- On September 3, 2025
The Affordable Care Act (ACA) requires applicable large employers (ALEs) to provide full-time employees (FTEs) with health coverage that is both affordable and of minimum value (MV). Employers that fail to meet these standards may face penalties under the “employer shared responsibility” (commonly called the “pay-or-play” rules).
An ALE only becomes liable for penalties if one or more FTEs receive a premium tax credit (PTC) to purchase health insurance through an ACA Exchange (Marketplace).
Employers should be mindful of the following changes taking effect in 2026:
- Coverage is considered affordable if an employee’s cost for self-only coverage does not exceed 9.96% of household income (up from 9.02% in 2025).
- Penalty amounts increase substantially. For example, if an ALE offers coverage that is deemed unaffordable, the penalty rises to $417.50 per month per impacted FTE (up from $362.50 in 2025).
- The enhanced PTC—introduced under recent federal legislation—expires at the end of 2025, unless extended. This change means fewer individuals will qualify for subsidies, and those who still qualify will receive smaller amounts.
Action Steps for Employers
ALEs should carefully evaluate their pay-or-play strategies before the 2026 plan year:
- Account for higher penalties: The increased penalty amounts heighten the financial risk of not offering affordable, MV coverage.
- Consider contribution strategies: With the higher affordability threshold, employers may be able to pass on more premium costs to employees without triggering penalties.
- Plan for subsidy changes: The expiration of the enhanced PTC may affect employee subsidy eligibility, which could also impact employers offering individual coverage health reimbursement arrangements (ICHRAs).
Affordability Standards for 2026
Affordability determines whether employees can access PTCs and whether ALEs risk penalties. Coverage is affordable if the employee’s required contribution for the lowest-cost, self-only plan that meets MV does not exceed the annual affordability percentage. Because household income data is not usually available to employers, the IRS allows ALEs to rely on safe harbors:
- Federal Poverty Level (FPL) safe harbor – For 2026, coverage is affordable if the monthly premium for self-only coverage does not exceed $129.90 for calendar-year plans (up from $113.20 in 2025).
- Rate of pay safe harbor – Coverage is affordable for an hourly employee earning $20/hour if the monthly cost does not exceed $258.96 (up from $234.52 in 2025).
- Form W-2 safe harbor – For an employee with annual wages of $45,000, self-only coverage is affordable if the contribution is no more than $373.50 per month (up from $338.25 in 2025).
Updated Pay-or-Play Penalties
Employers may face two types of penalties:
- Section 4980H(a) – Applies when an ALE fails to offer coverage to at least 95% of its FTEs (and dependents). The annual penalty increases to $3,340 per FTE in 2026 (up from $2,900 in 2025). After applying the monthly calculation, it equals $278.33 per FTE per month (minus the 30-employee reduction).
- Section 4980H(b) – Applies if coverage is offered but is unaffordable or does not provide MV. The annual penalty increases to $5,010 per affected FTE in 2026 (up from $4,350 in 2025), or $417.50 per month per FTE receiving a PTC.
Employers should weigh the cost of compliance (“play”) versus the potential liability of penalties (“pay”).
Expiration of the Enhanced PTC
The PTC helps lower- and middle-income individuals purchase Exchange coverage. Under standard ACA rules, eligibility is limited to households earning between 100% and 400% of the FPL.
The American Rescue Plan Act of 2021 (ARPA) temporarily expanded eligibility by eliminating the 400% FPL cap and increasing subsidy amounts. The Inflation Reduction Act of 2022 extended these enhancements through 2025. According to a Congressional Research Service report, enrollment in subsidized Exchange coverage grew from 9.2 million in 2020 to 19.3 million in 2024.
Unless extended by Congress, the enhanced subsidies end in 2025. Starting in 2026:
- Individuals above 400% FPL will no longer qualify.
- Subsidy amounts for those still eligible will decrease.
- Federal spending on subsidies will decline, but the number of uninsured individuals is expected to rise.
This could mean reduced penalty exposure for employers if fewer employees qualify for PTCs. However, employees may also seek jobs that offer affordable employer coverage, and employers with ICHRAs may need to increase contributions to keep coverage affordable.