What is the affordability safe harbor?
The affordability safe harbor is the method an applicable large employer (ALE) uses to show its health coverage is affordable without knowing each employee’s household income. ALEs, generally employers with 50 or more full-time employees including full-time equivalents, must offer full-time employees coverage that is affordable and provides minimum value, or risk a payment under section 4980H of the Internal Revenue Code.
Under the law, coverage is affordable if the employee’s required contribution for the lowest cost self-only coverage that provides minimum value does not exceed a set percentage of household income. Employers don’t know household income, so the regulations give them three stand-ins: Form W-2 wages, rate of pay and the federal poverty line. If the employee’s cost stays under the percentage of the stand-in the employer chose, no 4980H(b) payment applies for that employee, even if the coverage turns out to be unaffordable for that employee’s household.
Two rules apply to all three safe harbors:
- Only the cheapest plan counts. The test looks at the employee’s cost for the lowest cost self-only option that provides minimum value, not the plan the employee picks and not family coverage.
- Uniform use. An employer can use different safe harbors for reasonable categories of employees, such as hourly and salaried staff or different locations, but must apply them uniformly and consistently within each category. Naming individual employees is not a reasonable category.
What is the affordability percentage by year?
The affordability percentage is 9.96% for 2026 and 10.22% for 2027. It starts at 9.5% in the law and is indexed every year by IRS revenue procedure. It applies to plan years beginning in that calendar year.
| Plan years beginning in | Affordability percentage | IRS source |
|---|---|---|
| 2024 | 8.39% | Rev. Proc. 2023-29 |
| 2025 | 9.02% | Rev. Proc. 2024-35 |
| 2026 | 9.96% | Rev. Proc. 2025-25 |
| 2027 | 10.22% | Rev. Proc. 2026-26 |
The jump for 2026 came from a change in method. Starting with 2026, HHS measures premium growth using individual market premiums as well as employer coverage premiums, and the IRS adopted that measure in Rev. Proc. 2025-25. The IRS used the same measure for 2027.
A higher percentage gives employers more room. The ceiling on what an employee can be charged for the cheapest self-only plan moves up, so an employer may be able to hold its contribution steady, or shift slightly more of the premium to employees, and still pass. That only helps if the math is redone each year against the new figure.
A non-calendar plan year keeps its percentage until its next plan year starts. A plan year that began April 1, 2026 uses 9.96% through March 31, 2027, then 10.22%.
What are the three safe harbors and how does each work?
The three safe harbors are Form W-2 wages, rate of pay and the federal poverty line, and each sets a different income measure. The employer multiplies that measure by the year’s percentage and compares the result to the employee’s cost for the lowest cost self-only coverage that provides minimum value.
| Safe harbor | Income measure | Monthly test | Line 16 code |
|---|---|---|---|
| Form W-2 | Box 1 wages from the employee’s Form W-2 for the year | Employee cost is at or below the percentage of W-2 wages, divided across the months coverage was offered | 2F |
| Rate of pay | Hourly employees: 130 hours times the lower of the hourly rate on the first day of the coverage period or the lowest hourly rate in the month. Salaried employees: monthly salary on the first day of the coverage period | Employee cost for the month is at or below the percentage of that amount | 2H |
| Federal poverty line | The federal poverty line for a single person, divided by 12 | Employee cost for the month is at or below the percentage of that amount | 2G |
Form W-2 safe harbor
The Form W-2 safe harbor uses Box 1 wages for the calendar year. The employee’s contribution must stay a consistent amount or percentage all year. If coverage was offered for only part of the year, wages are multiplied by the months coverage was offered over the months employed. Its weakness is timing: Box 1 is known only after the year ends, and pre-tax deductions such as 401(k) deferrals and Section 125 contributions lower Box 1, so an employer has to build in a cushion.
Rate of pay safe harbor
The rate of pay safe harbor tests each month. For hourly employees it assumes 130 hours a month, so it works no matter how many hours the employee actually worked, but a pay cut during the month lowers the test. For salaried employees it uses monthly salary, and the safe harbor is lost if the salary is reduced, including through a cut in hours.
Federal poverty line safe harbor
The federal poverty line (FPL) safe harbor uses one number for everyone, so an employer that keeps the cheapest plan under it passes for every employee regardless of pay. It is the most protective safe harbor and sets the lowest ceiling.
Which poverty line applies each year?
An employer may use any HHS poverty guideline in effect within six months before the first day of the plan year. HHS publishes new guidelines each January, after a calendar year plan has started, so a January 1 plan uses the prior year’s figure. A plan year starting from January through June can use the prior year’s figure. Plan years starting later in the year generally use the current year’s figure.
The regulation applies the poverty line for the state where the employee works, and Alaska and Hawaii have higher guidelines. The Form 1095-C instructions for the qualifying offer method refer to the mainland figure, so check which rule a given reporting choice relies on.
Maximum monthly employee cost under the FPL safe harbor for a calendar year plan, rounded down to the cent:
| Plan year | Percentage | Poverty guideline used | 48 states and DC | Alaska | Hawaii |
|---|---|---|---|---|---|
| 2024 | 8.39% | 2023: $14,580 / $18,210 / $16,770 | $101.93 | $127.31 | $117.25 |
| 2025 | 9.02% | 2024: $15,060 / $18,810 / $17,310 | $113.20 | $141.38 | $130.11 |
| 2026 | 9.96% | 2025: $15,650 / $19,550 / $17,990 | $129.89 | $162.26 | $149.31 |
| 2027 | 10.22% | 2026: $15,960 / $19,950 / $18,360 | $135.92 | $169.90 | $156.36 |
The 2026 guidelines were published January 15, 2026. A plan year starting in the second half of 2027 will use the 2027 guidelines, which HHS has not yet published.
Worked examples with 2026 numbers.
These examples use the 2026 percentage of 9.96% and a calendar year plan.
- FPL safe harbor: 9.96% of $15,650 is $1,558.74 a year, or $129.89 a month. If the employee cost for the cheapest self-only plan with minimum value is $129.89 a month or less, the offer passes for every full-time employee in the 48 states and DC.
- Rate of pay, hourly: An employee earning $15.00 an hour: 130 hours times $15.00 is $1,950. 9.96% of $1,950 is $194.22, so a monthly cost up to $194.22 passes for that employee. In 2027, at 10.22%, the same wage allows $199.29.
- Form W-2: An employee with $30,000 in Box 1 wages and a full year of coverage offered: 9.96% of $30,000 is $2,988 a year, or $249.00 a month.
The FPL figure is usually the lowest of the three, which is why many employers with hourly or lower-wage staff set the cheapest plan’s cost at or under it.
What are the 4980H penalties by year?
Section 4980H has two payments, and both are indexed every year.
| Year | 4980H(a), annual per full-time employee | 4980H(a), monthly | 4980H(b), annual per affected employee | 4980H(b), monthly | IRS source |
|---|---|---|---|---|---|
| 2024 | $2,970 | $247.50 | $4,460 | $371.67 | Rev. Proc. 2023-17 |
| 2025 | $2,900 | $241.67 | $4,350 | $362.50 | Rev. Proc. 2024-14 |
| 2026 | $3,340 | $278.33 | $5,010 | $417.50 | Rev. Proc. 2025-26 |
| 2027 | $3,780 | $315.00 | $5,670 | $472.50 | Rev. Proc. 2026-22 |
- 4980H(a), the “A” penalty: applies when an ALE does not offer minimum essential coverage to at least 95% of full-time employees and their dependents, and at least one full-time employee receives a premium tax credit. It is figured on all full-time employees minus the first 30. For an employer with 100 full-time employees all year in 2026, that is 70 times $3,340, or $233,800.
- 4980H(b), the “B” penalty: applies when the ALE makes the offer, but the coverage is not affordable or does not provide minimum value, and a full-time employee receives a premium tax credit. It is figured only for those employees, and it can never exceed what the A penalty would have been.
Both are assessed monthly and neither is deductible. The IRS proposes them in a Letter 226-J. Under the Employer Reporting Improvement Act (Pub. L. 118-168), employers have at least 90 days to respond to that letter, and the IRS has six years from the Form 1094-C and 1095-C due date (or the filing date, if later) to assess a payment.
How do you report the safe harbor on line 16?
An employer reports the safe harbor it used on line 16 of Form 1095-C, employee by employee and month by month.
| Code | Meaning | Rule |
|---|---|---|
| 2F | Form W-2 safe harbor | Must be used for every month of the year in which the employee was offered coverage |
| 2G | Federal poverty line safe harbor | Can be used for any month or months |
| 2H | Rate of pay safe harbor | Can be used for any month or months |
Two rules from the IRS instructions trip up employers. If the employee enrolled in the coverage for every day of the month, enter code 2C instead of a safe harbor code (with a few exceptions, such as COBRA months). And do not enter a safe harbor code for any month the employer did not offer coverage to at least 95% of its full-time employees and their dependents. For how Form 1095-C differs from Form 1095-B, see 1095-B vs. 1095-C.
What is the minimum value 60% rule?
The minimum value rule is the other half of the test: the lowest cost plan used in the safe harbor must also provide minimum value, meaning it must pay at least 60% of the total cost of benefits for a standard population and include substantial coverage of inpatient hospital and physician services. A plan that is cheap for employees but fails minimum value does not protect the employer from the B penalty.
What to check before each renewal.
- Rerun the math against the new percentage for the plan year that is starting, not the one ending.
- Confirm which plan is the lowest cost self-only option with minimum value. A plan design change at renewal can change which plan that is.
- Pick the safe harbor for each employee category and apply it uniformly.
- Get current wage data from payroll. Rate of pay and W-2 tests depend on it, and a mid-year pay cut can break the rate of pay test.
- Match the line 16 codes to the safe harbor actually used, so your Form 1095-C supports your position if a Letter 226-J arrives.
Ethos Benefits runs this check with clients as part of its ACA compliance work.