The IRS recently announced the 2027 indexing adjustments under the Affordable Care Act (ACA). The affordability percentage threshold was changed as follows:
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2025: 9.02%
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2026: 9.96%
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2027: 10.22%
Adjustments (both up and down) are made annually from the baseline percentage provided in the ACA of 9.5%.
What's the Impact?
The affordability percentage defines the maximum self-only premium contribution that eligible employees are required to pay for the coverage to be considered “affordable” under the ACA. This matters because Applicable Large Employers must offer affordable, minimum value coverage to full-time employees or they may be liable for ACA shared responsibility penalties.
The newly increased affordability threshold creates a slightly higher allowable maximum premium contribution. Notably, 2027 is the first year the threshold has been above 10%.
Looking forward to 2027, employers will need to carefully review health plan offerings and contributions to ensure that affordability thresholds are met for all employees based on the updated affordability threshold.
Affordability Safe Harbor Options
There are three safe harbor options available to employers when calculating premium affordability. All use the ACA annually updated threshold to calculate whether coverage offered is affordable. Each establishes a maximum contribution for an employee to pay for the employer’s lowest cost, minimum value, self-only coverage.
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W-2 Safe Harbor. The W-2 safe harbor bases affordability on whether the employee’s required contribution does not exceed 10.22% of that employee’s W-2 wages from the employer for that calendar year.
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Rate of Pay Safe Harbor. The rate of pay safe harbor is split into two parts, depending on whether the employee is paid on an hourly or salaried basis.
Hourly Employees - Affordability is based on whether the employee’s required contribution for the month does not exceed 10.22% of the employee’s hourly rate of pay multiplied by 130 hours.
Salaried Employees - Affordability is based on whether the employee’s required monthly contribution does not exceed 10.22% of the employee’s monthly salary.
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Federal Poverty Line (FPL) Safe Harbor. The FPL safe harbor bases affordability on whether the employee’s required contribution does not exceed 10.22% of the monthly FPL for a single person.
For 2027, employers using the FPL method must offer at least one minimum value health plan with an employee only contribution of $135.93 or less. (2027 Single Person FPL of $15,960 / 12 x 10.22%.) Employers using other methods must evaluate plan offerings to confirm that premium contributions meet the 10.22% threshold.
2027 ACA Penalties Also Increase
The IRS has also announced higher employer shared responsibility payment amounts for 2027.
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Section 4980H(a) penalty: $3,780 annually ($315.00 monthly)
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Section 4980H(b) penalty: $5,670 annually ($472.50 monthly)
Section 4980H(a) Penalty – Is Coverage Offered To 95% of Employees? This penalty applies when an Applicable Large Employer (ALE) fails to offer minimum essential coverage to at least 95% of its full-time employees and their dependents, and at least one full-time employee receives a Marketplace premium tax credit. The penalty is based on the ALE’s total number of full-time employees (those who regularly work at least 30 hours per week) excluding the first 30 full-time employees.
For example, if an employer has 230 FTEs, and does not offer coverage to 95% of its FTEs, the penalty would be (230-30) x $3,780 = $756,000.
Section 4980H(b) Penalty – Is Affordable, Minimum Value Coverage Offered? This penalty applies when an ALE satisfies the 95% offer requirement, but one or more full-time employees receive a premium tax credit because the coverage offered was unaffordable or did not meet the minimum value requirement. The penalty generally applies separately to each full-time employee who receives a premium tax credit.
For example, if an employer does not offer minimum, affordable coverage to 20 employees and 10 of those employees receive a premium tax credit from an Exchange, the penalty would be 10 x $472.50 x 12 months = $56,700 annually.
Although the IRS publishes the penalties as annual amounts, both penalties are calculated and applied monthly.
Employer Action Item
Employers must review their health plan offerings and employee contributions to ensure that 2027 plans meet the newly updated affordability threshold.
Employers should determine which safe harbor will be applied and confirm that payroll and benefits data is available for the required calculations.
