.svg)
Health insurance premiums continue to increase, and employers are constantly trying to balance two competing priorities:
How much can the company afford to contribute—and how much can employees reasonably afford to pay?
For some employers, the employee cost isn't simply a benefits strategy question. It's an ACA compliance requirement.
Are You an Applicable Large Employer?
The Affordable Care Act's employer shared responsibility requirements apply to Applicable Large Employers, or ALEs.
Generally, an employer is considered an ALE if it averaged at least 50 full-time employees, including full-time-equivalent employees, during the previous calendar year.
For ACA purposes, a full-time employee generally works an average of at least 30 hours per week or 130 hours per month.
Part-time employee hours are also included when calculating full-time equivalents to determine whether an employer reaches the ALE threshold.
You might have a majority of part time employees, but if their hours are enough, they could bump you into the ALE status. If your organization is approaching 50 employees, determining ALE status should be part of your annual benefits compliance review.
What Does "Affordable" Actually Mean?
For plan years beginning in 2026, the ACA affordability percentage is 9.96%. Technically, affordability is based on an employee's household income.
There's an obvious problem with that: Employers don't know their employees' total household income. An employee may have a working spouse, investment income, or other household income the employer has no way of knowing about.
That's why the IRS provides three affordability safe harbors employers can use instead.
The Three ACA Affordability Safe Harbors
Since it is nearly impossible to know the exact household income for each employee, the federal government has three "safe" options when calculating affordability.
1. W-2 Safe Harbor
This method uses the employee's Box 1 W-2 wages.
The employee's contribution for self-only coverage is compared with the affordability percentage of those wages. This method can work well for employees with relatively consistent annual earnings, but because the final W-2 amount isn't known until the end of the year, it can require careful planning and monitoring.
2. Rate of Pay Safe Harbor
The rate of pay method uses an employee's hourly rate or monthly salary to determine affordability. For hourly employees, the calculation generally uses the employee's hourly rate multiplied by 130 hours per month.
This can be particularly useful for employers with hourly workforces because affordability can be evaluated using information already available through payroll.
3. Federal Poverty Line Safe Harbor
The Federal Poverty Line, or FPL, safe harbor is often the simplest to administer. Instead of calculating affordability separately based on each employee's wages, the employer uses the applicable federal poverty level for a single individual.
This creates one maximum employee contribution that can generally be applied across the workforce.
The tradeoff?
Because the calculation isn't based on each employee's actual earnings, it may mean the employer contributes more toward coverage than would be necessary using another safe harbor. Simpler isn't always the least expensive.
Which Medical Plan Has to Be Affordable?
If you offer multiple medical plans, not every plan has to meet the affordability threshold.
Affordability is generally measured using the employee's cost for the lowest-cost self-only coverage available to that employee that provides minimum value. That creates opportunities for employers to design their benefits strategically.
For example, an employer might offer:
- A lower-cost base medical plan designed to meet ACA affordability requirements.
- One or more richer buy-up options for employees who want broader benefits or lower out-of-pocket costs.
The employer can structure its contribution around the base plan while allowing employees to pay the additional premium for richer coverage.
What Happens If Coverage Isn't Affordable?
ACA penalties can be significant.
There are two primary Employer Shared Responsibility Payments.
The first can apply when an ALE fails to offer Minimum Essential Coverage to full-time employees and their dependent children and at least one full-time employee receives a Marketplace premium tax credit.
A second penalty can apply when the employer offers coverage to enough employees to avoid the first penalty, but an individual full-time employee receives a Marketplace premium tax credit because the coverage offered to that employee was unaffordable or did not provide minimum value.
For 2026, these penalties can amount to thousands of dollars per affected employee. That's why affordability shouldn't be something employers only track at the end of the year when ACA reporting is completed. By then, it's too late.
Track Affordability Throughout the Year
ACA affordability should be part of the benefits strategy before the plan year begins—and monitored as employee circumstances change.
Employers should have a process for tracking:
- Employee eligibility and full-time status
- Employee contribution amounts
- Wage or rate-of-pay changes
- Which affordability safe harbor is being used
- Medical plans available to each employee class
- Offers of coverage
- Enrollment and waiver information
Payroll, benefits administration systems like Employee Navigator, and ACA reporting systems can help automate much of this process, but employers still need to understand what is being tracked and why.
Affordability Is Also a Benefits Strategy
Even when an employer satisfies the technical ACA requirements, there's another question worth asking:
Can our employees actually afford the coverage we're offering?
Compliance establishes a minimum standard but a strong benefits strategy goes further by considering the employer's budget, employee wages, recruiting needs, plan design, and the actual payroll deductions employees will experience.
- Sometimes the solution is increasing the employer contribution.
- Sometimes it's introducing a lower-cost base plan.
- Sometimes it's offering multiple medical plans so employees have a choice.
- And sometimes it requires looking at a different funding or plan strategy altogether.
The right answer depends on the organization. Learn more about how to determine contribution strategies in our blog post here.
At Royal Benefits, we help employers evaluate ACA affordability alongside plan design, contribution strategy, employee eligibility, and overall benefits costs. The goal isn't simply to check a compliance box—it's to build a strategy that meets employer requirements while providing coverage employees can realistically use and afford.
.svg)
