The IRS has updated its penalty amounts for the 2026 calendar year, related to the employer shared responsibility (pay-or-play) rules under the Affordable Care Act (ACA). The IRS has also released the new affordability percentage under the ACA’s pay-or-play rules for plan years beginning in 2026.
IRS Releases ACA Pay-or-Play Penalties for 2026
On July 22, 2025, the IRS released updated penalty amounts for 2026 related to the employer shared responsibility (“pay-or-play”) rules under the Affordable Care Act (ACA). For calendar year 2026, the adjusted $2,000 penalty amount is $3,340, and the adjusted $3,000 penalty amount is $5,010. This is an increase from the penalty amounts for the 2025 calendar year, which are $2,900 and $4,350, respectively.
Pay-or-Play Rules
The ACA requires applicable large employers (ALEs) to offer affordable, minimum-value (MV) health coverage to their full-time employees (and dependents) or potentially pay a penalty to the IRS. An ALE is an employer with at least 50 full-time employees, including full-time equivalent employees, during the preceding calendar year.
An ALE may be subject to a pay-or-play penalty if at least one full-time employee receives a premium tax credit for purchasing individual health coverage through an Exchange and the ALE:
- Did not offer health plan coverage to “substantially all” (generally, at least 95%) of full-time employees and their dependents;
- Offered health plan coverage to substantially all full-time employees but not to the specific full-time employee receiving the credit; or
- Offered health plan coverage to full-time employees that was unaffordable or did not provide MV.
Pay-or-Play Penalty Calculations
Depending on the circumstances, one of two penalties may apply under the pay-or-play rules, the 4980H(a) penalty or the 4980H(b) penalty, as follows:
- Under Section 4980H(a), an ALE will be subject to a penalty if it does not offer coverage to substantially all of its full-time employees (and dependents) and any one of its full-time employees receives a subsidy toward their Exchange plan. This monthly penalty is equal to the ALE’s number of full-time employees (minus 30) multiplied by one-twelfth of $2,000 (as adjusted) for any applicable month. For 2026, the adjusted penalty amount is $3,340; and
- Under Section 4980H(b), ALEs that offer coverage to substantially all full-time employees (and dependents) may still be subject to a penalty if at least one full-time employee obtains a subsidy through an Exchange because the ALE did not offer coverage to all full-time employees, or the ALE’s coverage is unaffordable or does not provide MV. The monthly penalty assessed on an ALE for each full-time employee who receives a subsidy is one-twelfth of $3,000 (as adjusted) for any applicable month. For 2026, the adjusted penalty amount is $5,010. However, the total penalty for an ALE is limited to the 4980H(a) penalty amount.
LEARN MORE: IRS employer health insurance ‘pay-or-play’ penalties to rise 15.2% in 2026
Pay-or-Play Affordability Percentage Will Increase for 2026
On July 18, 2025, the IRS released Revenue Procedure 2025-25 to index the contribution percentage in 2026 for determining the affordability of an employer’s health plan under the Affordable Care Act (ACA). For plan years beginning in 2026, employer-sponsored coverage will be considered affordable under the ACA’s “pay-or-play” rules if the employee’s required contribution for self-only coverage does not exceed 9.96% of their household income for the year.
Affordability Test
The ACA’s pay-or-play rules require applicable large employers (ALEs) to offer affordable, minimum-value health coverage to their full-time employees (and dependents) or risk paying a penalty. The affordability of health coverage is a key point in determining whether an ALE may be subject to a penalty. An ALE’s health coverage is considered affordable if the employee’s required contribution to the plan does not exceed 9.5% (as adjusted annually) of the employee’s household income for the taxable year. This percentage is adjusted each year based on health plan premium growth rates in relation to income growth rates.
In recent years, the affordability percentage has been adjusted to:
- 9.12% for plan years beginning in 2023;
- 8.39% for plan years beginning in 2024;
- 9.02% for plan years beginning in 2025; and
- 9.96% for plan years beginning in 2026.
For purposes of the pay-or-play rules, the affordability test applies only to the portion of the annual premiums for self-only coverage and does not include any additional cost for family coverage. Also, if an employer offers multiple health coverage options, the affordability test applies to the lowest-cost option that provides minimum value.
Because an employer generally will not know an employee’s household income, the IRS has provided three optional affordability safe harbors that ALEs may use to determine affordability based on information that is available to them: the Form W-2 safe harbor, the rate of pay safe harbor and the federal poverty level safe harbor.
Affordability Percentage for 2026
For 2026, the affordability percentage increases to 9.96%. This means that an ALE’s health coverage for the 2026 plan year will be considered affordable if a full-time employee’s required contribution for self-only coverage under the lowest-cost option does not exceed 9.96% of their income. This is a significant increase from the affordability contribution percentage for 2025 and the highest this percentage has ever been. As a result, employers may be able to increase employees’ health coverage contributions for 2026 while still meeting the adjusted affordability percentage.
This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. © 2025 Zywave, Inc. All rights reserved.
