By: HUB’s EB Compliance Team

In January, the Department of Health and Human Services released its 2026 Federal Poverty Guidelines. The federal poverty guidelines (also called the federal poverty level or “FPL”) are income thresholds used to determine eligibility for various federal programs. Federal Poverty Guidelines (“FPG”) are a key component in demonstrating affordability under one of the Affordable Care Act’s (“ACA”) three affordability safe harbors as part of compliance with the ACA’s employer mandate. Understandably, benefits professionals track these annually updated amounts.

Background Summary

As a reminder, an applicable large employer (“ALE”) is generally required to offer at least one health plan that provides affordable, minimum value coverage to its full-time employees (and minimum value coverage to dependent children), to avoid potential Employer Shared Responsibility Payment/penalty. For this purpose, “affordable” means the employee portion of the premium for self-only coverage cannot exceed 9.96% of the employee’s household income for plan years beginning in 2026 (up from 9.02% in 2025).

Of course, since employers don’t usually know an employee’s household income, the IRS has provided three affordability safe harbors (each with its own corresponding “pros and cons” to consider). This means that if the employer’s plan is “affordable” under any one of the available safe harbors, then it will be treated as affordable for purposes of the employer mandate penalty, even if it is not technically affordable for one or more employees based on total household income. Using a safe harbor to demonstrate affordability under the ACA mandate provides employers critical protection from potential penalties.

New Federal Poverty Guideline

Among the three safe harbor options and arguably the easiest to administer, is the FPG safe harbor. Under this rule, if the employee’s cost of self-only coverage under an employer’s lowest-cost minimum value plan is no more than 9.96% (for plan years beginning in 2026) of the single FPG applicable to that individual for that year, then it will be treated as affordable. For 2026, the U.S. mainland’s FPG is $15,960. Separate higher poverty guidelines are used for Hawaii ($18,360) and Alaska ($19,950). This means that, to satisfy the safe harbor for a mainland employee, the employee’s share of the monthly premium amount cannot exceed $132.46 ($15,960 / 12 X 9.96% = $132.468; note that a plan sponsor should always round down to ensure affordability).

Just because an employer decides to charge a monthly contribution that is greater than the amount derived from the FPG does not mean that the health coverage offer is “unaffordable” necessarily. It simply means that the employer cannot use the FPG safe harbor to show that its coverage is affordable. Instead, the employer must use one of the other “safe harbor” options to demonstrate affordability or the coverage would have to be affordable based on the employee’s household income. Typically, one of the other safe harbor options may enable the employer to collect larger health coverage contributions from workers. In other words, although the FPG is easiest to use and always offers a definitive “affordability” threshold, plan sponsors may decide against using it since the FPG generates the lowest employee contribution of the three safe harbors.

There’s Always Last Year

A key challenge stemming from the FPG affordability safe harbor is that it is not released until after January 1. For many plans, that may be months after they have set their contribution rates for the upcoming year. Regulations provide relief by permitting employers to use the FPG in effect six months prior to the beginning of the plan year. This means employers with plan years beginning January through June may use the prior year's poverty guidelines combined with the current affordability percentage. For example, in setting contribution rates for 2026, the employer would use the 2025 Federal Poverty Guideline ($15,650 for the mainland) and the 2026 percentage (9.96%) and come up with a premium of $129.89 ($15,650 / 12 X 9.96% = $129.895, but rounded down to ensure affordability).

However, plans with July through December start dates cannot rely on the prior year's FPG because the new guidelines will have been in effect for more than six months. For such plans, one approach is to use the premium based on the 2026 FPG until the 2027 FPG is released and then increase the required employee contribution. However, this can create employee relations concerns and administrative difficulty. Employees may have budgeted based on one premium and not be pleased with an increase (even one that, in some years, may appear relatively small). Such a change may also have implications for the employer’s insurance carrier. Finally, an employer may need to evaluate, based on the size of the change in the FPG and its workforce composition, whether employees need to be given the opportunity to change their benefit plan elections in accordance with tax rules governing pre-tax elections. These issues about premium changes are discussed in a previous article here.

Takeaway

Although the updated FPG is welcome information, it may be too late for some employers to adjust their 2026 contribution levels. Employers that are subject to the employer mandate and use this safe harbor should keep this information in mind for ACA reporting purposes and in setting rates for 2027.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory

NOTICE OF DISCLAIMER
Neither HUB International Limited nor any of its affiliated companies is a law or accounting firm, and therefore, they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on HUB International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect, and HUB International does not have an obligation to update this information. You should consult an attorney, accountant or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.