IRS Issues Affordability Percentage Adjustment for 2026
Compliance News
Thursday, August 14 2025
The Internal Revenue Service (IRS) has released Rev. Proc. 2025-25, which contains the inflation adjusted amounts for 2026 used to determine whether employer-sponsored coverage is “affordable” for purposes of the Affordable Care Act’s (ACA) employer shared responsibility provisions and premium tax credit program. As shown in the table below, for plan years beginning in 2026, the affordability percentage for employer mandate purposes is indexed to 9.96%. This is a significant increase from 2025. HHS used a premium growth measure provided for in the 2026 HHS Marketplace Integrity and Affordability Rule when calculating the increase. This measure will be used for the 2026 benefit year and beyond. The IRS has also released Rev. Proc. 2025-26, which contains the indexed amounts used to calculate employer shared responsibility payments (ESRP) for 2026.
Under the ACA, applicable large employers (ALEs) must offer health insurance coverage to full-time employees. If an ALE does not offer coverage (or does not offer affordable coverage), it may be subject to an ESRP. An ALE is an employer that employed 50 or more full-time equivalent employees on average in the prior calendar year. Coverage is considered affordable if the employee’s required contribution for self-only coverage under the employer’s lowest-cost, minimum value plan does not exceed 9.96% of the employee’s household income in 2026 (prior years are also shown above). An ALE may rely on one or more safe harbors in determining if coverage is affordable: W-2, Rate of Pay, and Federal Poverty Level. If the employer’s coverage is not affordable under one of the safe harbors and a full-time employee is approved for a premium tax credit for Marketplace coverage, the employer may be subject to an ESRP.
Since 2019, the individual mandate penalty imposed on individual taxpayers for failure to have qualifying health coverage was reduced to $0 under the Tax Cuts and Jobs Act, effectively repealing the federal individual mandate. A previous lawsuit challenging the constitutionality of the ACA due to this change to the individual mandate penalty was unsuccessful. The employer mandate has not been repealed, and the IRS continues to enforce it through Letter 226J. The IRS is currently enforcing employer shared responsibility payments for tax year 2023 as well as enforcing the reporting requirement itself. The IRS aggressively enforces the ACA reporting requirement, notifying applicable large employers via Letter 5699 if the IRS has not received the employer’s form 1094-C and forms 1095-C.
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Under the ACA, applicable large employers (ALEs) must offer health insurance coverage to full-time employees. If an ALE does not offer coverage (or does not offer affordable coverage), it may be subject to an ESRP. An ALE is an employer that employed 50 or more full-time equivalent employees on average in the prior calendar year. Coverage is considered affordable if the employee’s required contribution for self-only coverage under the employer’s lowest-cost, minimum value plan does not exceed 9.96% of the employee’s household income in 2026 (prior years are also shown above). An ALE may rely on one or more safe harbors in determining if coverage is affordable: W-2, Rate of Pay, and Federal Poverty Level. If the employer’s coverage is not affordable under one of the safe harbors and a full-time employee is approved for a premium tax credit for Marketplace coverage, the employer may be subject to an ESRP.
Since 2019, the individual mandate penalty imposed on individual taxpayers for failure to have qualifying health coverage was reduced to $0 under the Tax Cuts and Jobs Act, effectively repealing the federal individual mandate. A previous lawsuit challenging the constitutionality of the ACA due to this change to the individual mandate penalty was unsuccessful. The employer mandate has not been repealed, and the IRS continues to enforce it through Letter 226J. The IRS is currently enforcing employer shared responsibility payments for tax year 2023 as well as enforcing the reporting requirement itself. The IRS aggressively enforces the ACA reporting requirement, notifying applicable large employers via Letter 5699 if the IRS has not received the employer’s form 1094-C and forms 1095-C.
To Read More Click Here