ACA Affordability Percentage and Employer Penalties Set to Rise in 2026

The IRS recently released two important updates under the Affordable Care Act’s (ACA) employer shared responsibility — or “pay-or-play” — rules. Employers should take note of two key changes for 2026: a significant increase in the affordability percentage and higher penalty amounts for noncompliance.

What Are the ACA Pay-or-Play Rules?

Under the ACA, ALEs — those with 50 or more full-time and full-time equivalent employees during the preceding calendar year — must offer affordable, minimum-value (MV) health coverage to full-time employees and their dependents. Failing to do so may result in steep IRS penalties.

New Affordability Percentage for 2026

On July 18, 2025, the IRS issued to index the contribution percentage in 2026 for determining the affordability of an employer’s health plan under the ACA.

For plan years beginning in 2026, employer-sponsored coverage will be considered affordable under the ACA’s pay-or-play rules if the employee’s required contribution for self-only coverage does not exceed 9.96% of their household income for the year.    

This represents a notable increase from previous years:

• 12% for plan years beginning in 2023;
• 39% for plan years beginning in 2024;
• 02% for plan years beginning in 2025; and
• 96% for plan years beginning in 2026.

Important considerations for ALEs:

• For purposes of the pay-or-play rules, the affordability test applies only to the portion of the annual premiums for self-only coverage and does not include any additional cost for family coverage.
• If an employer offers multiple health coverage options, the affordability test applies to the lowest-cost option that provides MV.
• The percentage applies to the employee’s household income — a figure employers generally cannot access directly. To address this, employers can use one of the three IRS-approved affordability safe harbors:
  • Form W-2 safe harbor
  • Rate of pay safe harbor
  • Federal poverty level (FPL) safe harbor

Higher Penalties for ACA Noncompliance in 2026

In addition, on July 22, 2025, the IRS released updated, increased penalty amounts related to the pay-or-play rules. An ALE may be subject to a pay-or-play penalty if at least one full-time employee receives a premium tax credit for purchasing individual health coverage through an Exchange and the ALE:

• Did not offer health plan coverage to “substantially all” (generally, at least 95%) of full-time employees and their dependents;
• Offered health plan coverage to substantially all full-time employees but not to the specific full-time employee receiving the credit; or
• Offered health plan coverage to full-time employees that was unaffordable or did not provide MV.

2026 Pay-or-Play Penalties

There are two types of ACA penalties that may apply to ALEs, depending on the situation:

4980H(a) Penalty

Applies if an ALE does not offer coverage to substantially all of its full-time employees (and dependents) and any one of its full-time employees receives a subsidy toward their Exchange plan.

The monthly penalty is equal to the ALE’s number of full-time employees (minus 30) multiplied by one-twelfth of $2,000 (as adjusted) for any applicable month. For 2026, the adjusted penalty amount is $3,340.

4980H(b) Penalty

ALEs that offer coverage to substantially all full-time employees (and dependents) may still be subject to a penalty if at least one full-time employee obtains a subsidy through an Exchange because the ALE did not offer coverage to all full-time employees, or the ALE’s coverage is unaffordable or does not provide MV.

The monthly penalty assessed on an ALE for each full-time employee who receives a subsidy is one-twelfth of $3,000 (as adjusted) for any applicable month. For 2026, the adjusted penalty amount is $5,010. However, the total penalty for an ALE is limited to the 4980H(a) penalty amount. 

What These Increases Mean for Employers

For employers, the increased affordability percentage may allow for modest increases in employee premium contributions without triggering a penalty. However, increased penalty amounts make noncompliance more costly than ever. As such, employers should carefully model the affordability of their lowest-cost, self-only coverage using at least one of the IRS affordability safe harbors.

At CBIZ, our team guides employers through the complexities of complying with ACA requirements. Connect with us today to learn more about how we can help your organization evaluate contribution strategies, maintain compliance, and avoid costly penalties.