The IRS has published the ACA affordability percentage for plan years beginning in 2027: 10.22%.
That is up from 9.96% for 2026, according to IRS Revenue Procedure 2026-26. The percentage has moved higher in recent years, and this latest increase matters immediately if you are in the middle of a 2027 renewal.
The practical question is not simply whether your carrier’s renewal rate increased. It is whether the contribution you are asking employees to pay still passes the affordability test after the new premium and contribution structure are applied.
The 2027 number applies based on your plan year
The 10.22% affordability percentage applies to plan years beginning in calendar year 2027. It is not based solely on the calendar year in which an employee uses the coverage.
For example, a plan renewing on October 1, 2026 generally continues to use the 2026 percentage for that plan year. A plan renewing on July 1, 2027 uses the 2027 percentage of 10.22%.
That timing matters during renewal season. You should test affordability based on the actual effective date of the plan you are considering, not simply the year in which you receive the renewal proposal.
What “affordable” means under the 2027 test
For ACA purposes, employer coverage is generally considered affordable when the employee’s required contribution for self-only coverage does not exceed 10.22% of household income for the applicable year.
“Self-only coverage” means the employee-only premium, not the amount required to cover a spouse or dependents. The affordability test also generally focuses on the lowest-cost self-only coverage option that provides minimum value and is available to that employee.
The problem is that you cannot see an employee’s household income. You may know the employee’s wages from your payroll system, but you generally do not know whether the employee has a spouse, additional household income, or other factors affecting household income.
That is why the IRS provides three affordability safe harbors. A safe harbor is an approved alternative calculation that allows an applicable large employer (ALE) to demonstrate affordability using information it can reasonably access.
The three affordability safe harbors
1. Form W-2 wages
The W-2 safe harbor generally uses the employee’s wages reported in Box 1 of Form W-2.
You compare the employee’s required annual contribution for the lowest-cost self-only minimum-value plan with the applicable percentage multiplied by the employee’s Box 1 wages. The test may need to be adjusted for an employee who was not eligible for coverage for the full year.
This method can be difficult to model in advance because final Box 1 wages are not known until after the year ends. Changes in hours, unpaid leave, salary reductions, and other payroll factors can affect the result.
2. Rate of pay
The rate-of-pay safe harbor uses the employee’s rate of pay at the beginning of the coverage period, subject to the applicable IRS rules.
For an hourly employee, the monthly calculation uses:
130 hours × the employee’s hourly rate
For example, an employee earning $20 per hour has monthly wages of:
130 × $20 = $2,600
For a salaried employee, the calculation uses the employee’s monthly salary as of the first day of the coverage period, provided the applicable requirements are met.
One of the most common errors is using the employee’s actual hours worked instead of 130 hours for the hourly calculation. If an employee works 118 hours in a particular month, that does not mean you should automatically use 118 hours for this safe harbor.
Using actual hours instead of 130 is conservative, but it can incorrectly make coverage appear unaffordable. The rate-of-pay safe harbor is designed to use the 130-hour monthly assumption for hourly employees.
3. Federal poverty line
The federal poverty line safe harbor uses the federal poverty line for a single individual for the applicable calendar year.
The monthly employee contribution is compared with the applicable affordability percentage multiplied by the single-person federal poverty line and divided by 12.
This method can simplify affordability planning because it does not require you to calculate each employee’s household income or individual annual wages. However, the employee contribution must be designed carefully so the lowest-cost self-only option stays within the applicable limit.
The IRS permits employers to use one safe harbor for all employees or different safe harbors for reasonable employee categories, provided the selected method is applied consistently within the applicable category.
Affordability is only half of the test
Affordability and minimum value are separate requirements. They are often discussed together, but they answer different questions.
Affordability asks whether the employee’s required contribution for self-only coverage is within the applicable percentage of income under the household-income test or an available employer safe harbor.
Minimum value asks whether the plan provides sufficient financial protection for covered services. Under the IRS standard, a plan provides minimum value when it is designed to pay at least 60% of the total allowed cost of benefits expected to be incurred under the plan. The IRS also identifies requirements involving substantial coverage of inpatient hospitalization and physician services.
A plan can be:
- Affordable but not minimum value;
- Minimum value but unaffordable; or
- Both affordable and minimum value.
Changing the employee premium does not automatically change the plan’s actuarial value. Likewise, selecting a plan with strong cost-sharing features does not automatically make the employee contribution affordable.
You need to test both requirements separately.
A renewal example: how a plan can fail without a design change
Assume you use the rate-of-pay safe harbor for an hourly employee earning $20 per hour.
The monthly safe-harbor wage calculation is:
130 × $20 = $2,600
For 2026:
$2,600 × 9.96% = $258.96
If the employee’s required contribution for the lowest-cost self-only minimum-value plan is $255 per month, the contribution is below the 2026 threshold.
For 2027:
$2,600 × 10.22% = $265.72
The affordability percentage increased, which provides slightly more room under the test. However, suppose the renewal increases the employee’s required contribution to $270 per month.
The plan design has not changed. The employee remains at the same hourly rate. But the employee contribution is now $4.28 above the 2027 rate-of-pay threshold.
That is how a plan that passed in 2026 can fail in 2027 because the premium and contribution structure changed during renewal.
The lesson is straightforward: model the affordability test before you finalize employee contributions, not after open enrollment materials have already been prepared.
Where penalty risk enters the discussion
The employer shared responsibility rules generally apply to an applicable large employer: an employer with an average of at least 50 full-time employees, including full-time equivalents, during the applicable measurement period.
There are two different penalty provisions to keep separate.
Section 4980H(a): insufficient offer of coverage
Section 4980H(a) generally applies when an ALE 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.
This is the broad “no offer” or insufficient-offer exposure.
Section 4980H(b): unaffordable or inadequate coverage
Section 4980H(b) generally applies when an ALE offers coverage but the coverage offered to an employee is unaffordable or fails to provide minimum value, and that employee receives a premium tax credit.
For calendar year 2026, IRS Revenue Procedure 2025-26 sets the adjusted annual amounts at:
- $3,340 under Section 4980H(a); and
- $5,010 under Section 4980H(b).
Those are the confirmed 2026 amounts. The indexed 2027 penalty amounts are separate figures and should not be projected or treated as final unless confirmed by an IRS source.
If you are not an ALE, you generally are not subject to an employer shared responsibility payment under Section 4980H. However, affordability still matters for smaller employers because an offer of employer coverage can affect whether an employee qualifies for a premium tax credit. It also provides a useful benchmark when deciding how much of a renewal increase employees can reasonably absorb.
What to do before approving your 2027 renewal
Before you finalize your contribution schedule, complete these steps:
- Confirm the plan-year start date. Determine whether the plan year begins in 2026 or 2027.
- Identify the lowest-cost self-only option that provides minimum value.
- Choose the applicable affordability safe harbor.
- Run the calculation using 10.22% for plan years beginning in 2027.
- Use 130 hours for hourly employees under the rate-of-pay safe harbor.
- Test affordability by employee category where appropriate.
- Confirm minimum value separately.
- Review how salary changes, hourly rates, and contribution tiers affect the result.
- Document the method before enrollment materials are distributed.
When the affordability math becomes tight, you may have more than one strategic option. Plan design may provide a path forward, including a high-deductible health plan or another minimum-value structure that changes the premium balance while preserving the required coverage standards.
A defined-contribution approach is another possibility. Under that structure, the employer funds a fixed amount and employees shop among individual-market options. This can create more predictable employer budgeting, but it requires careful review of plan administration, employee communications, and applicable compliance requirements.
The most important point is to work with a broker or benefits advisor who runs the affordability and minimum-value analysis, not someone who simply forwards the renewal rate.
Let us review your 2027 contribution strategy
A double-digit renewal increase does not automatically mean you must accept an unaffordable contribution structure or abandon your benefits strategy. It does mean you should run the numbers before making a final decision.
At Total Benefit Solutions, we help employers compare renewal options, evaluate employee contributions, apply the appropriate affordability safe harbor, and distinguish affordability from minimum value. We act as an independent advocate so you can make a well-informed decision before the new plan year begins.
Contact us at 215-355-2121 or visit www.totalbenefits.net to discuss your 2027 renewal.
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