Employers may be able to increase the amount employees contribute to health coverage for 2027 because the Affordable Care Act’s (ACA) affordability percentage is rising, resulting in a higher employee contribution threshold.
On July 21, 2026, the IRS released Revenue Procedure 2026-26 to index the contribution percentage in 2027 for determining the affordability of an employer’s health plan under the ACA. For plan years beginning in 2027, 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 10.22% of their household income for the year.
What is the Affordability Test?
Under the ACA’s pay-or-play rules, applicable large employers (ALEs) must offer affordable, minimum-value health insurance to their full-time employees and dependents. If they fail to do so, they may face penalties.
The affordability test is a critical factor in determining whether an ALE may be subject to a penalty. Employer-sponsored health coverage is considered affordable if the employee’s cost for self-only coverage does not exceed 9.5% (as adjusted annually) of the employee’s household income for the taxable year. The affordability percentage is adjusted annually based on health plan premiums relative to income growth.
Recent adjustments to the affordability percentage include:
- 39% for plan years beginning in 2024
- 02% for plan years beginning in 2025
- 96% for plan years beginning in 2026
- 22% for plan years beginning in 2027
The affordability test only applies to the cost of self-only coverage, excluding the cost of family coverage. If an employer offers multiple health coverage options, the test is applied to the lowest-cost plan that still provides minimum-value coverage.
This is an increase from the affordability contribution percentage for 2026 and the highest this percentage has ever been.
Highlights
- The IRS has announced the affordability percentage that will apply under the ACA’s pay-or-play rules for plan years beginning in 2027.
- The affordability threshold for employer-sponsored health coverage will increase to 10.22%.
- ALEs will need to consider this affordability percentage in developing their health plan contribution strategies for the 2027 plan year.
- Employers may be able to increase employee contributions while still meeting the ACA’s affordability requirement.
Safe Harbors for Determining Affordability
Since employers typically do not have access to an employee’s exact household income, the IRS created three safe harbor methods to help employers determine affordability:
- Form W-2 Safe Harbor – Affordability is based on the employee’s wages from their Form W-2.
- Rate of Pay Safe Harbor – Uses the employee’s hourly rate or monthly salary to determine affordability.
- Federal Poverty Level (FPL) Safe Harbor – Looks at the federal poverty level to assess affordability.
These optional safe harbors allow employers to use accessible and verifiable information to confirm compliance.
Need help navigating ACA guidelines? Contact CBIZ to learn more about our ACA services and how we can assist your organization.
Frequently Asked Questions
An applicable large employer may face an ACA pay-or-play penalty if at least one full-time employee receives a premium tax credit through the Marketplace and the employer either fails to offer minimum essential coverage to substantially all full-time employees and their dependents or offers coverage that is unaffordable or does not provide minimum value.
Employers may be able to change contribution amounts midyear, but the decision depends on plan terms, notice requirements, and cafeteria plan rules. If employees pay premiums on a pretax basis, election changes generally must meet IRS rules and align with the plan document.
Employers should review ACA affordability before each plan year and again when wages, plan costs, employee classifications, or contribution strategies change. Regular reviews can help identify risks before coverage becomes unaffordable or reporting errors create penalty exposure.
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