In July 2025, the IRS released new guidance increasing both the affordability percentage and penalty amounts under the Affordable Care Act’s employer mandate for the 2026 plan year. These changes will affect how Applicable Large Employers (ALEs) determine affordability and assess compliance risk moving into the next benefits cycle.

For plan years beginning in 2026, the affordability threshold under §4980H(b) will rise to 9.96%—up from 9.02% in 2025. This percentage represents the maximum portion of household income an employee can be required to contribute toward self-only coverage under the lowest-cost, minimum-value plan in order for the offer of coverage to be considered “affordable.”

In practical terms, this increase gives employers more flexibility to charge slightly higher employee premiums for single coverage, while still satisfying affordability under §4980H(b). However, employers must still apply one of three affordability safe harbors—federal poverty level (FPL), rate of pay, or Form W-2—since household income is rarely known.

Updated §4980H penalties

• The §4980H(a) penalty (failure to offer coverage to at least 95% of full-time employees and their dependent children) will increase to $3,340 per year ($278.33/month).
• The §4980H(b) penalty (failure to offer affordable, minimum-value coverage to a specific employee) will increase to $5,010 per year ($417.50/month).

These penalties apply when a full-time employee obtains subsidized Marketplace coverage and the employer fails to meet the applicable requirements.

Employers with non-calendar-year plans must apply the affordability percentage based on the plan year start date. For example, a plan year beginning July 1, 2026, will use the new 9.96% figure, while a plan year that begins in October 2025 will still use the 9.02% threshold.

As always, small employers (fewer than 50 full-time equivalent employees) are not subject to §4980H penalties, though many voluntarily offer health coverage.

Employers are encouraged to review their contribution strategies, affordability testing methods, and ACA reporting processes in light of these updates. With IRS enforcement activity increasing and penalty amounts rising, now is the time to confirm that your health plan offering will continue to meet the ACA’s employer mandate in 2026.

For more Employee Benefits resources, contact INSURICA today.

This is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.