What Is the 1095-C Employee Required Contribution?

On Form 1095-C, the employee required contribution is the monthly dollar amount a full-time employee would pay out of pocket for the cheapest self-only health plan the employer offers that meets the ACA’s Minimum Value standard. It goes on Line 15, reported to the cent, and for plan years beginning in 2026 it cannot exceed 9.96% of the employee’s income (measured through one of three safe harbors) for the coverage to count as affordable.¹ Miss the calculation and the penalty runs $5,010 per affected employee.

What the Number Actually Represents

The contribution isolates one figure and one figure only: the employee’s share of the monthly premium for the lowest-cost self-only plan that provides Minimum Value. A plan meets Minimum Value when it covers at least 60% of the total expected cost of covered benefits.²

What the employee actually paid does not matter here. If your employee enrolled in family coverage, picked a richer plan, or declined coverage entirely, Line 15 still reflects the cost of the cheapest qualifying self-only option. This is the most common source of reporting errors: employers pull the premium the employee is actually paying, and that’s the wrong number.

If premiums are deducted on a schedule other than monthly, convert. For bi-weekly payroll deductions, multiply by 26 and divide by 12. For semi-monthly, multiply by 24 and divide by 12. Enter the result on Line 15 with no dollar signs and no commas.³ When qualifying coverage costs the employee nothing, enter “0.00” — a blank Line 15 means no Minimum Value plan was offered at all, which is a different statement.

The 2026 Affordability Percentage

For plan years beginning in 2026, coverage is affordable if the employee required contribution does not exceed 9.96% of the employee’s income.¹ The statutory base is 9.5%, indexed annually under Section 36B for premium growth.⁴ The 2026 figure sits well above the percentages of a few years ago, so employers who set contribution levels against older thresholds have more room now than they did then.

The percentage matters for two reasons at once. It’s the standard the IRS uses to test whether the coverage the employer offered was affordable, and it’s the standard the IRS uses to determine whether the employee qualified for a premium tax credit on the marketplace. When the required contribution exceeds 9.96% of the employee’s income, they can get subsidized marketplace coverage, and the employer faces a potential penalty for each employee who does.

The Three Safe Harbors

The statute measures affordability against household income, but employers almost never know their employees’ household income. So the IRS created three safe harbors that let employers test affordability using income proxies they do have.² Successfully using any one of them protects the employer from a penalty for unaffordable coverage, even if the employee’s actual household income would have produced a different answer. You identify which one you used through a code on Line 16 of the form.

W-2 Wages (Code 2F)

The W-2 method compares the annual employee required contribution against the employee’s Box 1 wages. For 2026, the contribution cannot exceed 9.96% of those wages. Because Box 1 isn’t final until the W-2 is prepared, this is a backward-looking test rather than a planning tool. If you use it for an employee, you must apply it for every month of the calendar year the employee was offered coverage.⁵

Rate of Pay (Code 2H)

For hourly employees, multiply the lowest hourly rate in the month by 130 hours to get a monthly income floor, then test whether the contribution stays within 9.96% of that. If the rate changes during the month, use the lowest. For salaried employees, use the monthly salary. The 130-hour floor makes this safe harbor useful for workforces where hours fluctuate, because the calculation stabilizes regardless of how many hours the employee actually worked.

Federal Poverty Line (Code 2G)

The FPL method uses the annual poverty line for a single individual, applied as of the first day of the plan year. For calendar-year plans beginning January 1, 2026, the applicable FPL is $15,650, which produces a maximum monthly contribution of $129.90 (9.96% × $15,650 ÷ 12).¹ This is the simplest to administer because every employee gets the same number, and it doesn’t require tracking wages or hours. It also sets the lowest maximum, so some employers can’t use it without cutting what they charge.

Opt-Out Payments and Flex Credits

Opt-out payments trip up more employers than any other piece of the calculation. When an employer offers cash to employees who waive coverage, the IRS treats an unconditional opt-out payment as an increase to the employee required contribution.⁶ If the employee’s premium share is $150 per month and the employer offers $100 to opt out, the IRS treats the required contribution as $250.

A narrow exception exists. If the opt-out is paid only when the employee provides reasonable evidence of alternative coverage other than individual marketplace coverage — Medicare, TRICARE, Medicaid, CHIP, or another employer’s plan — the payment stays out of the affordability math. The employee’s attestation of alternative coverage counts as reasonable evidence, collected each plan year. The same principle covers wellness incentives and flex credits: if they can reduce what the employee pays for the plan, they factor into the contribution figure.

How Lines 14, 15, and 16 Work Together

Part II of Form 1095-C uses three lines to describe the coverage offer for each month.⁷

Line 14 identifies what was offered. Code 1B means Minimum Value coverage offered to the employee only. Code 1E means Minimum Value coverage offered to the employee, with at least minimum essential coverage extended to spouse and dependents.⁵ The Line 14 code drives whether Line 15 needs an entry. No Minimum Value plan offered, no Line 15 amount.

Line 15 carries the monthly required contribution. Same amount for the whole year? Use the “All 12 Months” box. Different amounts across months? Enter each month separately.³

Line 16 identifies the safe harbor. Code 2F for W-2, Code 2G for federal poverty line, Code 2H for rate of pay. This line is the employer’s specific defense against a penalty for unaffordable coverage. Incorrect code, undermined defense — even if the underlying math was right.⁵

What It Costs to Get This Wrong

Section 4980H has two penalties, and they operate independently.

The 4980H(a) penalty applies when an applicable large employer (50 or more full-time employees, including full-time equivalents) fails to offer minimum essential coverage to at least 95% of its full-time workforce and at least one employee receives a premium tax credit. For 2026, the penalty is $3,340 per full-time employee, assessed monthly at one-twelfth of that amount, with the first 30 employees subtracted before the math runs.⁸

The 4980H(b) penalty is the one tied directly to the required contribution figure. If the employer does offer coverage but it fails Minimum Value or fails affordability, the penalty is $5,010 for 2026 per affected employee who actually receives a premium tax credit. Unlike the (a) penalty, this one is limited to the employees who went to the marketplace and got subsidized, not the full workforce.⁸

If the IRS Sends Letter 226-J

The IRS doesn’t assess these penalties in real time. It cross-references 1094-C and 1095-C filings against the tax returns of employees who claimed premium tax credits, and when the data suggests a penalty is owed, it mails Letter 226-J proposing an amount.⁹

It’s a proposal, not a bill. The employer responds using Form 14764, either agreeing or explaining the disagreement, and marks corrections to specific employees on the attached Form 14765. This is where careful Line 15 and Line 16 reporting earns its keep. An employer with a valid safe harbor code and an accurate contribution amount can point to the form and be done. An employer with sloppy or inconsistent reporting often ends up paying penalties that clean forms would have deflected. The response deadline appears on the letter, and additional time is available if requested before the deadline passes.⁹

1
Internal Revenue Service. Rev. Proc. 2025-25
2
Internal Revenue Service. Minimum Value and Affordability
3
Internal Revenue Service. 2025 Instructions for Forms 1094-C and 1095-C
4
Office of the Law Revision Counsel. 26 USC 36B – Refundable Credit for Coverage Under a Qualified Health Plan
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Internal Revenue Service. Instructions for Forms 1094-C and 1095-C (2025)
6
Internal Revenue Service. Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act
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Internal Revenue Service. About Form 1095-C
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Office of the Law Revision Counsel. 26 USC 4980H – Shared Responsibility for Employers Regarding Health Coverage
9
Internal Revenue Service. Understanding Your Letter 226-J