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, for purposes of the ACA Employer Shared Responsibility provisions, affordability is 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 for plan years beginning in each calendar year:
- 2025 plan years: 9.02%
- 2026 plan years: 9.96%
- 2027 plan years: 10.22%
For non-calendar-year plans, the applicable affordability percentage changes when the new plan year begins, not on January 1.
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. When applicable, the affordability safe harbor used for an employee is reflected on Form 1095-C, Line 16.
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 generally based on an hourly employee’s rate of pay (× 130 hours per month) or a salaried employee’s monthly salary. Special rules apply if an employee’s hourly rate or monthly salary is reduced during the coverage period.
- 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
For example, using the 2027 affordability percentage (10.22%):
- $17/hour × 130 hours = $2,210/month
- $2,210 × 10.22% = $225.86
For this $17/hour example, the maximum monthly employee contribution under the ROP Safe Harbor is $220.11 for 2026 and $225.86 for 2027.
In practice, the ROP Safe Harbor can be useful for setting employee contribution amounts prospectively because the employer knows the employee’s rate of pay in advance. The W-2 Safe Harbor, by contrast, relies on actual Box 1 wages and therefore cannot be conclusively determined until after the calendar year has ended.
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 useful at ACA reporting time because by then W-2 data is finalized and readily available. For employees who work more than 130 hours per month, Box 1 wages may also result in a higher affordability threshold than the Rate of Pay Safe Harbor.
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 and the applicable ACA affordability percentage to calculate the maximum employee contribution under the FPL Safe Harbor. Employers may use an FPL guideline that is in effect during the six-month period before the first day of the plan year.
Because updated federal poverty guidelines are generally published in January, calendar-year plans typically use the prior year’s FPL guideline.
For example, for a calendar-year plan beginning January 1, 2026
- Applicable FPL for a household of one: $15,650
- 2026 ACA affordability percentage: 9.96%
- Annual contribution limit = $15,650 × 9.96% = $1,558.74
- Monthly contribution limit = $1,558.74 ÷ 12 = $129.90
For a calendar-year plan beginning January 1, 2026, if the employee contribution for the lowest-cost self-only MEC/MV plan does not exceed $129.90 per month, the offer will generally be considered affordable under the FPL Safe Harbor.
Historical FPL Context – Calendar Year Plans
The following examples are provided for illustrative purposes only and assume a January 1 plan-year start date. The maximum monthly employee contribution under the FPL Safe Harbor changes based on both the applicable ACA affordability percentage and the federal poverty guideline available for the plan year:
- 2024 — Applicable FPL: $14,580 × 8.39% ÷ 12 = $101.94/month
- 2025 — Applicable FPL: $15,060 × 9.02% ÷ 12 = $113.20/month
- 2026 — Applicable FPL: $15,650 × 9.96% ÷ 12 = $129.90/month
- 2027 — Applicable FPL: $15,960 × 10.22% ÷ 12 = $135.93/month
Non-calendar-year plans may use a different federal poverty guideline depending on the plan’s start date and the guideline available under the applicable FPL Safe Harbor rules. Employers should calculate the applicable limit based on their specific plan year.