the maximum allowable contribution under this safe harbor:

  • 2023 — FPL: $14,580 × 8.39% = $1,223.26 annually → $101.94/month

  • 2024 — FPL: $15,060 × 8.39% = $1,263.53 annually → $105.29/month

  • 2025 — FPL: $15,600 × 9.02% = $1,411.63 annually → $117.64/month

  • 2026: Not yet released (expected January 2026)