2027 Updates – ACA Employer Mandate

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§4980H penalty amounts and the affordability percentage are available for 2027.

The IRS has begun issuing Letter 5699 (for failure to report) and Letter 226J assessments (with proposed §4980H penalties) for the 2024 tax year.

As the IRS continues to actively enforce the employer shared responsibility payments and associated employer reporting requirements, we are reminded that all applicable large employers (ALEs) are subject to §4980H offer of coverage requirements and §6056 employer reporting requirements on Form 1094-C and Form 1095-Cs. ALEs that fail to comply with §4980H offer of coverage requirements may face penalties (i.e., employer shared responsibility payments) for full-time employees who enroll in subsidized coverage through a public Marketplace.

§4980H Requirements

To avoid potential §4980H penalties, ALEs (50 or more full-time equivalents (FTEs)) must offer coverage to full-time employees that:

  1. provides minimum value (60% or better actuarial value); and

  2. is affordable.

ALEs must also offer minimum essential coverage (MEC) to full-time employees’ dependent children (but not spouses).

NOTE: Small employers (<50 FTEs) are not required to offer coverage, and if choosing to do so, are not required to use the ACA's full-time employee definition (generally 30 hours per week) and do not have to offer affordable coverage.

Affordability

To meet the affordability requirement under §4980H(b) for 2027 plan years, the required employee contribution for the lowest cost minimum value plan option for employee-only (single) coverage cannot exceed 10.22% of the employee’s household income. Because employers generally do not know employees’ household income, they may instead rely on one of three affordability safe harbors (Federal Poverty Level (FPL), Rate of Pay, or Form W-2).

The increase from 9.96% in 2026 to 10.22% in 2027 will allow ALEs to charge a slightly higher employee contribution for single coverage while still meeting §4980H(b) affordability requirements. The affordability percentage adjustments apply for “plan years beginning in…,” and therefore an ALE with a non-calendar year must apply the percentage for the year in which the plan year begins. For example, an ALE with a medical plan year of July - June would use 9.96% for the plan year beginning in July 2026 and 10.22% for the plan year beginning in July 2027.

§4980H Penalties

As employers prepare for 2027, ALEs need to weigh the potential risks of increased §4980H penalties against the cost of offering compliant coverage to full-time employees and their dependent children.

§4980H(a)

If the employer fails to offer MEC to at least 95% (or all but 5, if greater) of full-time employees and their dependent children in any given month, a penalty will apply if any full-time employee enrolls through a public Marketplace and qualifies for a premium tax credit (or tax subsidy). The penalty is multiplied by the total full-time employee count, minus the first 30 (allocated proportionally across controlled groups), regardless of how many employees were offered coverage.

2027 calculation = (full-time employee count – 30) x $315 for each month of non-compliance

§4980H(b)

If the employer satisfies §4980H(a) requirements, the employer may still owe a penalty for any full-time employee who is not offered minimum-value, affordable coverage if that employee enrolls through a public Marketplace and qualifies for a premium tax credit. This penalty applies on a per-employee basis rather than against the total full-time employee count.

2027 calculation = $472.50/month for each full-time employee who enrolls through a public Marketplace and qualifies for a premium tax credit because they were not offered minimum-value, affordable coverage.

 

Lumelight is not a law firm and cannot dispense legal advice. Anything contained in this communication is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel.

 

Content provided by Q4intelligence

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