The Internal Revenue Service has issued Revenue Procedures 2025-25 and 2025-26 to implement the 2026 index adjustments for the “applicable contribution percentages” contained in the Affordable Care Act (“ACA”).
Background. Under the ACA, applicable contribution percentages are used to determine: (i) whether an Applicable Large Employer (“ALE”) is subject to the ACA’s employer shared responsibility penalty for failure to provide full-time employees with “affordable” coverage that has “minimum value;” and (ii) the amount of an eligible taxpayer’s ACA premium tax credit.
NOTE: ALEs are employers that had 50 or more full-time equivalent employees during the preceding calendar year.
The ACA provides that an ALE’s coverage is affordable if the employee’s required contribution for self-only coverage does not exceed a certain percentage of the employee’s “household income” (as determined under IRS guidelines and safe harbors) for the tax year.
The safe harbors are:
- W-2 safe harbor. If the employee’s contribution for single coverage under the employer’s lowest cost medical option does not exceed the applicable percentage of the employee’s Box 1, W-2 salary for that year.
- Rate of pay safe harbor.If the employee’s contribution for single coverage under the employer’s lowest cost medical option does not exceed the applicable percentage of the employee’s monthly wage amount.
- Federal poverty level safe harbor. If the employee’s contribution for single coverage under the employer’s lowest cost medical option does not exceed the applicable percentage of the federal poverty level for a single individual.
Also under the ACA, ALEs are subject to one of two penalties if they fail to comply with the ACA’ s employer shared responsibility provisions.
The first penalty applies when: (i) an employer fails to offer health care coverage to “substantially all” of its full-time employees; and (ii) a low-income, full-time employee receives a premium tax credit through an ACA Marketplace. In those situations, the employer must pay an annual penalty of $2,000 (adjusted for inflation) multiplied by the number of full-time employees (minus the first 30 full-time employees).
The second penalty applies when: (i) an employer offers health care coverage to its full-time employees that is either “unaffordable” or does not provide “minimum value;” and (ii) a low-income, full-time employee receives a premium tax credit through a Marketplace. In such situations, the employer must pay an annual penalty of $3,000 (adjusted for inflation) for each full-time employee who receives the premium tax credit.
Revenue Procedures. Under Revenue Procedure 2025-25, for 2026, the required contribution percentage for ALEs has increased to 9.96% (up from 9.02% for 2025).
Under Revenue Procedure 2025-26, the first ACA penalty rate will be $3,340 (up from $2,900 in 2025) per applicable employee (less the 30-employee reduction). The second penalty rate will be $5,010 (up from $4,350 in 2025) per applicable employee who receives a subsidy annually through a Marketplace. These new rates will be effective for taxable years and plan years beginning after December 31, 2025.
The Revenue Procedures are available at: https://www.irs.gov/pub/irs-drop/rp-25-25.pdf and https://www.irs.gov/pub/irs-drop/rp-25-26.pdf.