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ICHRAs Must be "Affordable" - here's how

Updated: May 4, 2023

For employers that are offering an ICHRA, keep in mind that an ICHRA has to be “affordable” in order to avoid an employer mandate penalty. An ICHRA offer is considered "affordable" to employees if, based on the employee's income and the ICHRA contribution, they are able to purchase the lowest-cost silver plan for single coverage in their area without spending more than 9.83% of their income (using one of the affordability safe harbors: W-2, Rate of Pay or FPL).

For example, a 40 year old employee is paid $15 per hour and works in Collin County, Texas. The lowest cost silver plan in that rating area is $421. This employer is using the Rate of Pay affordability safe harbor to determine the employee’s household income. Thus, the ICHRA contribution could not be any less than $229 for this employee per month [LCSP-(9.83%*(130X15))].

Employers must run this calculation on every employee who is offered the ICHRA in order to know if they are providing an affordable ICHRA. If the ICHRA is not affordable, an applicable large employer who is subject to the employer mandate could wind up with a penalty assessment from the IRS (ESRP Assessment 226-J).

If the ICHRA offering is deemed “affordable”, then an employee cannot accept a premium tax credit (PTC). But if the ICHRA is deemed “unaffordable” the employee can choose to decline the ICHRA and accept the premium tax credit.

The codes used on the employees' 1095-C forms will need to reflect ICHRA affordability as well.

If an employer is going to offer an ICHRA this year, it is important to work with a capable vendor and ensure that the reimbursement is high enough to maintain affordability standards under the employer mandate.

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