- On September 17, 2025
- ACA
The Affordable Care Act (ACA) requires applicable large employers (ALEs) to provide affordable, minimum-value (MV) health coverage to full-time employees (FTEs). Employers that fail to do so may face penalties if at least one FTE qualifies for a premium tax credit (PTC) to buy coverage on the Exchange. This requirement—commonly called the “employer shared responsibility” or “pay-or-play” mandate—continues to be a significant compliance issue for employers.
For 2026, several important updates will affect how ALEs measure affordability and potential penalty exposure.
What’s Changing in 2026
- Higher Affordability Threshold
- Coverage will be considered affordable if the employee’s cost for self-only coverage is no more than 9.96% of household income (up from 9.02% in 2025).
- This allows employers some additional flexibility to increase employee contributions while remaining compliant.
- Larger Penalties
- The penalty for not offering affordable coverage increases to $417.50 per month per FTE who receives a PTC (up from $362.50 in 2025).
- Employers that fail to offer coverage to substantially all FTEs may face annualized penalties of $3,340 per employee (minus 30), compared to $2,900 in 2025.
- Expiration of Enhanced PTCs
- Expanded subsidies created under pandemic relief laws end in 2025 unless Congress acts to extend them.
- Fewer employees will qualify for PTCs without these enhancements, and those who do may receive smaller amounts.
Affordability Safe Harbors for 2026
Because employers generally don’t know an employee’s household income, the IRS provides three safe harbors to determine affordability:
- Federal Poverty Level (FPL) safe harbor – Employee contribution for self-only coverage cannot exceed 9.96% of the federal poverty guideline for an individual, roughly $129.90 per month in 2026.
- Rate of pay safe harbor – For an hourly employee earning $20/hour, the monthly contribution limit is about $258.96.
- Form W-2 safe harbor: The monthly contribution limit for an employee with $45,000 in annual W-2 wages is about $373.50.
Understanding the Penalties
Two types of penalties may apply under the pay-or-play rules:
- 4980H(a) penalty – Applies when an ALE fails to offer coverage to at least 95% of its FTEs and one or more receive a PTC. The penalty is projected at $3,340 per employee (minus 30) in 2026.
- 4980H(b) penalty – Applies when coverage is offered but is unaffordable or doesn’t provide MV. In 2026, the monthly penalty will increase to $417.50 per affected employee, capped at the 4980H(a) amount.
Expiration of Enhanced Subsidies
The temporary expansion of PTC eligibility under the American Rescue Plan Act and extended by the Inflation Reduction Act ends after 2025. Beginning in 2026:
- PTCs will again be limited to households earning between 100% and 400% of the federal poverty level.
- Subsidy amounts will generally be smaller, leading to higher out-of-pocket costs for many Exchange enrollees.
- Employers may see fewer employees qualifying for PTCs, which could lower the risk of penalties. However, organizations offering individual coverage HRAs (ICHRAs) may need to increase contributions to maintain affordability.
Employer Action Steps
- Review contribution strategy – With a higher affordability threshold, employers may have more flexibility, but should weigh affordability against employee retention.
- Evaluate penalty exposure – The penalty increases are significant, and even a few FTEs receiving PTCs can incur large costs.
- Plan for subsidy changes – The expiration of enhanced PTCs could shift employee expectations and enrollment patterns, particularly for lower-wage workers.
Bottom Line
The 2026 updates raise both risks and opportunities for employers. While the higher affordability percentage allows slightly higher employee contributions, the penalty amounts are steep. Proactive planning will be critical for compliance and cost control, especially around contribution design and affordability safe harbors.