Key Takeaways
- Affordable Care Act (ACA) affordability rates have increased to 10.22% for 2027.
- This increase may help employers address affordability through available safe harbors.
- Penalties may apply if you do not offer health coverage or if the coverage is deemed unaffordable by this new rate.
The IRS has confirmed the ACA affordability rates and penalty amounts that apply to the employer mandate (“Play-or-Pay”) in 2027. The rate is increasing by a quarter of a percentage point to 10.22%.
This increase may create some additional flexibility for employers struggling to address affordability. Ask yourself the following questions to find out if your business is safe from IRS penalties for non-compliance.
1. Did your organization* have 50 or more full-time employees, including full-time equivalents, based on an employee count for the calendar year 2026**?
If no, the employer mandate will not apply to your organization for 2027.
If yes, proceed to question 2.
*Under IRS controlled group rules, entities related by common ownership are included pursuant to IRS 414.
**The calculation of FT + FTE is based on a 12-month average during the prior calendar year.
2. Does or will your organization offer group health coverage (at least “minimum essential coverage”) to all, or substantially all, full-time employees?
Tip: Full-time employees are defined by ACA eligibility rules as those who work 30+ hours per week or 130 hours per month.
If yes, you will not be at risk of the 4980H(A) penalty, commonly referred to as the “sledgehammer,” for not offering coverage.
The key is identifying all full-time employees and ensuring that they are offered coverage, whether or not they elect to enroll. Employers who offer coverage to 95% or more full-time employees for all months of 2027 will not be subject to this penalty. Proceed to question 3 below.
If no, you are at risk of the sledgehammer penalty, the maximum possible penalty.
For any month in which any employee who is a full-time employee is not offered coverage and separately receives subsidized Marketplace coverage, the penalty would be calculated as $315* per month ($3,780 annualized) times the number of full-time employees, minus 30.
If this penalty applies, question 3 below does not apply.
*The penalty amounts listed above/below are indexed and announced annually by the IRS.
3. If your organization offers group health coverage to all or substantially all full-time employees, is the coverage affordable and does it meet the minimum value standard?
First, it’s important to understand what “affordable” means in this context. Consider whether a full-time employee would pay more than 10.22% of his/her annual taxable income for self-only coverage. (There are three affordability safe harbors available to employers.)
If yes, you are likely not at risk of a 4980H(B) penalty, also known as the “tackhammer.”
If no, you are at risk of the tackhammer penalty. This penalty would be $472.50* per month ($5,670 annualized) for any month in which a full-time employee waives affordable coverage and separately receives subsidized Marketplace coverage.
However, unlike the sledgehammer penalty described in #2 above, this penalty would be assessed only on the employee(s) receiving subsidized coverage, rather than on all full-time employees.
If the employer meets the 95% threshold to avoid the sledgehammer penalty but does not offer affordable coverage to all full-time employees, any employee who receives a subsidy would also trigger a tackhammer penalty.
Additional Notes
- Play-or-Pay has been in effect since 2015. Note that state-specific small group definitions or carrier rating policies do not impact Play-or-Pay rules or determinations. The full-time (FT) + full-time equivalent (FTE) calculation is unique to the employer mandate and relevant IRS guidance.
- To identify full-time employees, refer to IRS guidance on hours of service and measurement periods.
- This is a simplified summary overview of the 2027 rules. Further assistance is available upon request.
There are so many complexities when it comes to benefits compliance. Don’t go it alone. Reach out to LewerBenefits for more information on how we can help your business remain compliant.
