Group Health Plan Affordability Levels Up, Giving Employers a Break

The IRS has significantly increased the group health plan affordability threshold, which is used to determine if an employer’s lowest-premium health plan complies with Affordable Care Act rules, for plan years starting in 2026.

The threshold for next year has been set at 9.96% of an employee’s household income, up from 9.02% this year. The higher threshold will give employers more wiggle room when setting their workers’ health insurance premium cost-sharing level to avoid running afoul of the ACA. In addition, penalties for failing to provide coverage that meets the affordability threshold will rise 15% in 2026.

Under the ACA, “applicable large employers” — those with 50 or more full-time or full-time equivalent employees — are required to offer at least one health plan to their workers that is considered affordable based on a percentage of the lowest-paid employee’s household income.

If an employer’s plan fails this test, it will be deemed non-compliant with the law, resulting in penalties for the employer.

The new threshold will apply to all health plans whenever they incept in 2026. The affordability test applies only to the portion of premiums for self-only coverage, not family coverage. If an employer offers multiple health plans, the affordability test applies only to the lowest-cost option.

Calculating

Employers can rely on one or more safe harbors when determining if coverage is affordable:

• The employee’s most recent W-2 wages.
• The employee’s rate of pay, which is the hourly wage rate multiplied by 130 hours per month.
• The federal poverty level.

Penalties

Failure to provide affordable coverage can result in a penalty of $5,010 per affected employee in 2026, up 15% from $4,350 in 2025.

Another penalty, known as the Employer Shared Responsibility Payment, will also increase. This penalty applies to employers that fail to offer minimum essential coverage to at least 95% of full-time employees and their dependents, and when at least one full-time employee purchases exchange coverage and receives a premium tax credit.

This penalty, which applies to the total number of full-time employees (minus the first 30), will rise to $3,340 per employee in 2026, also up 15%.

The above penalties are both indexed to inflation.

The takeaway

As 2026 approaches, it is important to review health plan costs and premium-sharing to ensure your lowest-cost option complies with the ACA affordability requirement.

We can help assess affordability and confirm your plans meet the standard, so your firm stays compliant.