ACA Affordability, Minimum Value, and Employer Coverage Test

Employers with 50 or more full-time employees have to clear three linked hurdles under the ACA’s affordability and minimum value employer coverage test: offer minimum essential coverage to at least 95% of full-time workers and their dependent children, make sure the plan pays for at least 60% of expected medical costs, and keep the employee’s share of the self-only premium at or below 9.96% of income for the 2026 plan year. Fail any one and the IRS can assess a per-employee penalty that is not deductible as a business expense.

Who Has to Run These Tests

The mandate applies to Applicable Large Employers, which the IRS defines as any business that averaged at least 50 full-time employees during the prior calendar year. A full-time employee is anyone averaging 30 hours a week or 130 hours in a calendar month, and part-time workers are converted into full-time equivalents that also count toward the 50-employee threshold.¹

Companies under common ownership are combined for the headcount. If a parent, subsidiaries, and affiliates together clear 50 employees, every entity in the group is an ALE member subject to the mandate, though each member’s penalty liability is calculated separately.¹

There is a narrow seasonal exception. An employer that only crosses the 50-employee line because of seasonal hiring stays outside ALE status if the workforce exceeded 50 for 120 days or fewer during the year and the workers who pushed the count over 50 were seasonal employees. The IRS uses holiday retail staff as its standard example.¹

Test One: Offering Coverage to 95% of Full-Time Employees

Once you are an ALE, minimum essential coverage has to go out to at least 95% of your full-time employees and their dependent children up to age 26. Spouses do not have to be offered coverage to meet the 95% threshold.²

Missing the 95% mark, combined with at least one full-time employee receiving a premium tax credit through the Marketplace, triggers the Section 4980H(a) penalty. The statutory base is $2,000 per full-time employee per year, indexed for inflation; the 2026 adjusted amount is $3,340.³ The penalty applies to the entire full-time workforce minus the first 30 employees, not just those without coverage. An ALE with 200 full-time employees owes on 170 of them, even if most already have coverage through the employer’s plan or elsewhere.²

Test Two: The 60% Minimum Value Standard

The plan you offer has to cover at least 60% of the total allowed costs of the benefits it provides. That 60% figure is the plan’s actuarial value: the insurer picks up at least three-fifths of the tab for covered services.⁴

Getting to 60% through creative benefit design is not enough. Federal regulations require that the plan also include substantial coverage for inpatient hospital services and physician services. A plan that clears the math by loading up on other benefits while skimping on hospitalization and doctor visits still fails.⁵ HHS publishes a Minimum Value Calculator employers can use to test plan designs against the standard.⁴

When a plan comes up short, the Section 4980H(b) penalty applies to each full-time employee who obtains a premium tax credit on the Marketplace. The statutory base is $3,000 per employee per year, indexed for inflation; the 2026 adjusted amount is $5,010. Unlike the (a) penalty, which sweeps in the whole workforce, the (b) penalty only hits employees who actually receive subsidized Marketplace coverage. Both penalties are non-deductible.³

Test Three: 9.96% Affordability for 2026

Coverage is affordable when the employee’s required contribution for the lowest-cost self-only option that meets minimum value does not exceed a set percentage of household income. For the 2026 plan year, that percentage is 9.96%.⁶

The threshold sat at 8.39% for 2024 and 9.02% for 2025 because of enhanced premium tax credits enacted through the Inflation Reduction Act. Those enhanced credits expired on January 1, 2026, which snapped the percentage back up. A higher threshold means employees can be charged more before coverage is deemed unaffordable.⁷

The Three Affordability Safe Harbors

Employers almost never know an employee’s actual household income, so the IRS lets you use one of three substitute measures. Applying any of them shields you from the 4980H(b) penalty for that employee, even if their real household income would make the coverage unaffordable.

W-2 wages. Compare the annual employee contribution for the cheapest self-only, minimum-value option against Box 1 wages on the employee’s W-2. If it does not exceed 9.96% of Box 1 wages, coverage is affordable.⁸
Rate of pay. For hourly workers, multiply the hourly rate at the start of the coverage period by 130 hours for a monthly baseline; for salaried workers, use monthly salary. The monthly premium must stay at or below 9.96% of that figure. A drop in an hourly rate during the year requires recalculation; an increase does not.⁸
Federal poverty line. Coverage is affordable if the monthly contribution does not exceed 9.96% of the federal poverty guideline for a single individual, divided by 12. The 2026 guideline for a one-person household in the 48 contiguous states is $15,960, which puts the monthly premium cap at roughly $132.47. The cap is the same for every employee, which makes this the simplest method to administer.⁹

Variable-Hour Employees and the Look-Back Method

A retail employee who works 35 hours one week and 20 the next does not fit neatly into full-time or part-time. The IRS allows a look-back measurement method for variable-hour, seasonal, and part-time employees instead of a real-time monthly determination.

It has three phases. During a measurement period, typically 12 months, you track the employee’s hours. An average of at least 130 hours per month across that window (1,560 hours over 12 months) classifies the employee as full-time. A short administrative period of up to two months follows for processing and enrollment. Then a stability period, also typically 12 months, locks in the employee’s status regardless of how their hours move.

For new hires with uncertain schedules, an initial measurement period plus an administrative period can total up to 13 months (plus a partial month for a mid-month start) before an offer is required. This is where compliance often breaks down. Skipping or shortening a measurement period, or delaying the offer once a variable-hour employee measures as full-time, can produce a 4980H penalty for every month the offer was late.

ICHRAs as an Alternative

Instead of sponsoring a group health plan, some ALEs use an Individual Coverage Health Reimbursement Arrangement. An ICHRA gives each employee a fixed monthly allowance to buy an individual health insurance policy, including through the Marketplace.

An ICHRA satisfies minimum value automatically as long as it is affordable, but the affordability test works differently. The IRS compares the employer’s ICHRA allowance against the cost of the lowest-cost silver-level Marketplace plan available in the employee’s rating area for self-only coverage. If the allowance is large enough to bring the employee’s remaining premium below 9.96% of household income (or the applicable safe harbor amount), the ICHRA is affordable. HHS publishes lookup tables each year with the lowest-cost silver plan premiums by rating area. An ICHRA still has to be offered to at least 95% of full-time employees and their dependents to avoid the 4980H(a) penalty, just like a group plan.

Reporting and Responding to a Penalty Notice

Every ALE files annual information returns documenting who was offered coverage, what it cost, and which months it was available. The workhorses are Form 1095-C (one for each full-time employee) and Form 1094-C (the transmittal that summarizes the whole workforce).¹⁰

For 2025 coverage, employers either distribute Form 1095-C directly by March 2, 2026, or post a website notice by that date telling employees they can request a copy and then fulfill any request within 30 days. Either way, the forms have to be filed electronically with the IRS by March 31, 2026. Electronic filing is mandatory once you file 10 or more information returns of any type in a year, which sweeps in essentially every ALE. Paper filing when you should have filed electronically carries a $340 penalty per return.¹⁰

When the IRS believes you owe a shared responsibility payment, it sends Letter 226-J. It is a proposed assessment, not a bill, and it includes a breakdown of which employees triggered the penalty and the amount for each month. You have to respond by the date printed on the letter using Form 14764. If you agree, sign, return, and pay. If you disagree, explain the basis and attach corrected data showing that coverage was offered, was affordable, or met minimum value. A tax professional can respond on your behalf under a Form 2848 Power of Attorney specifying the Section 4980H payment for the relevant year.¹¹

Careful coding on Form 1095-C — the offer of coverage, the affordability safe harbor used, and the covered months — is the strongest defense against a wrong penalty notice, because the IRS builds Letter 226-J by matching that data against employee premium tax credit claims.

1
Internal Revenue Service. Determining if an Employer Is an Applicable Large Employer
2
Internal Revenue Service. Employer Shared Responsibility Provisions
3
Office of the Law Revision Counsel. 26 USC 4980H
4
Internal Revenue Service. Minimum Value and Affordability
5
eCFR. 45 CFR 156.145
6
Internal Revenue Service. Rev. Proc. 2025-25
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CMS Agent and Brokers FAQ. How Is Affordability Determined for Offers of Employer-Sponsored Coverage
8
Internal Revenue Service. Questions and Answers on Employer Shared Responsibility Provisions
9
U.S. Department of Health and Human Services. 2026 Poverty Guidelines
10
Internal Revenue Service. Instructions for Forms 1094-C and 1095-C
11
Internal Revenue Service. Understanding Your Letter 226-J