Under the ACA’s Employer Shared Responsibility provisions, often called the employer mandate, Applicable Large Employers (ALEs) may owe a penalty if they don’t offer affordable, minimum value coverage to their full-time employees. They also need to offer coverage to employees’ dependent children up to age 26. Spouses don’t have to be offered coverage under these rules.
Affordability is one of the key tests. Say an ALE’s coverage is not affordable, and a full-time employee buys coverage through the Marketplace instead and receives a Premium Tax Credit (PTC) subsidy. In that case, the employer may owe a Penalty B assessment under IRC §4980H(b) for that employee.
Affordability comes down to one number: what the employee would pay for employee-only coverage under the lowest-cost plan offered that provides both Minimum Essential Coverage (MEC) and Minimum Value (MV).
It is not based on:
- The plan the employee actually enrolls in, or
- The cost of spouse, dependent or family coverage
So if an employee enrolls in a richer plan or adds family members, affordability still looks only at the employee-only cost of the lowest-cost qualifying plan.
ACA Affordability Threshold
Each year, the IRS publishes the ACA affordability percentage. Coverage is considered affordable if the employee’s cost doesn’t exceed this percentage of their income.
The cost being tested is always:
- The employee’s share of the premium for employee-only coverage
- Under the lowest-cost plan offered to that employee that provides MEC and MV
It is not the plan the employee actually chose, and it is not the cost of spouse or family coverage.
Affordability percentages by plan year:
- 2025 plan years: 9.02%
- 2026 plan years: 9.96%
- 2027 plan years: 10.22%
For non-calendar-year plans, the new percentage applies when the plan year begins, not on January 1.
Because employers usually don’t know an employee’s household income, Applicable Large Employers (ALEs) measure income using one of the three affordability safe harbors described below.
Affordability Safe Harbors
IRS rules give employers three affordability safe harbors. Each one is based on information the employer does have:
- Rate of Pay
- W-2 (Box 1 wages for the same calendar year)
- Federal Poverty Level (FPL)
If an offer meets any one of these safe harbors, it’s treated as affordable for purposes of the employer mandate (IRC §4980H). The safe harbors don’t determine whether an individual employee qualifies for a Premium Tax Credit, which is based on household income.
Employers may use different safe harbors for reasonable categories of employees, such as job class. Within each category, though, the same method has to be applied consistently. Employers can’t pick and choose a safe harbor employee by employee. The safe harbor used for an employee is reported on Form 1095-C, Line 16 (codes 2F for W-2, 2G for FPL, and 2H for Rate of Pay).
Rate of Pay Safe Harbor
Under the Rate of Pay Safe Harbor, affordability is based on what the employee is paid, not what they actually earn over the year. Because the employer knows each employee’s pay rate in advance, this safe harbor is often used to set contributions ahead of time.
- Hourly employees: Hourly rate × 130 hours × the affordability percentage
- Salaried employees: Monthly salary × the affordability percentage
Why 130 hours? IRS rules for the Rate of Pay Safe Harbor require the calculation for hourly employees to use 130 hours per month, even if the employee usually works more. Because the number is fixed, employers get a predictable monthly limit.
Special rules apply if an employee’s hourly rate or salary is reduced during the year.
For example, for an employee earning $17/hour:
- 2026 (9.96%): $17 × 130 = $2,210/month × 9.96% = $220.11 per month
- 2027 (10.22%): $17 × 130 = $2,210/month × 10.22% = $225.86 per month
For this employee, the employee contribution for the lowest-cost self-only MEC/MV plan would be considered affordable under the Rate of Pay Safe Harbor if it doesn’t exceed these amounts.
W-2 Safe Harbor
Under the W-2 Safe Harbor, affordability is based on what the employee actually earned during the year, using the taxable wages shown in Box 1 of their W-2.
Because W-2s aren’t final until the year is over, this is a “look-back” method. Affordability under this safe harbor can only be confirmed after the calendar year ends.
Planning ahead with this method: Employers who use the W-2 Safe Harbor often set the employee contribution as a percentage of pay rather than a flat dollar amount, so the contribution moves up or down with wages. The contribution must stay at a consistent amount or percentage throughout the year.
Prior-year wages don’t count: A prior year’s W-2 can’t be used. For example, 2026 W-2 wages can’t be used to measure 2027 affordability.
Box 1 is often lower than gross pay: Box 1 shows taxable wages, which means pre-tax deductions have already been taken out. These include 401(k) contributions and premiums paid through a Section 125 plan. As a result, Box 1 is often lower than the employee’s gross pay, and that lowers the affordability threshold.
For example, using the 2027 affordability percentage (10.22%):
- Box 1 wages: $40,000
- $40,000 × 10.22% = $4,088 per year
- $4,088 ÷ 12 = $340.66 per month (rounded down)
For this employee, the employee contribution for the lowest-cost self-only MEC/MV plan would be considered affordable under the W-2 Safe Harbor if it doesn’t exceed $340.66 per month.
Keep in mind: This example is for an employee with $40,000 in W-2 Box 1 wages, which is not the same as a $40,000 salary. Box 1 is what’s left after pre-tax deductions such as 401(k) contributions and health benefit premiums. An employee with $40,000 in Box 1 wages likely earned more than $40,000 in gross pay that year.
When it’s most useful: The W-2 Safe Harbor is often used at ACA reporting time, when W-2 data is final and readily available.
Federal Poverty Level (FPL) Safe Harbor
The FPL Safe Harbor lets an employer set one monthly employee contribution for self-only coverage that’s treated as affordable for every employee, no matter what each person earns. There’s no need to run calculations employee by employee.
The trade-off is cost. The FPL limit is usually lower than the limits under the Rate of Pay or W-2 safe harbors, so using it generally means the employer pays more toward the lowest-cost plan.
Some employers use this safe harbor by offering a lower-cost plan that provides minimum value and pricing it within the FPL limit, while also offering richer plans that employees can choose at a higher cost. Either way, affordability is measured against the lowest-cost minimum value plan offered, not the plan the employee picks.
How the FPL Safe Harbor Works
The calculation uses two numbers:
- The federal poverty guideline for a household of one
- The ACA affordability percentage for the plan year
Employers may use any poverty guideline that was in effect during the six months before the plan year starts. New guidelines usually come out in January, so calendar-year plans typically use the prior year’s guideline.
For example, for a calendar-year plan beginning January 1, 2027:
- Applicable FPL for a household of one (2026 guideline): $15,960
- 2027 ACA affordability percentage: 10.22%
- $15,960 × 10.22% = $1,631.11 per year
- $1,631.11 ÷ 12 = $135.92 per month
For this plan year, if the employee contribution for the lowest-cost self-only MEC/MV plan doesn’t exceed $135.92 per month, the offer will generally be considered affordable under the FPL Safe Harbor.
FPL Safe Harbor Limits by Year
The FPL Safe Harbor limit changes every year because both the poverty guideline and the affordability percentage change.
- 2024: $14,580 × 8.39% ÷ 12 = $101.93/month
- 2025: $15,060 × 9.02% ÷ 12 = $113.20/month
- 2026: $15,650 × 9.96% ÷ 12 = $129.89/month
- 2027: $15,960 × 10.22% ÷ 12 = $135.92/month
These limits are for calendar-year plans (January 1 start). Because new poverty guidelines aren’t published until mid-January, calendar-year plans use the prior year’s guideline. Non-calendar-year plans that start later in the year generally use the current year’s guideline. Amounts are rounded down to the nearest cent and use the guideline for the 48 contiguous states and DC.
Important: This information is provided for general educational purposes and reflects the rules as of October 2026. It is not legal or tax advice. How these rules apply depends on each employer’s specific circumstances, so employers should review their situation with their own legal counsel, ERISA attorney, CPA or tax advisor.