ACA Affordability Calculation

Each plan year, Applicable Large Employers confirm the employee-only cost of the lowest-cost minimum-value plan stays within an IRS percentage of income, using one of three safe harbors, or risk a Section 4980H(b) penalty.

See the Step-by-Step ProcessView Affordability Worksheets
What An annual check confirming that the employee-only cost of your lowest-cost minimum-value (MV) plan is "affordable" under one of three IRS safe harbors.
Who Applicable Large Employers (ALEs): generally employers averaging 50+ full-time and full-time equivalent employees in the prior calendar year. See the ALE Status Determination page.
When Run before setting payroll contributions each plan year. Re-test if you change employee deductions mid-year. Affordability cap: 9.02% of the safe-harbor income proxy for plan years starting in 2025; 9.96% for plan years starting in 2026.
Risk If coverage is unaffordable and a full-time employee receives a Marketplace premium tax credit, the ALE may owe a Section 4980H(b) penalty: $4,350 per affected employee for 2025, $5,010 for 2026 (assessed monthly at 1/12, capped at the Section 4980H(a) total).
9.96%
2026 cap

The 2026 plan-year affordability percentage (2025 plan years: 9.02%).

Pre-OE
Run annually

Test the lowest-cost MV plan (employee-only) before open enrollment pricing each year.

Re-test
On mid-year change

Re-check affordability before any mid-year contribution change takes effect.

Trigger Typical Timing Notes
Choose safe harbor (W-2, Rate of Pay, or FPL) Before OE / plan-year pricing Use the affordability percentage for the coming plan year. Can vary by reasonable employee category.
Run affordability calculation on lowest-cost MV plan (employee-only) Annually, pre-OE Document caps and results for each employee category (hourly/salaried, region, union).
Set payroll deductions and publish rates With OE materials Align plan communications, SBC/SPD, HRIS, and carrier files.
Mid-year contribution change (if any) Before effective date Re-check affordability under your chosen safe harbor before the change takes effect.
Retain affordability worksheets Ongoing Keep with 1094-C/1095-C support files for audit readiness.
Trigger: Choose safe harbor (W-2, Rate of Pay, or FPL)
Timing: Before OE / plan-year pricing
Notes: Use the coming plan year's percentage. Can vary by reasonable employee category.
Trigger: Run affordability calculation (employee-only, lowest-cost MV)
Timing: Annually, pre-OE
Notes: Document caps and results for each employee category.
Trigger: Set payroll deductions and publish rates
Timing: With OE materials
Notes: Align communications, SBC/SPD, HRIS, and carrier files.
Trigger: Mid-year contribution change (if any)
Timing: Before effective date
Notes: Re-check affordability under your chosen safe harbor first.
Trigger: Retain affordability worksheets
Timing: Ongoing
Notes: Keep with 1094-C/1095-C support files for audit readiness.
  • Lowest-cost MV plan premium: The employee-only cost per pay period and monthly equivalent for the plan you intend to test.
  • Pay data: Hourly rates or monthly salaries (Rate of Pay safe harbor) or prior-year Box 1 W-2 wages (W-2 safe harbor).
  • Federal Poverty Guidelines (FPG): The 1-person household amount for the year that applies to your plan year's FPL safe harbor calculation.
  • Current affordability percentage: The IRS-published rate for the upcoming plan year. See the Official Guidance & Links section.
1
Choose your safe harborYou may use different safe harbors for different reasonable employee categories (e.g., hourly vs. salaried), but must apply the chosen safe harbor consistently within each category for the full plan year:
  • W-2 Wages Safe Harbor: Annual employee-only cost at or below affordability% times the employee's Box 1 W-2 wages for that calendar year.
  • Rate of Pay Safe Harbor: Hourly: 130 times hourly rate (as of the first day of the plan year) times affordability%. Salaried: monthly salary times affordability%.
  • Federal Poverty Line (FPL) Safe Harbor: Monthly employee-only cost at or below affordability% times (1-person FPL divided by 12). Use Alaska or Hawaii tables if the primary worksite is in those states.
2
Use the correct year's inputs
  • Plan years beginning in 2025: affordability 9.02%; FPL safe harbor uses the 2024 1-person FPG ($15,060 for 48 states/DC), monthly cap approximately $113.20.
  • Plan years beginning in 2026: affordability 9.96%; FPL safe harbor uses the 2025 1-person FPG ($15,650 for 48 states/DC), monthly cap approximately $129.90.
3
Compare and adjustIf the employee-only payroll deduction exceeds the cap for your chosen safe harbor, reduce the required contribution or switch to a different safe harbor you can satisfy. Document the rationale.
4
DocumentSave the worksheet, inputs (rates, FPG amounts, pay data), your safe harbor selection, and assumptions. This is your defense if the IRS proposes a Section 4980H(b) assessment.

Keep in mind: affordability is measured on the employee-only cost of the lowest-cost MV plan; dependent cost does not factor in. Most wellness incentives (except tobacco surcharges) do not reduce the employee contribution for affordability testing purposes. Unconditional opt-out payments may increase the required contribution. For variable-hour employees, coordinate affordability testing with your measurement and stability periods.

  • Payroll and plan communications: Reflect the final employee contribution amount in OE materials, payroll deductions, SBC, and SPD. The contribution amount employees actually pay must match what was tested.
  • 1095-C coding: Your safe harbor selection determines the applicable Line 16 code on Form 1095-C (e.g., 2H for W-2 safe harbor, 2F for FPL safe harbor). Ensure your coding aligns with the safe harbor you used. See the ACA Reporting (1094-C/1095-C) page for 1095-C coding guidance.
  • Affordability worksheets by employee categoryShowing safe harbor chosen, inputs used, cap calculated, and actual employee cost.
  • Plan rate sheets and OE materialsPayroll setup confirmations and OE materials showing the employee-only cost that was tested.
  • Percentage and FPG referencesA printout or saved copy of the plan year's affordability percentage and the FPG table used.
  • Mid-year change memosAnd the recalculation worksheet confirming continued affordability after the change.

Can we use different safe harbors for different employee groups?

Yes, you can apply different safe harbors to different reasonable categories of employees (for example, hourly versus salaried, or employees in different divisions). What you cannot do is switch safe harbors within a category mid-year or apply them inconsistently within a group.

Which plan do I test?

The lowest-cost employee-only plan that provides minimum value. You are testing whether the cheapest MV option is affordable, not your most popular plan or your richest plan. Do not include dependent coverage cost in the calculation.

What about wellness incentives, HRA contributions, or opt-out credits?

Most wellness incentives (except tobacco surcharges) do not reduce the employee contribution for affordability testing; you cannot count them as lowering what the employee pays. Employer HRA contributions generally do not offset the employee premium for affordability purposes either. Unconditional opt-out payments, on the other hand, may effectively increase the required employee contribution and can create affordability problems if not accounted for.

What if we raise employee contributions mid-year?

Re-run the affordability calculation before the new contribution takes effect. A mid-year increase that pushes the employee cost above the safe harbor cap could create Section 4980H(b) exposure for the months after the increase.

What is the Section 4980H(b) penalty if we get this wrong?

If an ALE's coverage is unaffordable (or doesn't meet minimum value) and a full-time employee receives a Marketplace premium tax credit as a result, the IRS can assess a Section 4980H(b) penalty of $5,010 per affected employee for 2026 (annualized; assessed monthly at 1/12). The total Section 4980H(b) liability is capped at what the Section 4980H(a) amount would be for that ALE member. The 2025 rate is $4,350. For information-return penalties related to 1094-C/1095-C filing errors, see the ACA Reporting page.

How does the affordability test connect to 1095-C coding?

Your safe harbor selection maps to a specific Line 16 code on Form 1095-C. Code 2H indicates the W-2 safe harbor was used; code 2F indicates the FPL safe harbor; code 2G indicates the Rate of Pay safe harbor. Using the wrong code, or failing to code the safe harbor at all, can complicate your response to a Letter 226J inquiry. See the ACA Reporting (1094-C/1095-C) page for coding guidance.

  • Alaska and Hawaii: Use the state-specific FPG for the FPL safe harbor; both states have higher poverty guidelines, so the monthly cap will be higher than the 48 states/DC figure.
  • Variable-hour employees: Coordinate affordability testing with your measurement and stability periods. An employee whose hours are being tracked under a look-back method may move between full-time and non-full-time status; affordability must be confirmed for the months they are treated as full-time.
  • Controlled groups: Section 4980H(b) penalties apply per ALE member, not at the controlled-group level. Each member's plan offerings and affordability must be tested separately.
  • Mid-year acquisitions and divestitures: Re-evaluate employee categories, pay rates, and the chosen safe harbor for any groups affected by ownership changes.
  • ICHRA offerings: If you offer an Individual Coverage HRA instead of a traditional group plan, different affordability rules apply. The affordability calculation for ICHRA is based on the lowest-cost silver plan available in the employee's rating area minus the ICHRA amount. This is a distinct calculation from the group plan safe harbors described on this page. See the ICHRA page.

Use the worksheet for whichever safe harbor you choose. Fill it in, keep it with your ACA records, and redo it any time employee contributions change. If you use different safe harbors for different employee categories, run a separate worksheet for each.

AFFORDABILITY CALCULATION WORKSHEET

Company: _________________________________  |  Plan Year Beginning: _____________

Employee Category: _________________________  |  Completed by: _________________________

Safe Harbor Used: ☐ FPL   ☐ Rate of Pay   ☐ W-2 Wages  |  Date: _____________

OPTION A: FEDERAL POVERTY LINE (FPL) SAFE HARBOR

Best for: employers who want one simple cap that applies to all employees regardless of wages. Does not require knowledge of individual employee pay.

Step 1: Plan year affordability percentage_______ %  (2025 plan years: 9.02%  |  2026 plan years: 9.96%)
Step 2: Annual 1-person FPG for applicable area$ _____________  (48 states/DC: 2024 FPG = $15,060  |  2025 FPG = $15,650)
Step 3: Monthly FPL cap (Step 1 times Step 2 divided by 12)$ _____________ /month  (2025 plan year approximately $113.20  |  2026 approximately $129.90)
Step 4: Actual monthly employee-only cost of lowest-cost MV plan$ _____________ /month
Result: Is Step 4 at or below Step 3?☐ Yes, affordable under FPL safe harbor    ☐ No, not affordable; reduce contribution or choose another safe harbor

OPTION B: RATE OF PAY SAFE HARBOR

Best for: employers who know their employees' pay rates and want to set contributions as a percentage of wages. Run separately for hourly and salaried employees.

Hourly Employees
Lowest hourly rate in this category (as of first day of plan year)$ _____________ /hour
Times 130 hours times affordability %times 130 times _______ % = $ _____________ /month cap
Actual monthly employee-only cost of lowest-cost MV plan$ _____________ /month
Result: Is actual cost at or below cap?☐ Yes, affordable    ☐ No, not affordable
Salaried Employees
Lowest monthly salary in this category (as of first day of plan year)$ _____________ /month
Times affordability %times _______ % = $ _____________ /month cap
Actual monthly employee-only cost of lowest-cost MV plan$ _____________ /month
Result: Is actual cost at or below cap?☐ Yes, affordable    ☐ No, not affordable

OPTION C: W-2 WAGES SAFE HARBOR

Best for: employers who want to tie the affordability test to actual wages. Applied on a per-employee basis using the prior year's W-2 Box 1 wages. Note: this safe harbor is tested after the fact (at year-end), so you must set contributions conservatively enough to pass for all employees in the category.

Employee's Box 1 W-2 wages for the calendar year$ _____________
Times affordability %times _______ % = $ _____________ annual cap
Actual annual employee-only cost (monthly cost times months enrolled)$ _____________
Result: Is actual annual cost at or below annual cap?☐ Yes, affordable    ☐ No, not affordable

[HR Use Only] Worksheet reviewed by: _________________________  |  Date: _____________  |  Filed with ACA records: ☐  |  1095-C Line 16 code confirmed: ☐