Under the ACA’s “pay-or-play” rules, applicable large employers must offer full-time employees affordable, minimum value health coverage or face potential penalties.
Coverage is considered affordable if the employee’s share of the premium does not exceed the IRS’s applicable affordability percentage of household income. Because employers typically do not know household income, the IRS provides three optional safe harbors based on employer-available data. Before each plan year, employers should confirm that at least one plan option meets the affordability standard using one or more of these safe harbors. Here are some common affordability mistakes to avoid.
1. Mistake: Offering Affordable Health Coverage Only to Employees Working 40 or More Hours Per Week
Applicable Large Employers (ALE) can face IRS penalties if they don’t offer affordable, minimum-value health coverage to all full-time employees as defined by the ACA, those averaging at least 30 hours per week or 130 hours per month. To help stay compliant with pay-or-play rules, the IRS offers two approved methods to determine full-time status: the monthly measurement method (reviewing 130 hours each month) and the look-back measurement method (using a prior “measurement period” to set status for a future “stability period”).
2. Mistake: Applying the Affordability Test to All Health Plan Coverage Tiers
Under ACA rules, affordability is based only on the cost of employee-only coverage. Coverage is considered affordable if the employee’s share of the lowest-cost self-only plan that provides minimum value is no more than 9.5% of their W-2 wages, rate of pay, or the federal poverty level (FPL) for a single individual, other tiers like self-plus-one or family are not used in this test.
Example: In 2026, an ALE offers self-only coverage at $200/month, self-plus-one at $300, and family at $400. An employee earning $20/hour elects self-plus-one. Using the rate-of-pay safe harbor, affordability is based on self-only coverage: ($20 x 130 hours) x 9.96% = $259. Because $200 is less than $259, the coverage is affordable under pay-or-play.
The affordability test for the ACA premium tax credit (PTC) is different. For PTC eligibility, family affordability is based on the cost of covering the employee plus family members. These PTC rules do not change how affordability is determined under the employer pay-or-play rules, which look only at employee-only coverage.
3. Mistake: Applying the Affordability Test to Every Health Plan Option Offered by the ALE
An employer that offers more than one health coverage option to its full-time employees satisfies the ACA’s affordability test if the lowest-cost option that provides minimum value is affordable. While some employers offer only a single health plan option, many employers offer multiple health plan options. When an ALE offers more than one health plan option to its full-time employees, only one of the options needs to satisfy the ACA’s affordability threshold.
Example: An ALE offers the following three health plan options to its full-time employees (all providing minimum value):
- Option A has the lowest deductible and a monthly premium of $400 for employee-only coverage.
- Option B has the next lowest deductible and a monthly premium of $250 for employee-only coverage.
- Option C has the highest deductible and a monthly premium of $100 for employee-only coverage.
To avoid penalties under the ACA’s pay-or-play rules, only one of these options is required to satisfy the ACA’s affordability threshold. Thus, if Option C is considered affordable for the ALE’s full-time employees, employee contributions for Options A and B can exceed the ACA’s affordability percentage without triggering penalties.
However, the affordable option must actually be offered to full-time employees. If a full-time employee is not eligible for the affordable option (e.g., because they live outside the coverage area), the ALE would need to provide another affordable option for that employee to avoid potential penalties.
4. Mistake: Basing the Form W-2 Safe Harbor on Employee Salary (Not Taxable Compensation)
The Form W-2 safe harbor measures affordability after the year ends by using each employee’s Box 1 W-2 wages (taxable pay minus pretax deductions). Because wages can change during the year, this method is less predictable and works best when annual compensation is relatively stable. The W-2 safe harbor can help maximize employee contributions based on actual earnings, though the rate-of-pay and FPL safe harbors generally offer more certainty.
5. Mistake: Not Knowing When to Include Health Plan Opt-out Payments in Affordability Calculation
Some employers offer taxable “opt-out” cash to employees who waive the group health plan, often targeting employees who can enroll in a spouse’s coverage. The IRS generally treats these payments as increasing the employee’s required contribution, which can make coverage fail the ACA affordability test. For instance, if self-only coverage costs $200 per month and the employee can receive $100 per month for waiving coverage, the required contribution is considered $300 for affordability purposes. However, if the employer uses a conditional “eligible opt-out arrangement,” available only when employees decline employer coverage and show that they and their tax dependents have other minimum essential coverage (not individual market coverage), the opt-out payments are not added to the affordability calculation.
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Links and Resources
IRS final regulations on the ACA’s pay or play rules
IRS final regulations addressing wellness program incentives and affordability
IRS Notice 2015-87 and proposed regulations addressing opt-out payments and affordability
