The IRS has released updated Affordable Care Act (ACA) guidance for 2027, alongside a clear message to employers: enforcement is fully active. Penalty letters are already hitting mailboxes for prior tax years, making now the time for Applicable Large Employers (ALEs) to review their health plan strategies, affordability calculations, and reporting protocols.
Below is a breakdown of the 2027 Section 4980H penalty rates, the updated affordability percentage, and what this means for your organization.
2027 ACA Numbers at a Glance
Metric
2026
2027
Affordability Threshold
9.96%
10.22%
§4980H(a) Penalty (Annual / Monthly)
$3,680 / $306.67
$3,780 / $315.00
§4980H(b) Penalty (Annual / Monthly)
$5,520 / $460.00
$5,670 / $472.50
IRS Enforcement Alert: Letters 5699 and 226J Are Out
The IRS is actively issuing compliance notices for the 2024 tax year:
Letter 5699: Issued to employers the IRS believes were ALEs but failed to file Forms 1094-C and 1095-C.
Letter 226J: Proposed employer shared responsibility penalty assessments sent to ALEs where at least one full-time employee received a premium tax credit for Marketplace coverage.
If your organization receives one of these notices, pay close attention to response deadlines. Resolving coding errors on Form 1095-C or proving coverage offers early can prevent substantial proposed assessments from converting into final bills.
The 2027 Affordability Cap Rises to 10.22%
Under Section 4980H(b), an ALE’s lowest-cost, single-only minimum value plan cannot exceed a set percentage of an employee’s household income. For plan years beginning in 2027, that cap rises to 10.22% (up from 9.96% in 2026).
What This Means for Employers
Slightly Higher Premium Shares: You can charge full-time employees slightly more for self-only coverage in 2027 without triggering an affordability penalty.
Plan Year Timing Matters: The threshold applies based on when your plan year begins.
Example: A plan year running July 1, 2026 – June 30, 2027 uses the 9.96% rate. The 10.22% rate takes effect for the plan year starting July 1, 2027.
Safe Harbors Remain Essential: Because employers rarely know an employee’s total household income, you should continue setting payroll contributions using one of three IRS affordability safe harbors:
Federal Poverty Level (FPL)
Rate of Pay
Form W-2 (Box 1)
Section 4980H Penalties: Understanding the Risks
To avoid Employer Shared Responsibility Payments (ESRP), ALEs—defined as employers with 50 or more full-time equivalent employees (FTEs)—must offer affordable, minimum value coverage to full-time employees and minimum essential coverage (MEC) to their dependent children (spousal coverage is not required under ACA rules).
Note for Small Employers: Businesses with fewer than 50 FTEs are exempt from Section 4980H rules, do not need to use the ACA’s 30-hour full-time definition, and are not subject to affordability caps or reporting requirements.
Penalty A: The “Hammer” Penalty (§4980H(a))
Triggered if an ALE fails to offer Minimum Essential Coverage (MEC) to at least 95% of its full-time employees (and their dependents) in any calendar month, and at least one full-time employee enrolls in subsidized Marketplace coverage.
2027 Rate:$315 per month ($3,780 annualized) multiplied by all full-time employees (minus the first 30 across the controlled group).
The Risk: This penalty applies to your entire full-time workforce headcount—not just the employees who were missed or who enrolled in Marketplace coverage.
Monthly Penalty A = (Total Full-Time Employees – 30) x $315
Penalty B: The Unaffordable / Inadequate Coverage Penalty (§4980H(b))
Triggered if an ALE satisfies Penalty A (offers coverage to 95%+ of full-time staff), but the coverage offered to a specific full-time employee is unaffordable or fails to provide minimum value (less than 60% actuarial value)—and that employee receives a Marketplace tax subsidy.
2027 Rate:$472.50 per month ($5,670 annualized) per impacted employee.
The Risk: Unlike Penalty A, Penalty B is capped at what Penalty A would have cost for that month, protecting employers from exceeding the overall workforce penalty limit.
Action Items for HR and Benefits Teams
Review 2027 Contributions: Use the new 10.22% threshold along with your preferred safe harbor (FPL, Rate of Pay, or W-2) to set 2027 employee contribution tiers.
Audit FTE Classifications: Verify that variable-hour and part-time staff who cross the 30-hour/week threshold are correctly identified and offered coverage within required administrative periods.
Respond Promptly to IRS Notices: If you receive a Letter 5699 or Letter 226J for 2024, coordinate immediately with your tax advisor or ACA compliance vendor to gather enrollment documentation and contest inaccuracies.
