Understanding ICHRA affordability rules

by Keely S.

Understanding  the ICHRA affordability rules that accompany the individual coverage health reimbursement arrangement (ICHRA) will go a long way in ensuring that employers are getting the most benefits out of this tax-advantaged tool. Let’s look at the most recent affordability rates and the ICHRA affordability rules to remember.

Some background on ICHRA affordability rules

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.

ICHRA satisfies the ACA’s employer mandate if the offer is “affordable."

The catch? The ICHRA has to be “affordable” to meet the mandate and clear the employer of any penalties. This makes sense, as otherwise employers could offer $1/mo and escape the penalty which would be unfair to employees.

Since employers cannot ask their employees outright what their annual household income is, the IRS has set forth three safe harbors employers can use to calculate affordability.

  • W2 Wages- as reported in Box 1 of W2
  • Rate of pay-  multiply the hourly rate by 130 to get the monthly amount
  • Federal Poverty Line- assume employees earnings are equal to the FPL

Understanding ICHRA affordability rules

In order to determine ICHRA affordability we need to determine the lowest cost self-only silver plan on the marketplace.

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 9.83% of the employee’s household income for 2021.

Affordable HRA Contribution > Lowest Cost Silver Plan - (9.83% * Employee Household Income)

Insurance premiums are driven by location and age of insured. To allow employers to estimate the cost of plans for their employees, the IRS has allowed the following safe harbors to determine lowest cost silver plans for each employee.

  1. Location- employer can use primary work address instead of employee residence.
  2. Age based bands- age of employee on first day of plan year
  3. Prior year- employers can use prior years rates to determine affordability for the following year (ie 2020 rates can be used to calculate 2021).

Confused? Our ICHRA Affordability Calculator allows you to upload an employee census to our site and we can run a free affordability analysis for you.

You can also check out the section on affordability in our comprehensive ICHRA guide.

If the ICHRA is found to be not affordable:

Once a year the employee has the option to opt-out of ICHRA. If the ICHRA offering is deemed unaffordable to the employee the employee has the option to still participate in the ICHRA or opt-out of the ICHRA and accept a premium tax credit (PTC) from the marketplace.

Applicable Large Employers (ALE) may be liable for ACA penalties for not providing affordable coverage.

ICHRA affordability help with Take Command Health

Want to learn more? Check out our ICHRA guide or chat with one of our HRA experts online to guide you through our ICHRA Administration platform. We'd be happy to help!


Picture of Keely S.

Hi, I'm Keely S.! A wife to one and mother to four, Keely does all of the things. She’s also dabbled in personal finance blogging and social media management, contributed to MetroFamily magazine, and is passionate about good food, treasure hunting and upcycling. With a B.S. in Psychology from the University of Oklahoma and a knack for a witty punchline, it’s no surprise that Keely’s social posts are as clever as they get. In her (very little) free time, you’ll find Keely with her nose in a book or trying out a local restaurant with her family.