July 22, 2025
This month the IRS released two key updates for Affordable Care Act penalties for 2026. First, the IRS released Rev. Proc. 2025-25 which, among other items, set the affordability threshold for employers in 2026. In order to avoid a potential section 4980H(b) penalty an employer must make sure one of its plans provides minimum value and is offered at an affordable price. An actuary will determine whether the minimum value threshold has been satisfied and this is generally not an issue for employers. However, an employer is in control as to whether the plan it is offering meets the affordability threshold.
As explained thoroughly in our previous affordability publication, a plan is considered affordable under the ACA if the employee’s contribution level for self-only coverage does not exceed 9.5 percent of the employee’s household income. This 9.5 percent threshold is indexed for years after 2014. In 2026 the affordability threshold will rise to 9.96 percent.
The following chart displays the movement of the affordability percentage since the ACA’s inception:
| Year | Affordability Percentage | Year | Affordability Percentage |
|---|---|---|---|
| 2014 | 9.5 percent | 2021 | 9.83 percent |
| 2015 | 9.56 percent | 2022 | 9.61 percent |
| 2016 | 9.66 percent | 2023 | 9.12 percent |
| 2017 | 9.69 percent | 2024 | 8.39 percent |
| 2018 | 9.56 percent | 2025 | 9.02 percent |
| 2019 | 9.86 percent | 2026 | 9.96 percent |
| 2020 | 9.78 percent |
According to Internal Revenue Code (IRC) section 36B(c)(3)(v)(A)(1), an employer-sponsored plan is affordable for an employee if the portion of the annual premium the employee must pay, whether by salary reduction or otherwise (required contribution) for self-only coverage does not exceed the required contribution percentage (9.96 percent in 2026) of the applicable taxpayer’s household income for the taxable year. An individual’s household income is the taxpayer’s modified adjusted gross income plus the aggregate modified adjusted gross income of all other individuals who are included in the taxpayer’s family who are required to file a tax return (see section 1.36B-1(e)). The IRS recognized that an employer would have no way to determine an individual’s household income, so, as a result, the IRS created three affordability safe harbors that an employer can use to satisfy the employer’s affordability threshold.
An employer wishing to use one of the affordability safe harbors will use the 2026 affordability threshold of 9.96 percent when determining if the safe harbor has been satisfied. The first affordability safe harbor an employer may utilize is referred to as the form w-2 safe harbor. Under the form w-2 safe harbor, an employer’s offer will be deemed affordable if the employee’s required contribution for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.96 percent of that employee’s form w-2 wages (box 1 of the form w-2) from the employer for the calendar year.
The second affordability safe harbor is the rate of pay safe harbor. The rate of pay safe harbor can be broken into two tests, one test for hourly employees and another test for salaried employees. For hourly employees an employer’s offer will be deemed affordable if the employee’s required contribution for the month for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.96 percent of the product of the employee’s hourly rate of pay and 130 hours. For salaried employees an employer’s offer will be deemed affordable if the employee’s required contribution for the month for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.96 percent of the employee’s monthly salary.
The final affordability safe harbor is the federal poverty line safe harbor. Under the federal poverty line safe harbor, an employer’s offer will be deemed affordable if the employee’s required contribution for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.96 percent of the monthly Federal Poverty Line (FPL) for a single individual.
Additionally, the IRS released Rev. Proc. 2025-26. In this IRS document the IRS set the penalty amounts for section 4980H(a) and 4980H(b) penalties for 2026. The remainder of this article explains the Code provision and the math behind the 2026 penalty amounts.
The Code explains that the original $2,000 amount associated with the section 4980H(a) penalty and the original $3,000 amount associated with the section 4980H(b) penalty would be adjusted for calendar years beginning after 2014 (see IRC section 4980H(c)(5)). The Code tells us that the original dollar amount of each penalty is multiplied by the PAP which is defined in a separate section of the ACA (see PPACA section 1302(c)(4)). Furthermore, the Code instructs that the product of those numbers is rounded down to the next lowest multiple of $10 (if the number is not a multiple of $10). The equation is simple once the PAP is known.
On June 25, 2025 the Department of Health and Human Services (HHS), in conjunction with the Centers for Medicare & Medicaid Services (CMS), released the final rule for the Patient Protection and Affordable Care Act; Marketplace Integrity and Affordability. Among other things, this document provided the 2026 PAP. For 2026, the PAP is 1.6726771219.
Since the premium adjustment percentage is already provided, all the numbers necessary to calculate the 2026 section 4980H penalty amounts are known which were confirmed by Rev. Proc. 2025-26. The equations with the numbers filled in are:
$2,000 * 1.6726771219= $3,345.35
$3,000 * 1.6726771219 = $5,018.03
The Code’s rounding rule instructs us to round to the next lowest multiple of $10 (if the number is not a multiple of $10). Therefore, the correct numbers to use when calculating the potential section 4980H penalties for 2026 are:
Section 4980H(a) penalty amount = $3,340.00
Section 4980H(b) penalty amount = $5,010.00
As many employers have discovered, the IRS is serious about its enforcement of the section 4980H penalties. The section 4980H penalties continue to increase each year. Therefore, avoiding the section 4980H penalties and, importantly, accurately reporting on the Forms 1094-C and 1095-C is the best strategy. We take great pride in our work and would welcome the opportunity to share how Accord Systems can make tracking and reporting a simple process. Please contact us if you would like to learn more about our services.
About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC. Ryan received his LL.M. from Georgetown University Law Center and his J.D. from Saint Louis University School of Law. He has distinguished himself as a leader in the Affordable Care Act arena and has written and spoken on a variety of ACA topics as it relates to compliance for companies.
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