The Affordable Care Act (ACA) requires employers with more than 50 full-time equivalent (FTE) employees to provide health insurance to their employees. This is known as the “employer mandate." Employers that don’t provide affordable insurance are subject to steep penalties. If you're offering an Individual Coverage HRA, you'll want to know what the ALE safe harbors are for you.
Thankfully, the ICHRA can satisfy the employer mandate. Employers that have felt stuck using complicated group plans to meet the mandate now have a much simpler option with ICHRA. However, the ICHRA has to be “affordable” to meet the mandate and clear the employer of any penalties—a rule that's important to consider as you compare group plans and HRAs like ICHRA.
But what does "affordable" mean? The IRS has proposed a clear-as-mud description of affordability:
“An ICHRA is affordable if the remaining amount an employee has to pay for a self-only silver plan on the exchange is less than 9.78% of the employee’s household income (rate applies to 2020).” (See IRS Notice 2018-88 and IRS Notice rp-19-29)
In layman’s terms, this means that an affordable contribution must be greater than the lowest cost silver plan an employee can purchase minus 9.78% times the employee’s household income.
The two variables that go into the affordability equation are not difficult to understand, but could be very hard for an employer to know. Thankfully, the IRS has proposed several safe harbors that employers can use to estimate these amounts to make an affordability determination.
ALE Safe Harbors and ICHRA
Affordability is based on the lowest cost silver plan for self-only coverage provided for the residence of an employee, or, under the location safe harbor (which we explain below), an employee's primary site of employment.
An additional safe harbor allows an employer to determine affordability of an ICHRA with a calendar year plan year using the lowest cost silver plan for self-only coverage for January of the prior year. For an ICHRA that does not have a calendar year plan year, the employer may determine affordability of the HRA using the lowest cost silver plan for self-only coverage for January of the current year. Regulations under Code section 36B (PDF) provide similar rules referencing the lowest cost silver plan for self-only coverage for the location of an employee's residence for determining the employee's eligibility for a premium tax credit if the employee is offered an ICHRA.
To recap: To allow employers to reasonably estimate the lowest cost silver plan, the IRS distinguishes the following safe harbors:
- Location: Employers can use employees’ primary work address instead of their home address when determining the availability of silver plans
- Age-based Bands
- Prior Year: Employers can use prior year plan rates to determine affordability for the following year (For example, 2020 plans can be used to determined 2021 affordability)
Determining Employee Household Income
It would not be reasonable for an employer offering an ICHRA to be able to estimate an employee’s household income—what if their spouse works? Or a dependent kid has a summer job?
To allow employers to estimate an employee’s household income, the IRS has proposed the following safe harbors:
- W-2 Wages: For salaried employees, employers can assume their household income is equal to what the employer reports annually in Box 1 of their W-2 form
- Rate of Pay: For hourly employees, employers can multiply the hourly rate by 130 hours to estimate a monthly income (regardless of how many hours the employee actually works)
- Federal Poverty Line (FPL): Employers can assume an employee’s income to be equal to the federal poverty level. (learn more about FPL)
Still have questions?
We know this is confusing, and Take Command Health is here to help! Please reach out to our team of HRA experts and we can talk you through these rules and regulations. We also have an comprehensive guide to the ICHRA and an FAQ page.
We've also built an ICHRA Affordability Calculator that allows you to calculate affordability for your team. You can even upload a census to quickly determine your baseline! We are here to help.