The IRS has increased the group health plan affordability threshold, which determines whether an employer’s lowest-premium health plan complies with Affordable Care Act rules, for plan years beginning in 2027.
The threshold has been set at 10.22% of an employee’s household income, up from 9.96% in 2026. The higher threshold will give employers more leeway in determining employees’ share of health insurance premiums. It also marks the first time the threshold has exceeded 10%.
Under the ACA, “applicable large employers” — those with 50 or more full-time or full-time-equivalent employees — must offer their workers at least one health plan that is considered affordable based on a percentage of the lowest-paid employee’s household income. If an employer’s plan fails this test, the employer may face penalties for noncompliance.
For 2027, coverage is considered affordable if the lowest-paid employee’s required contribution for self-only coverage under the employer’s lowest-cost plan providing minimum value does not exceed 10.22% of their household income.
The affordability test applies only to the employee’s cost for self-only coverage, not to the premium for family coverage. If an employer offers multiple health plans, the test is based on the lowest-cost option that provides minimum value.
For non-calendar-year plans, the affordability percentage in effect when the plan year begins applies throughout that year. That means a plan year beginning after Jan. 1, 2026, would continue using the 9.96% threshold until the next plan year starts in 2027.
Calculating
Since employers typically don’t know their workers’ household incomes, the IRS provides three safe harbors for determining affordability:
- W-2 wages: The employee’s required contribution generally cannot exceed 10.22% of their Form W-2 wages from the employer.
- Rate of pay: For hourly employees, affordability is based on the employee’s hourly wage multiplied by 130 hours per month. For salaried workers, the monthly salary is used.
- Federal poverty level: Employers can base affordability on the federal poverty level for a single individual.
For calendar-year 2027 plans using the federal poverty level safe harbor in the mainland U.S., the employee’s maximum monthly contribution is about $135.93, based on the 2026 federal poverty level of $15,960. Employers may want to set the contribution slightly below the maximum to avoid exceeding the limit.
Penalties
Failure to provide affordable coverage may result in a penalty of $5,670 per affected full-time employee in 2027, up from $5,010 in 2026. The penalty may apply when an employee is offered unaffordable coverage and receives a premium tax credit for Marketplace coverage.
A separate Employer Shared Responsibility Payment may apply if an employer fails to offer minimum essential coverage to at least 95% of its full-time employees and their dependents and at least one full-time employee receives a premium tax credit for Marketplace coverage.
The separate penalty will rise to $3,780 per employee in 2027 from $3,340 in 2026. It is generally calculated using the employer’s total number of full-time employees minus 30.
Both penalties are indexed to inflation and calculated monthly.
The takeaway
The higher affordability threshold gives employers more flexibility in setting employee premium contributions for 2027, but now is the time to review those amounts in preparation for the upcoming plan year.
We can help assess your plans’ affordability and confirm that they meet the standard, so your firm stays compliant.
