2026 ACA Affordability Threshold Rises to 9.96%, What It Means for Service-Based Businesses

The IRS has announced the new Affordable Care Act (ACA) affordability threshold for plan years beginning in 2026, and it’s a big jump. Under Revenue Procedure 2025-25, the threshold will rise to 9.96%, up from 9.02% in 2025.

For employers, particularly in service-based industries where labor costs are high and margins can be slim, this change has important implications for compliance, budgeting, and employee retention.

ACA Affordability Basics

What Is the ACA Affordability Threshold?

Under the ACA, applicable large employers (ALEs), those with 50 or more full-time or full-time equivalent employees, must offer:

• Minimum essential coverage
• Affordable coverage
• Minimum value medical benefits

The affordability threshold determines the maximum percentage of an employee’s household income they can be required to pay for self-only coverage. If the cost exceeds the threshold, the plan is not considered “affordable,” and the employer could face penalties.

4980H Penalties at a Glance

Penalty for Not Offering Minimum Essential Coverage (§4980H(a))

• 2025 rate: $241.67/month ($2,900 annualized) per full-time employee, minus the first 30 employees.
• Triggered if at least one full-time employee isn’t offered coverage and gets subsidized coverage on the Exchange.

Penalty for Not Offering Affordable, Minimum Value Coverage (§4980H(b))

• 2025 rate: $362.50/month ($4,350 annualized) per full-time employee receiving subsidized coverage.
• Applies when coverage is offered but is unaffordable or fails to meet minimum value.

Note: Penalty amounts are indexed annually and could increase for 2026.

Historical ACA Affordability Thresholds

Year	Percentage
2015	9.56%
2016	9.66%
2017	9.69%
2018	9.56%
2019	9.86%
2020	9.78%
2021	9.83%
2022	9.61%
2023	9.12%
2024	8.39%
2025	9.02%
2026	9.96%

Why the 2026 Increase Matters for Service-Based Industries

1. Labor-Intensive Workforces

Industries like hospitality, retail, food service, automotive repair, and personal services often employ large numbers of full-time staff. A higher affordability threshold can give employers more pricing flexibility on health plan contributions without breaching compliance.

2. High Turnover Rates

Service-based industries tend to experience above-average turnover. Non-compliance risks increase when benefits administration isn’t streamlined, particularly when onboarding and offboarding employees quickly.

3. Multiple Pay Structures

Many service industry employers use hourly wages, tips, commissions, or seasonal pay fluctuations. The ACA’s affordability safe harbors (W-2 wages, rate of pay, and federal poverty line) become especially important when setting contribution rates.

Potential Benefits of the Increase

Greater Flexibility in Plan Design

With the threshold rising to 9.96%, employers can set slightly higher employee premium contributions for self-only coverage while still meeting ACA affordability standards.

Reduced Immediate Penalty Risk

A higher threshold could help employers already close to the limit avoid §4980H(b) penalties, especially those offering competitive plans but struggling with premium cost-sharing compliance.

Potential Risks and Considerations

Premium Increases Could Hurt Retention

While compliance might be easier, passing more costs to employees, particularly in lower-wage service roles, could harm recruitment and retention.

Complex Payroll Coordination

For hourly or tipped workers, employers must ensure contribution calculations still align with the chosen ACA safe harbor. Payroll and HR teams need tight integration to avoid miscalculations.

Best Practices for Service-Based Employers in 2026

Review Current Plan Contributions

Assess whether your 2025 rates remain compliant under the new threshold or if you have room to adjust contributions without risking affordability.

Leverage ACA Safe Harbors

Understand and apply the W-2, rate of pay, or federal poverty line safe harbor methods to simplify compliance tracking.

Monitor Workforce Changes

Track employee hours closely, especially for variable-hour workers, to avoid unintentional ACA violations.

Communicate Clearly with Employees

If contribution amounts are changing, communicate early and clearly to maintain trust and minimize turnover.

The Bottom Line

The 2026 ACA affordability threshold increase to 9.96% may give service-based industries more breathing room in benefits pricing, but it’s not a green light to pass costs unchecked onto employees.

With high turnover, complex pay structures, and the constant challenge of compliance, service industry employers should work with benefits advisors who understand ACA rules inside and out.

What Does the ACA Affordability Threshold Mean?

The ACA affordability threshold sets the maximum percentage of an employee’s household income that an Applicable Large Employer (ALE) can charge the employee for self-only coverage under the lowest-cost plan that meets ACA requirements. This is the threshold used to determine whether the employer is offering “affordable” coverage as defined by the IRS, and whether they are at risk for Penalty B under the Employer Shared Responsibility Provisions.

For the 2025 tax year (applicable to coverage offered in 2026), the affordability threshold is 9.96%.

Practical Example: Employee Earning $50,000 per Year

If an employee earns $50,000 annually, the maximum amount that employer-sponsored self-only coverage can cost them to be considered “affordable” under the ACA is calculated as follows:

• 9.96% of $50,000 = $4,980 per year
• $4,980 ÷ 12 months = $415 per month (rounded)

This means an employer can charge the employee up to $415 per month for self-only health insurance coverage and still comply with ACA affordability rules.

This does not include coverage for a spouse or dependents, only the employee’s individual coverage.

What About Dependents?

The affordability threshold applies only to the cost of self-only coverage for the employee.

Employers can charge more for dependent coverage without violating ACA rules. There is currently no ACA penalty for unaffordable spouse or dependent coverage.

Some employers choose to subsidize family coverage to support recruitment and retention, but they are not required to make that coverage affordable under ACA guidelines.

Why Does the Affordability Threshold Change Each Year?

The IRS adjusts the threshold annually based on the relationship between premium growth and wage growth.

• If premiums rise faster than wages, the threshold is typically raised, allowing employers to shift more cost to employees.
• If wages grow faster or economic factors change, the threshold may be lowered to protect employees from excessive health costs.
  

For example:

• In 2023, the threshold was 9.12%
• In 2024, it dropped significantly to 8.39%
• For 2025 (affecting 2026 coverage), it increased sharply to 9.96%
  

These shifts can have a significant impact on both plan design and employer cost-sharing strategy.

Which Is Better: A Lower or Higher Threshold?

It depends on your perspective.

For employees:

• A lower threshold means the employer must cover more of the premium, resulting in lower monthly costs for the employee.
• A higher threshold means employees may be required to pay more, which can reduce plan affordability.
  

For employers:

• A higher threshold gives more flexibility to shift premium costs to employees, helping to control expenses.
• A lower threshold means the employer must contribute more toward coverage to remain compliant, which may increase their financial burden.
  

In short:

• Lower thresholds are better for employees
• Higher thresholds are more favorable for employers
  

Key Takeaway for 2026

Employers must ensure they are not charging more than 9.96% of an employee’s household income for the lowest-cost self-only plan to remain ACA-compliant. This gives employers more flexibility than in prior years, but they should still balance compliance with offering benefits that employees will actually use.

Partner with Parker Insurance to Stay ACA Compliant and Competitive

At Parker Insurance, we help service-based businesses simplify ACA compliance while keeping benefits affordable and attractive to employees. From plan design and contribution strategy to ongoing monitoring and reporting, our team ensures you avoid costly penalties and stay ahead of regulatory changes.

Let’s make your benefits work harder for your business and your people. Contact us today to review your 2026 strategy and keep your coverage compliant, competitive, and cost-effective.