The coverage affordability test is an ACA requirement that determines whether an employer-sponsored health plan is considered affordable for employees. A plan passes the test if the employee's required contribution for self-only coverage does not exceed a set percentage of their household income.
Employers subject to the ACA's employer shared responsibility rules must meet this standard to avoid penalties.
How is affordability calculated?
Affordability is based on the cost of the lowest-priced self-only plan an employer offers. The employee's share of the monthly premium for that plan must not exceed the affordability threshold, which adjusts annually.
For 2026, the affordability threshold is 9.96% of household income.
Year | Affordability threshold |
2024 | 8.39% |
2025 | 9.02% |
2026 | 9.96% |
Because employers typically do not know an employee's household income, the IRS allows three safe harbor methods to determine affordability instead.
What are the safe harbor methods?
Safe harbors give employers a reliable way to test affordability without relying on household income data.
The three options are:
W-2 safe harbor: Employee contribution does not exceed the threshold percentage of Box 1 W-2 wages
Rate of pay safe harbor: Contribution does not exceed the threshold percentage of the employee's monthly rate of pay
Federal poverty line (FPL) safe harbor: Contribution does not exceed the threshold percentage of the federal poverty level for a single person
The FPL safe harbor is the simplest to administer because the same dollar amount applies to all employees.
What happens if an employer fails the coverage affordability test?
If an employee receives a premium tax credit through the ACA marketplace because their employer's plan was unaffordable, the employer may owe a penalty under IRC Section 4980H(b).
For 2026, that penalty is $417.50 per month per employee who received a premium tax credit. It applies only to the employees who triggered it, not the entire workforce.
Does the affordability threshold change each year?
Yes. The IRS adjusts it annually based on the cost of health coverage relative to income growth. Employers need to review their plan contributions each year to confirm they still meet the current threshold.
Missing a threshold change is one of the most common ACA compliance errors employers make.
Who is subject to the coverage affordability test?
Applicable Large Employers (ALEs), meaning companies with 50 or more full-time equivalent employees, are required to meet ACA affordability standards.
Employers with fewer than 50 FTEs are not subject to the employer shared responsibility rules and do not need to run this test.
Key Takeaways
Summary | |
Definition | ACA test that determines whether employer health coverage is affordable for employees |
2026 threshold | Employee contribution must not exceed 9.96% of household income |
Safe harbors | W-2 wages, rate of pay, or federal poverty line |
Penalty for failure | $417.50 per month per employee who receives a premium tax credit (2026) |
Who it applies to | Applicable Large Employers with 50 or more full-time equivalent employees |
Frequently Asked Questions
Does the affordability test apply to dependent coverage?
No. Affordability is based only on the cost of self-only coverage for the employee. The cost of adding dependents is not factored in.
What if an employer offers multiple plans?
Affordability is tested against the lowest-cost plan that also meets minimum value standards. Employees do not have to enroll in that plan for it to count.
Can a small employer fail the affordability test?
Only ALEs are subject to affordability penalties. Employers with fewer than 50 FTEs are not required to meet these standards, though offering affordable coverage is still good practice.
Where can employers find the current federal poverty line amount?
The IRS publishes the applicable FPL amounts for safe harbor calculations each year, typically in an employer health coverage affordability notice.
