What Is the 1095-C Employee Required Contribution?

The employee required contribution on Form 1095-C is the monthly 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. For plan years beginning in 2026, that amount is considered affordable only if it stays at or below 9.96% of the employee’s household income.¹ Employers put the figure on Line 15 of Form 1095-C, and reporting it incorrectly can expose the employer to penalties above $5,000 per affected employee.

What the Number Actually Represents

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

The number is hypothetical in an important way. It reflects what the employee would pay if they enrolled in that cheapest qualifying plan, regardless of what they actually did. If the employee picked family coverage, chose a richer plan, or waived coverage entirely, none of that changes what goes on Line 15. The premium the employee actually pays is not the reporting figure.

Payroll deduction schedules other than monthly need to be converted. Bi-weekly deductions get multiplied by 26 pay periods and divided by 12. Semi-monthly deductions get multiplied by 24 and divided by 12. The IRS wants the amount reported to the cent, with no dollar signs or commas.³

The 2026 Affordability Percentage

The affordability percentage is adjusted each year. For plan years beginning in 2026, the employee required contribution passes the affordability test if it stays at or below 9.96% of the employee’s income measure.¹ The statutory base is 9.5%, indexed annually under Section 36B for premium growth.⁴ The 2026 percentage is higher than in several recent years, so contribution levels set against tighter thresholds have more room now than they did previously.

The same 9.96% figure sets the point at which an employee can qualify for a premium tax credit on the marketplace. If the required contribution exceeds that percentage of income, the employee can get subsidized marketplace coverage, and the employer faces potential penalty exposure for each such employee.

The Three Safe Harbors for Testing Affordability

Affordability is technically measured against the employee’s household income, which the employer almost never knows. Three safe harbors let the employer substitute an income figure it does have. Successfully using any one of them protects the employer from the affordability penalty for that employee, even if actual household income would have produced a different result.²

W-2 Safe Harbor

This method uses Box 1 wages from the employee’s Form W-2 as the income proxy. The required contribution for the year cannot exceed 9.96% of those Box 1 wages for 2026. Because Box 1 isn’t final until the W-2 is prepared, this is a backward-looking test. If the employer uses it for a given employee, it has to apply for every month of the calendar year that coverage was offered.⁵

Rate of Pay Safe Harbor

For hourly employees, the employer multiplies the employee’s lowest hourly rate for the month by 130 hours to produce a monthly income figure. The required contribution cannot exceed 9.96% of that number. For salaried employees, the monthly salary is used directly. The 130-hour floor makes this workable when hours fluctuate, since it standardizes the income figure regardless of actual hours worked. If the rate of pay drops during a month, the lowest rate governs.

Federal Poverty Line Safe Harbor

This method uses the annual federal poverty line for a single individual, applying the FPL in effect on the first day of the plan year. For calendar-year plans starting January 1, 2026, that’s the 2025 guideline of $15,650, which produces a maximum monthly required contribution of $129.90 (9.96% × $15,650 ÷ 12).¹

This is the simplest safe harbor to run, because every employee gets the same number and the employer doesn’t track individual wages or hours. It’s common at employers with large lower-wage workforces. It also sets the tightest ceiling, so some employers can’t stay under it without reducing what they charge employees.

Opt-Out Payments and Flex Credits

Cash payments offered to employees who waive coverage change the calculation in a way that catches employers off guard. The IRS treats an unconditional opt-out payment as an increase to the employee required contribution.⁶ If the employee’s share of premium is $150 and the employer offers $100 to waive, the IRS treats the required contribution as $250 for affordability purposes.

There is a narrow carve-out. If the opt-out is paid only when the employee provides reasonable evidence of alternative coverage that is not individual marketplace coverage, the payment doesn’t get added. Acceptable alternatives include Medicare, TRICARE, Medicaid, CHIP, or another employer’s plan. An employee attestation counts as reasonable evidence, and it has to be collected each plan year. Wellness incentives and flex credits that reduce the employee’s premium cost follow the same logic, folding into the affordability math.

Reporting on Form 1095-C: Lines 14, 15, and 16

Three lines in Part II work together. Line 14 says what was offered, Line 15 says what it cost the employee, and Line 16 says which safe harbor the employer is claiming.⁷

Line 14: Offer of Coverage Code

Line 14 identifies the type of coverage offered each month. Code 1B is Minimum Value coverage to the employee only. Code 1E is Minimum Value coverage to the employee plus at least minimum essential coverage to dependents and a spouse.⁵ The Line 14 code determines whether Line 15 needs a figure at all; without a Minimum Value offer, Line 15 stays blank.

Line 15: Employee Required Contribution

Line 15 carries the monthly employee required contribution, to the cent. If the amount was the same all year, one entry in the “All 12 Months” box handles it. If it changed mid-year, each affected month gets its own entry.³ When qualifying coverage was free to the employee, enter “0.00” rather than leaving the line empty. A blank line means no Minimum Value plan was offered, which is a different statement.

Line 15 always reflects the cheapest qualifying self-only option, even for an employee enrolled in family coverage or a richer plan. What the employee actually paid does not belong here.

Line 16: Safe Harbor Code

Line 16 tells the IRS which affordability safe harbor the employer used:

Code 2F is the W-2 safe harbor.
Code 2G is the federal poverty line safe harbor.
Code 2H is the rate of pay safe harbor.

The code on Line 16 is the employer’s specific defense against an affordability penalty. A wrong code undermines the safe harbor claim even when the underlying math is correct.⁵

What’s at Stake if the Number Is Wrong

Section 4980H sets two separate penalties, but the one tied to the employee required contribution is 4980H(b), which applies when the employer offers coverage that fails affordability or Minimum Value. For 2026, that penalty is $5,010 per affected employee who actually receives a premium tax credit on the marketplace. It only reaches employees who go to the marketplace and get subsidized, not the entire workforce.⁸ A separate and larger penalty under 4980H(a) applies when the employer fails to offer coverage to at least 95% of its full-time workforce, but that branch is about the absence of an offer rather than the affordability of one that was made.

Letter 226-J and Why Clean Reporting Matters

The IRS doesn’t assess a 4980H penalty on the spot. It cross-references 1094-C and 1095-C filings against the tax returns of employees who claimed premium tax credits, and if the data suggests a penalty is owed, it sends Letter 226-J with a proposed amount.⁹

Letter 226-J is a proposal, not a final bill. The employer responds on Form 14764, either agreeing or explaining the disagreement, and marks corrections to specific employees on the attached Form 14765. Employers who reported a valid safe harbor code on Line 16 and an accurate contribution amount on Line 15 have a direct defense. Employers who used the wrong codes or reported sloppy numbers often pay penalties that a cleaner 1095-C would have prevented. The response deadline is printed on the letter, and the IRS grants additional time if the employer asks 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
5
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
8
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