For Applicable Large Employers and sponsors of group health plans.
The IRS has set the Affordable Care Act affordability threshold at 10.22% of household income for plan years beginning in calendar year 2027 — the highest figure since the employer mandate took effect, and the first time it has ever exceeded 10%. For applicable large employers (ALEs), this is favorable: you may charge employees more for self-only coverage in 2027 than in any prior year without creating exposure under Code section 4980H(b). Consequently, you should re-do your affordability calculations before you set 2027 contribution rates — which, for calendar-year plans, means over the next 60 to 90 days.
Authority: Revenue Procedure (Rev. Proc. 2026-26, issued July 21, 2026), effective for taxable years and plan years beginning in calendar year 2027.
What Changed
The required contribution affordability percentage under Code section 36B(c)(2)(C)(i)(II) is 10.22% for plan years beginning in 2027, up from 9.96% for 2026 and 9.02% for 2025. Rev. Proc. 2026-26 also updates the section 36B(b)(3)(A)(i) applicable percentage table used to compute individual premium tax credits; the 2027 percentages range from 2.15% to 10.22%.
Two consecutive large increases reflect a change in methodology, not a policy shift toward employers. Beginning with the 2026 benefit year, HHS revised the premium growth measure to capture increases in individual market premiums in addition to employer-sponsored insurance premiums (HHS Marketplace Integrity and Affordability rule, 90 Fed. Reg. 27074 (June 25, 2025)). The IRS applied that revised measure again for 2027. Employers should not plan on the trend continuing indefinitely.
The Three Affordability Safe Harbors for 2027
Because ALEs do not know an employee’s household income, the final regulations at Treas. Reg. section 54.4980H-5(e)(2) permit affordability to be measured under any of three safe harbors, applied on a reasonable and uniform basis to any reasonable category of employees. The table below assumes a calendar-year 2027 plan and the lowest-cost self-only option providing minimum value.
| Safe Harbor | 2027 Maximum Employee Contribution | How It Is Determined |
|---|---|---|
| Federal Poverty Line (FPL) | $135.92 / month (48 states + D.C.) $169.90 / month (Alaska) $156.36 / month (Hawaii) | 10.22% x mainland FPL for a single individual, divided by 12, using the FPL in effect within six months before the first day of the plan year. For calendar-year 2027 plans, that is the 2026 HHS guidelines ($15,960). |
| Rate of Pay | Hourly: 10.22% x (hourly rate x 130 hours) e.g., $20.00/hour = $265.72 / month e.g., $16.00/hour = $212.57 / month Salaried: 10.22% x monthly salary | Determinable prospectively at the start of the plan year. For hourly employees, use the lower of the rate at the start of the year or the lowest rate during the year; may not be used for tipped or commission-only employees. |
| Form W-2 | 10.22% x Box 1 wages for the calendar year e.g., $60,000 Box 1 = $6,132 / year ($511.00 / month) | Tested retrospectively after year-end, per employee, per employer. Requires the employee contribution to remain a consistent dollar amount or a consistent percentage of pay for the full year. |
Authority: final regulations (Treas. Reg. section 54.4980H-5(e)(2)) for the safe harbor structure; dollar figures derived from Rev. Proc. 2026-26 and the 2026 HHS poverty guidelines ($15,960 mainland; $19,950 Alaska; $18,360 Hawaii).
For Calendar-Year Plans, the FPL Figure Is Already Locked
For a plan year beginning January 1, 2027, the applicable poverty guideline is the 2026 HHS poverty figure — $15,960 for a single individual — published in January 2026. The 2027 guidelines will not be published until roughly January 2027, after the plan year has already begun. For calendar-year plans, $135.92 per month is therefore a final figure, not a placeholder that will rise later this year.
Non-calendar-year plans are different. A plan year beginning, for example, July 1, 2027 may use the 2027 guidelines once published, which will almost certainly produce a higher monthly limit. Those plans generally benefit from waiting for the updated figure where the plan year start date permits it.
Non-Calendar-Year Plans Continue to Apply 9.96%
The required contribution percentage applies on a plan-year basis, not a calendar-year basis. A plan year that began in 2026 continues to use 9.96% for the entire plan year, including the months of that plan year that fall in 2027. A plan year beginning October 1, 2026 uses 9.96% through September 30, 2027 and picks up 10.22% only on October 1, 2027.
Employers with non-calendar-year plans sometimes want to raise contributions on January 1 to capture the higher percentage early. That does not work for affordability purposes, and a mid-plan-year contribution increase carries separate consequences — including participant notice obligations and the possibility that participants become entitled to change their cafeteria plan elections. Treat any mid-year change as a plan design decision requiring its own analysis.
Why this Matters
Rev. Proc. 2026-22 (Revenue Procedure, issued May 4, 2026) sets the 2027 employer shared responsibility amounts: $3,780 per full-time employee annually ($315.00 monthly) under section 4980H(a), and $5,670 per affected employee annually ($472.50 monthly) under section 4980H(b). Both are roughly 13% above the 2026 amounts and nearly double the original $2,000 and $3,000 statutory baselines. An affordability failure is assessed per affected employee per month, and the IRS communicates proposed liability through Letter 226-J.
Action Items
- Confirm your plan year. Determine whether 10.22% applies to your 2027 plan year, or whether 9.96% continues to apply into 2027 because the plan year began in 2026.
- Re-run affordability modeling under all three safe harbors. Do not assume the safe harbor you used for 2026 remains optimal. A record percentage changes the relative outcomes, particularly for lower-wage populations where the rate of pay and FPL results can diverge substantially.
- Set the 2027 employee contribution for the lowest-cost self-only minimum value option before open enrollment materials are finalized. For calendar-year plans using the FPL safe harbor, use no more than $135.92 per month in the mainland states and D.C., $169.90 in Alaska, and $156.36 in Hawaii.
- Verify minimum value separately. Affordability and minimum value are independent requirements. A plan that clears 10.22% still fails section 4980H(b) if it does not provide minimum value.
- Document the safe harbor selection. Record which safe harbor applies to which category of employees, and confirm the categories are reasonable and applied uniformly. That documentation is what supports your Form 1095-C line 16 coding if the IRS proposes liability.
- Coordinate with your 1095-C reporting vendor before year-end so the affordability safe harbor codes match the contribution structure you actually adopt.
- If you sponsor a non-calendar-year plan and intend to use the FPL safe harbor, calendar the publication of the 2027 HHS poverty guidelines and confirm whether your plan year start date permits use of the higher figure.
A note on scope: plans with individual coverage HRA (ICHRA) arrangements, multiemployer plan contributions, opt-out or cash-in-lieu payments, wellness incentives, or flex credits have additional adjustments to the employee’s required contribution that this alert does not address. Those features can move a plan from affordable to unaffordable independent of the 10.22% figure and warrant a separate, plan-specific review.
This alert is provided by ERISA Benefits Law Group, PLLC for informational purposes only and does not constitute legal advice. The information contained herein should not be relied upon or used as a substitute for consultation with legal counsel. If you have questions about how these developments affect your practice, please contact us directly.
ERISA Benefits Law Group, PLLC | Phoenix & Tucson, Arizona | erisabenefitslaw.com
