The ICHRA affordability test: How ALEs set a compliant monthly allowance

A step-by-step guide to the affordability rules, safe harbors, and 2027 numbers large employers need to know

ICHRA is now CHOICE Arrangement. New name, same benefits. Since many employers, brokers, and HR teams still use the original name, this article uses ICHRA and CHOICE Arrangement interchangeably. Every rule, safe harbor, and calculation below applies the same way under either name.

Large employers are adopting ICHRA (now called CHOICE Arrangement) at a faster pace than ever. According to the HRA Council’s 2026 data report, ICHRA adoption among applicable large employers (ALEs) grew 108% on an aggregated basis from 2025 to 2026.¹ For many of these organizations, the draw is a predictable benefits budget paired with more plan choice for employees.

For an ALE, offering a CHOICE Arrangement comes with one important compliance question: is the monthly allowance large enough to count as “affordable” under the Affordable Care Act (ACA)? When the allowance is set correctly, the ICHRA satisfies the employer mandate. If it falls short for even a few full-time employees, the organization could face IRS penalties.

This guide explains how the ICHRA affordability test works, which safe harbors simplify the math, and how to calculate a compliant allowance for the 2027 plan year.

Why the CHOICE Arrangement affordability test matters for ALEs

Under the ACA’s employer shared responsibility provisions, found in Internal Revenue Code Section 4980H, an ALE is an employer with at least 50 full-time employees, including full-time equivalents. ALEs must offer full-time employees and their dependents minimum essential coverage that is affordable and provides minimum value, or they may owe a penalty.²

Here is how an ICHRA fits into those requirements:

• Offer of coverage: Under proposed IRS regulations that employers may rely on, an offer of an ICHRA counts as an offer of an eligible employer-sponsored plan for Section 4980H purposes.³ Offering it to at least 95% of full-time employees and their dependents helps an ALE avoid the larger Section 4980H(a) penalty.²

• Affordability and minimum value: The offer must also be affordable for each full-time employee. Under the same proposed regulations, a CHOICE Arrangement that is affordable is treated as providing minimum value.³

That second requirement is where the monthly allowance comes in. With a traditional group plan, affordability depends on what the employee pays toward the premium. With an ICHRA, affordability depends on how the employer’s allowance compares with the cost of a specific individual market plan available to the employee.

What happens if the allowance falls short

An employee who accepts an ICHRA cannot also claim a premium tax credit for Marketplace coverage.¹⁰ However, if the ICHRA offer is unaffordable, the employee can decline it and claim the credit instead. When a full-time employee does that, the employer may owe a Section 4980H(b) penalty for that employee.²

For 2027, the IRS has set the Section 4980H(b) penalty at $5,670 per year, or $472.50 per month, for each affected full-time employee.⁴ That is up from $5,010 in 2026.

To put that in perspective, if 20 full-time employees receive an unaffordable offer and claim premium tax credits for all 12 months of 2027, the potential penalty would be $113,400. The total Section 4980H(b) penalty is capped at the amount the employer would have owed under Section 4980H(a).²

How the ICHRA affordability formula works

The CHOICE Arrangement affordability test compares two numbers for each full-time employee:

The employee’s required contribution: This equals the monthly premium for the lowest cost silver plan (LCSP) for self-only coverage available to the employee, minus the employer’s monthly ICHRA allowance.³

The affordability threshold: This is a set percentage of the employee’s household income, divided by 12.

If the employee’s required contribution does not exceed the affordability threshold, the ICHRA is affordable for that employee.

Here is the formula in its simplest form:

(LCSP premium – monthly ICHRA allowance) ≤ (affordability percentage × household income ÷ 12)

The 2027 affordability percentage

The IRS updates the affordability percentage, officially called the required contribution percentage, every year. In Revenue Procedure 2026-26, the IRS set the percentage at 10.22% for plan years beginning in 2027.⁵ For plan years beginning in 2026, the percentage is 9.96%.⁶

Keep these points in mind when applying the percentage:

• The percentage is tied to the year the plan year begins, so a plan year starting in November 2026 uses 9.96% for the full plan year.⁶

• The test uses the premium for self-only coverage, even if the employee enrolls in a family plan.³

• Affordability is measured employee by employee, so an allowance that works for most of your workforce may still fall short for a few individuals.³

ICHRA safe harbors for location and timing

Employers rarely have real-time insight into every employee’s home address, the exact LCSP premium in each area, or how premiums will change before the plan year starts. To make the ICHRA affordability test workable, the IRS created two ICHRA-specific safe harbors and a simplified rule for determining age.³ Employers can use these alongside the household income safe harbors covered in the next section.

The location safe harbor

By default, affordability is based on the LCSP where the employee lives. The location safe harbor allows the employer to use the LCSP available at the employee’s primary site of employment instead.³

This approach tends to work well for ALEs with:

• Employees who commute into one office from several counties or rating areas

• Multiple worksites with stable, established locations

• Frequent employee address changes that would otherwise require new calculations

A few rules apply to how the primary site of employment is defined:

• It is generally the location where the employer reasonably expects the employee to work on the first day of the plan year.³

• For an employee who works from home or another off-site location and has no assigned office space or reporting location, the primary site of employment is the employee’s residence.³

• If an employee’s work location changes permanently or indefinitely, the employer must update the location no later than the first day of the second calendar month after the change.³

The look-back month safe harbor

Individual market premiums can change each year, and employers usually need to set allowances before new rates are published. The look-back month safe harbor addresses this timing gap:³ ⁷

• Calendar year plans: Employers can use the LCSP premium for January of the prior calendar year. For a plan year starting January 1, 2027, that means January 2026 rates.

• Non-calendar year plans: Employers can use the LCSP premium for January of the current calendar year. For a plan year starting July 1, 2027, that means January 2027 rates.

Once a look-back month is used, the proposed regulations do not require employers to adjust for premium changes during the plan year.³

How employee age is determined

Individual market premiums vary by age, so each employee’s LCSP premium depends on how old they are. Under the proposed regulations, an employee’s age for the plan year is their age on the first day of the plan year, or on the date the ICHRA first takes effect for employees who become eligible later in the year.³ That means a birthday partway through the year does not change the calculation for that plan year.

Finding the LCSP premium

The IRS provides an Employer Lowest Cost Silver Plan Premium Look-up Table that employers can use to find the LCSP for any location and year.⁷ ICHRA administrators typically pull this data automatically and run the affordability calculation for every employee.

Household income safe harbors for CHOICE affordability

The other half of the formula depends on the employee’s household income. Since employers do not have access to employees’ full household finances, ALEs may use one of three household income safe harbors instead. These are the same safe harbors used for traditional group plans, and they apply to ICHRAs as well.^3,8

Federal poverty line (FPL) safe harbor

This is the simplest and most conservative option. The ICHRA is affordable if the employee’s required contribution does not exceed 10.22% of the FPL for a single individual, divided by 12.⁸

• Employers may use the poverty guidelines in effect within six months before the first day of the plan year.⁸

• For a calendar year 2027 plan, that is the 2026 guideline of $15,960 for one person in the 48 contiguous states and D.C.⁹

• The calculation: $15,960 × 10.22% ÷ 12 = $135.93 (rounded down to $135.92 per month to stay under the limit)

Under this safe harbor, the employee’s required contribution can be no more than $135.92 per month, regardless of what the employee earns. Alaska and Hawaii have separate, higher poverty guidelines.⁹

Rate of pay safe harbor

This option works well for hourly workforces. For an hourly employee, the employer multiplies 130 hours by the lower of the employee’s hourly rate on the first day of the coverage period or their lowest hourly rate during the month, then applies the affordability percentage.⁸

• Example: An employee earning $22 per hour has a monthly benchmark of $22 × 130 = $2,860.

• The calculation: $2,860 × 10.22% = $292.29 per month

For salaried employees, the employer uses monthly salary as of the first day of the coverage period. If a salaried employee’s monthly salary is reduced, this safe harbor cannot be used for that employee.⁸

Form W-2 safe harbor

This option uses the wages reported in Box 1 of the employee’s Form W-2 from the employer.⁸

• Example: An employee with $52,000 in Box 1 wages has an annual threshold of $52,000 × 10.22% = $5,314.40.

• The monthly equivalent: $5,314.40 ÷ 12 = $442.87 (rounded down to $442.86 per month to stay under the limit)

The main challenge is timing. Box 1 wages are not final until after the year ends, so employers using this safe harbor need to estimate wages carefully and build in a margin for changes.

Comparing the three household income safe harbors

Employers can apply different household income safe harbors to different reasonable categories of employees, such as hourly and salaried staff, as long as each safe harbor is applied uniformly and consistently within a category.⁸

Putting it together: calculating a compliant ICHRA allowance

Here is how an ALE might apply the CHOICE Arrangement affordability test to one employee in a calendar year 2027 plan.

The scenario

• Employee age on January 1, 2027: 45

• Primary site of employment: the company’s main office

• Hypothetical LCSP for a 45-year-old at that location, using January 2026 rates: $560 per month

• Safe harbors applied: location, look-back month, and FPL

The math

• Find the maximum required contribution under the FPL safe harbor: $135.92

• Subtract that amount from the LCSP premium: $560 – $135.92 = $424.08

• Round up to set the minimum compliant allowance: $425 per month

Any allowance of $425 or more makes the ICHRA affordable for this employee. If the employer used the rate of pay safe harbor for an employee earning $22 per hour, the minimum allowance would drop to 268permonth(560 – $292.29 = $267.71, rounded up).

Why age-based allowances help

Since LCSP premiums rise with age, a flat allowance that is affordable for a 30-year-old may not be affordable for a 60-year-old. ICHRA rules allow employers to increase allowances by age within a class, as long as the amount offered to the oldest participants is no more than three times the amount offered to the youngest.¹⁰ For example, if the youngest employees in a class receive $200 per month, the oldest can receive up to $600 per month. Many ALEs use age-based allowances to meet affordability across the workforce without overspending on younger employees.

How employee classes affect the test

ALEs can offer different CHOICE Arrangement allowances to different employee classes, such as full-time and part-time employees or employees in different rating areas, as long as the allowance is offered on the same terms within each class.¹⁰ Affordability for Section 4980H purposes is still measured for each individual full-time employee, so a class-wide allowance that works on average may still leave some employees short.³

Reporting ICHRA affordability on Form 1095-C

ALEs report their ICHRA offers to the IRS on Form 1095-C each year. Accurate reporting matters because the IRS uses these forms to evaluate potential penalties.

• Line 14: ICHRA offers use codes 1L through 1U. These codes show who received the offer, whether affordability was based on the employee’s residence or primary site of employment, and whether the offer was unaffordable or made to someone who was not a full-time employee.¹¹

• Line 15: Shows the employee’s required contribution for the offer.

• Line 17: Shows the ZIP code used to determine affordability. This is the employee’s residence for codes 1L, 1M, 1N, and 1T, or the primary site of employment for codes 1O, 1P, 1Q, and 1U.¹¹

If the employer applied the location safe harbor, both the offer code and the ZIP code should reflect the work location. Keeping your reporting consistent with the safe harbors you used to set allowances helps avoid discrepancies.

Common CHOICE affordability mistakes to avoid

Even experienced HR and benefits teams can run into issues with the ICHRA affordability test. Watch for these common problems:

• Using the wrong affordability percentage: The percentage depends on when the plan year begins, so a plan starting in late 2026 should still use 9.96%.

• Testing affordability with family premiums: The test always uses the self-only LCSP premium, even if employees buy family coverage.

• Overlooking remote employees: A remote worker without an assigned office or reporting location has a primary site of employment at home, so their LCSP may differ from the office.

• Missing location changes: A permanent change in work location must be reflected by the first day of the second calendar month after the change.

• Overlooking new hires and status changes: Employees who join midyear or move into full-time status need an affordable offer from their first eligible month.

• Applying safe harbors inconsistently: Household income safe harbors must be applied uniformly within each reasonable category of employees.

A checklist for your 2027 ICHRA affordability review

Before open enrollment, ALEs offering an ICHRA (now called CHOICE Arrangement) can use this checklist to confirm their allowances are compliant:

• Confirm your plan year start date and the correct affordability percentage (10.22% for plan years beginning in 2027).

• Select a household income safe harbor for each category of employees.

• Decide whether to apply the location and look-back month safe harbors.

• Pull LCSP premiums for each employee’s applicable location and age.

• Calculate the minimum compliant allowance for every full-time employee.

• Review age-based and class-based allowance structures to confirm every full-time employee passes the test.

• Document your methodology so your Form 1095-C reporting matches your calculations.

• Plan for midyear changes, including new hires, relocations, and status changes.

Make affordability a confident part of your CHOICE Arrangement strategy

The ICHRA affordability test can look complex at first, but it follows a clear structure: compare the cost of the lowest cost silver plan with what the employee pays after the allowance, and make sure that amount stays within the IRS threshold. The safe harbors exist to give employers predictability, and using them strategically can keep allowances both compliant and cost-effective.

As more large employers adopt ICHRA, setting affordability correctly from the start protects the organization from penalties while giving employees the freedom to choose coverage that fits their needs. Take Command calculates affordability for each employee, applies the safe harbors that fit your organization, and supports accurate Form 1095-C reporting, so your team can offer a CHOICE Arrangement with confidence.

Talk to a Take Command expert today

References

1. Becker’s Payer Issues, “ICHRA market doubles to 500,000 enrollees: Report.” https://www.beckerspayer.com/payer/ichra/ichra-market-doubles-to-500000-enrollees-report/

2. Internal Revenue Service, “Employer Shared Responsibility Provisions.” https://www.irs.gov/affordable-care-act/employers/employer-shared-responsibility-provisions

3. Federal Register, “Application of the Employer Shared Responsibility Provisions and Certain Nondiscrimination Rules to Health Reimbursement Arrangements and Other Account-Based Group Health Plans Integrated With Individual Health Insurance Coverage or Medicare,” proposed rule, September 30, 2019. https://www.govinfo.gov/content/pkg/FR-2019-09-30/pdf/2019-21087.pdf

4. Internal Revenue Service, Revenue Procedure 2026-22. https://www.irs.gov/pub/irs-drop/rp-26-22.pdf

5. Internal Revenue Service, Revenue Procedure 2026-26. https://www.irs.gov/pub/irs-drop/rp-26-26.pdf

6. Internal Revenue Service, Revenue Procedure 2025-25. https://www.irs.gov/pub/irs-drop/rp-25-25.pdf

7. Internal Revenue Service, “Health Reimbursement Arrangements (HRAs).” https://www.irs.gov/newsroom/health-reimbursement-arrangements-hras

8. Code of Federal Regulations, 26 CFR § 54.4980H-5, “Assessable payments under section 4980H(b).” https://www.law.cornell.edu/cfr/text/26/54.4980H-5

9. U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation, “Poverty Guidelines.” https://aspe.hhs.gov/topics/poverty-economic-mobility/poverty-guidelines

10. Federal Register, “Health Reimbursement Arrangements and Other Account-Based Group Health Plans,” final rule, June 20, 2019. https://www.govinfo.gov/content/pkg/FR-2019-06-20/pdf/2019-12571.pdf

11. Internal Revenue Service, Form 1095-C, “Employer-Provided Health Insurance Offer and Coverage.” https://www.irs.gov/pub/irs-pdf/f1095c.pdf