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 Affordable Care Act (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.
Affordability Test
The ACA’s pay-or-play rules require applicable large employers (ALEs) to offer affordable, minimum-value health coverage to their full-time employees or risk paying a penalty. The affordability of health coverage is a key point in determining whether an ALE may be subject to a penalty. An ALE’s health coverage is considered affordable if the employee’s required contribution to the plan does not exceed 9.5% (as adjusted annually) of the employee’s household income for the taxable year. This percentage is adjusted each year based on health plan premium growth rates in relation to income growth rates.
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. Also, if an employer offers multiple health coverage options, the affordability test applies to the lowest-cost option that provides minimum value.
Because an employer generally will not know an employee’s household income, the IRS has provided three optional affordability safe harbors that ALEs may use to determine affordability based on information that is available to them: the Form W-2 safe harbor, the rate of pay safe harbor and the federal poverty level safe harbor.
Employer Takeaway
For 2027, the affordability percentage increases to 10.22%. This is an increase from the 2026 percentage and the highest it has ever been. As a result, employers may be able to increase employees’ health coverage contributions for 2027 while still meeting the adjusted affordability percentage.
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