Determining ICHRA affordability in 2027

If you're an applicable large employer (ALE) with 50 or more full-time equivalent employees (FTEs), your organization faces more benefits regulations than a small business. This is especially true when it comes to offering health insurance coverage.

One rule ALEs must follow is the ACA's affordability requirement. The rule ensures that employer-sponsored coverage is affordable to full-time employees. Recently, the IRS updated the affordability percentage, affecting how much employers must contribute to eligible employees’ health coverage.

This affordability rate applies to employers offering traditional group health insurance. However, it also applies to those offering a CHOICE Arrangement, formerly known as an individual coverage health reimbursement arrangement (ICHRA).

What to know:

• The ACA affordability threshold for applicable large employers (ALEs) increases to 10.22% in 2027, up from 9.96% in 2026.
• Employers can use safe harbors to determine employee income. For example, for 2027, the federal poverty level (FPL) safe harbor limits employee contributions for self-only coverage to $135.93 per month.
• Employers can determine CHOICE Arrangement affordability by subtracting their monthly contribution from the lowest-cost silver plan premium and comparing the remaining cost with the applicable affordability limit. Organizations may need to increase employer contributions to avoid ACA penalties.

What is the affordability requirement?

The Affordable Care Act's (ACA) affordability rule sets the highest percentage of an employee's household income they can pay for their monthly premium and still be considered affordable. The rule bases this on the least expensive employer-sponsored health plan that meets minimum value and minimum essential coverage (MEC).

The rule ensures that employees have access to affordable health coverage through their employer. Under IRS Rev. Proc. 2026-26, the affordability standard is 10.22% in 2027.¹ So, for a plan to be considered “affordable,” employees can't be expected to pay more than 10.22% of their household income for their health coverage.

Employers won’t know their employees' household income, so the ACA established “safe harbors” as benchmarks. Safe harbors help employers determine if their health plans are affordable.

The most commonly used safe harbors for affordability determination are the federal poverty level (FPL) safe harbor, the W-2 wages safe harbor, and the rate-of-pay safe harbor:

• The FPL safe harbor gives employers a maximum premium amount for employee contributions for that year. For 2027, the FPL safe harbor requires an employee to pay no more than $135.93 per month for self-only coverage to be affordable.
  • This is the hourly rate multiplied by 130 hours per month as of the first day of the plan year or, for salaried employees, 10.22% of the monthly salary as of the first day of the 2027 coverage period.
• The Rate of Pay Safe Harbor determines affordability based on an employee's wages. For hourly employees, employers multiply the employee's hourly rate by 130 hours per month and then by 10.22%. For salaried employees, employers multiply their monthly salary by 10.22%.
  
• The Form W-2 Safe Harbor determines affordability using an employee's annual wages reported in Box 1 of their Form W-2. Employers divide the employee's annual W-2 wages by 12 and multiply the result by 10.22% to calculate the monthly affordability limit.

As long as employers can show that they used a safe harbor and their benefit is affordable, they aren't subject to the employer mandate penalty for unaffordable coverage.

What changes did the IRS make to the affordability requirement for 2027?

While the affordability requirement for 2026 was 9.96%, the IRS raised it to 10.22% for 2027. That means the IRS expects employees to contribute more than in 2026. Employers don't need to offer as large a share of an employer-sponsored health plan to be considered affordable.

For example, this changed the FPL safe harbor amount from $129.90 per month for the employee's maximum contribution to a monthly health insurance premium to around $135.93 for the mainland U.S.

As long as employees don't pay more than $135.93 per month in premiums in 2027, the plan is affordable under the ACA's standards when using that safe harbor.

If you have non-calendar year health benefits, you'll continue to use the 9.96% affordability threshold to determine affordability in 2026 until your new plan year starts.

ACA affordability percentages by plan year:

What does the IRS raising the affordability requirement mean for my organization?

For your plan to be considered affordable in 2027, you'll need to ensure that your plan doesn't require any of your employees to pay more than 10.22% of their annual household income.

You can calculate affordability based on your employee's rate of pay, W-2 wages, or use the FPL safe harbor.

How to calculate ICHRA affordability

To be considered affordable under the ruling, an employee's health insurance cost must be no more than 10.22% of the employee’s household income. You'll use the lowest-cost silver plan on the local exchange as the standard for the calculation. You'll also subtract an employer’s ICHRA contributions from the premium.

That means the monthly premium for the lowest-cost silver plan, minus the ICHRA monthly allowance being offered, shouldn't exceed 10.22% of the employee’s household income for the month. If this requirement is met, the CHOICE Arrangement is considered affordable.

Let’s take a look at the calculation.

Formula:

Household income * .1022 = X

X/12 = Y

Lowest-cost silver plan - Y = minimum affordable ICHRA monthly allowance

Example:

Derrick, an employee at Big Build Construction, has a household income of $45,000. His employer is offering a CHOICE Arrangement. The lowest-cost silver plan in his area is $550. The calculation for affordability in this case is:

$45,000 * .1022= $4,599

$4,599 / 12 = $383.25

$550 - $383.25 = $166.75

In this scenario, the lowest affordable employer-funded allowance for the employee is $166.75. A monthly contribution of this amount or higher is considered affordable for the plan year.

This formula can be used to calculate the affordability of any allowances your company is considering for a specific employee class.

What are my options if my health plan is no longer considered affordable?

IRS Rev. Proc. 2026-22 raises the penalty amounts for employers that fail to comply with the employer shared responsibility provisions (ESRP) of the Patient Protection and ACA². More commonly, this is known as the employer mandate.

If your current employer-sponsored health plan will no longer be considered affordable for your employees in 2027, you have two options:

1. Play. Increase your employer contributions so the plan meets the new affordability requirements.
2. Pay. Potentially pay a penalty for not offering an affordable plan.

Let's go over each in more detail.

Play

If you choose to “play,” then you'll adjust your contributions for the lowest-cost, self-only plan for the 2027 year until your employees are no longer paying more than 10.22% of their household income.

This is your best option if you can afford to increase your contributions. This helps you avoid any potential penalties for not offering affordable coverage.

Pay

If you choose to “pay,” then you'll simply offer an unaffordable plan. You may have to pay the penalty for failing to offer your full-time workers with MEC that meets affordability and minimum value thresholds.

However, not all ALEs face penalties for not offering affordable coverage. While any organization with 50 or more FTEs has ALE status, the IRS penalizes only organizations with more than 30 full-time employees — not FTEs. To trigger the penalty, at least one employee must receive a federal tax credit for their health insurance.

So if you have 30 or fewer full-time employees, you can continue offering your current plan, even if it's considered unaffordable in 2027.

However, if you do have more than 30 full-time employees, you may have to pay a penalty.

There are two penalties, also known as employer shared-responsibility payments (ESRP), enforced by the IRS:

1. The Section 4980H(a) penalty, or the A penalty:
1. This applies when an ALE doesn't offer MEC to at least 95% of its full-time employees in any given calendar month. To trigger it, at least one full-time employee must receive a premium tax credit to help pay for coverage through a public exchange, such as a state-run portal or the federal Health Insurance Marketplace.
2. The 2027 A penalty is $315 per month ($3,780 annualized), multiplied by all full-time employees, not FTEs, minus the first 30.
2. The Section 4980H(b) penalty, or the B penalty:
1. This applies when an ALE offers coverage to at least 95% of full-time employees, but each full-time employee was not offered an affordable, minimum-value option. The penalty is triggered when a full-time employee of an ALE declines an offer of noncompliant coverage and instead enrolls in subsidized coverage on the ACA marketplace exchange.
2. The 2027 B penalty is $472.50 per month ($5,670 annualized) for each full-time employee who receives a premium tax credit and uses it to buy subsidized coverage on the ACA marketplace exchange.

Conclusion

For ALEs, paying attention to changes like these is essential to ensure you offer an affordable plan and avoid hefty penalties. If you're looking to offer affordable, individualized health benefits, such as a CHOICE Arrangement, PeopleKeep by Remodel Health can help you stay on top of the regulations that affect your health plan coverage, so you can always provide compliant coverage for your employees.

This blog post was originally published on September 29, 2020. It was last updated on November 3, 2026.

References

1. IRS Revenue Procedure 2026-26
2. IRS Revenue Procedure 2026-22