The IRS released its annual inflation adjustment to the percentage-of-household income used to determine whether an employer offers affordable health care coverage under the Affordable Care Act (ACA). For plan years beginning in 2026, the IRS has increased the affordability threshold under the ACA to 9.96% of an employee’s household income. This is a notable jump from the 2025 threshold of 9.02%. This percentage increase gives employers more flexibility in setting employee premiums without making their coverage unaffordable under the safe harbor. 

Background 

Under Internal Revenue Code (IRC) Section 36B, individuals may qualify for a premium tax credit (PTC) if their employer fails to offer health coverage that is both affordable and provides minimum value. Coverage is deemed unaffordable if the employee’s required contribution for self-only coverage exceeds a certain indexed percentage-of-household income. 

Current regulations define family coverage as affordable if the employee’s self-only coverage meets the affordability threshold. If a full-time employee obtains coverage through a state or federal health insurance marketplace and qualifies for a PTC, the employer may be subject to an Employer Shared Responsibility Payment. 

The ACA’s employer mandate requires applicable large employers to offer minimum essential coverage that provides minimum value and is affordable to all its full-time employees. Affordability is determined as a certain percentage of an employee’s household income. Using the adjusted percentage for 2026, if the required employee premium contribution does not exceed 9.96% of the employee’s household income, then the coverage is affordable under the ACA. 

Safe Harbors  

Since employers may not know an employee’s actual household income, they can rely on three safe harbors to determine affordability, which are based on the:    

• Employee’s Form W-2 wages.  
• Employee’s rate of pay.  
• Federal poverty line (FPL).  

If the employee’s required premium contribution is no more than 9.96% of any one of these safe harbors, the contribution will be considered affordable. Employers that set their health insurance premiums based on ACA affordability should consider carefully reviewing their rates with their brokers and/or consultants. For the many plans using the FPL affordability safe harbor, the considerations differ for calendar- and non-calendar-year plans. 

Here to Help  

Collaborating with a payroll provider well-versed in ACA regulations can help streamline your compliance efforts and reduce administrative burden. To discover how we support our clients in maintaining ACA compliance, contact our pros below.