ACA CENTRAL:
Employer Guide & Glossary
AFFORDABILITY SAFE HARBORS
AFFORDABILITY is defined above in the section 'ACA EMPLOYER MANDATE.' The threshold for TY26 is set at 9.96% of household income.
Below is a guide to the different SAFE HARBOR methods used to calculate if the offer made to an individual employee meets this threshold.
APPLICABLE LARGE EMPLOYERS [ALEs] are not required to use the same SAFE HARBOR method or all FULL-TIME EMPLOYEES. Different methods may be used for different business classifications as specified in the ACA regulations. But within each classification these SAFE HARBOR methods must be applied consistently.
ALEs CANNOT apply different methods on an employee-by-employee basis.
W-2 METHOD:
This SAFE HARBOR uses an employee's W-2 BOX 1 gross income.
Affordability is based on an employee’s taxable wages in Box 1 of Form W-2. For TY26 the employee’s annual contribution for a lowest-cost, self-only plan cannot exceed 9.96% of these Box 1 wages, prorated for months of employment during the calendar year.
PROS:
• Reflects actual taxable wages, accommodates bonuses, reduced hours, or leaves.
• Lower W-2 wages can make affordability easier for employees with variable schedules.
CONS:
• Final wages are unknown until the end of the year, making midyear compliance tracking difficult.
• Overtime and bonuses increase Box 1 wages, creating a risk of unanticipated unaffordable offers.
• Employers with complex payroll systems may struggle to project W-2 wages accurately.
WORKS WELL FOR:
• Salaried or predictable-wage workforces.
• Employers comfortable determining affordability retroactively.
RATE OF PAY METHOD:
This method based affordability on an employee’s hourly or monthly RATE OF PAY rather than their total household income or W-2 wages. For hourly employees, affordability assumes 130 hours per month multiplied by the employee's lowest hourly rate of pay - regardless of actual hours worked.
PROS:
• Simple, predictable, and based on fixed values known at the start of the year.
• No risk of year-end surprises from bonuses or overtime.
CONS:
• Does not account for wage reductions, unpaid leave, or schedule changes.
• For employees working fewer than 130 hours, the assumed earnings may exceed actual income.
WORKS WELL FOR:
• Large hourly workforces, including automating calculations.
• Employers wanting easy, prospective affordability monitoring.
FEDERAL POVERTY LEVEL (FPL):
This is the simplest method to administer, but it typically requires the highest employer contribution of the three SAFE HARBORS. It takes the FPL as a proxy for the employee's actually monthly income, dividing the annual FPL by 12.
For ACA TY26 [reporting 2027], the following 2026 FPL guidelines are to be used:
| 1 ............................................................ | $15,960 |
| 2 ............................................................ | $21,640 |
| 3 ............................................................ | $27,320 |
| 4 ............................................................ | $33,000 |
| 5 ............................................................ | $38,680 |
| 6 ............................................................ | $44,360 |
| 7 ............................................................ | $50.040 |
| 8 ............................................................ | $55,720 |
For families/households with more than 8 persons, add $5,680 for each additional person. Marginally higher guidelines are established for Alaska and Hawaii.
- NOTE: MEDICAL OPT-OUT & WELLNESS PROGRAM INCENTIVES. These programs may impact affordability calculations and need to be properly structured to manage this impact.
- NOTE: IRS 4980H[b] PENALTIES. An ALE’s potential penalty exposure for unaffordable coverage lies with eligible employees who waive coverage. The ACA penalty for unaffordable coverage is not automatic. The IRS 4980H[b] PENALTY is triggered only when an employee who has waived the unaffordable coverage on offer enrolls in a HEALTH INSURANCE MARKETPLACE [also called EXCHANGES] to purchase coverage and benefit from a FEDERAL PREMIUM TAX CREDIT [FPTC], lowering their monthly payments. Employees enrolled even in unaffordable coverage [FORM 1095-C LINE 16, CODE 2C] do not trigger the 4980H[B] PENALTY, because they would not be enrolled in a HEALTH INSURANCE MARKETPLACE with FPTC assistance.
If you have questions regarding AFFORDABILITY calculations and SAFE HARBORS or any other aspect of ACA reporting & compliance for employers, please contact BENEFITSCAPE, the leading ACA specialist. BENEFITSCAPE provides best-in-class ACA services and intelligent ACA_RegTech DIAGNOSTICS to 1000s of employers of all sizes, in all sectors, and on all major HCMs/ACA modules.