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Does your business have more than 50 full-time equivalent (FTE) employees? If so, the Affordable Care Act (ACA) requires you to provide health insurance to employees. This is known as the “employer mandate.” If you don’t provide affordable insurance, you are subject to large penalties.

Good news! ICHRA can satisfy the employer mandate. If you’ve been using complicated group plans to meet the mandate previously, there is a new, simplified option. Individual Coverage Health Reimbursement Arrangements (ICHRAs) can satisfy the employer mandate. To meet the minimum mandate requirements, the ICHRA must be “affordable”. This is a reasonable policy because otherwise, you could theoretically offer your employees $5/month and escape the penalty, which wouldn’t be fair.

Determining Affordability

What makes ICHRAs affordable, you ask? Per the IRS:

“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 (rate applies to 2021).”

In math terms, the formula is:

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

The premium of the lowest-cost Silver plan in the Marketplace is the standard for this calculation. You take the monthly premium for the lowest-cost silver plan and subtract the ICHRA monthly allowance offered. The total should not exceed 9.83% of the employee’s household income for the month. If the total is below the 9.83%, then the ICHRA is considered affordable.

For those of us who are less mathematically inclined this means that the amount you offer must be greater the standard cost of a Qualified Health Plan (QHP) for the area where the employee lives minus about 10% of their monthly income. If you still need more clarification, check out our example below.


Sam works at Ellie’s Market and has a household income of $40,000. His employer is offering him an ICHRA of $300 per month. The lowest-cost Silver plan in his area is $600. The affordability calculation is:

$40,000 / 12 =$3,333
$3,333 * .0983 = $327.67
$300 > $600 – $327.67
$300 > $272.33

The ICHRA benefit that Sam was offered is affordable as $300 is more than $272. The lowest allowance that can be deemed affordable for the employee in this example is $272.33.

If, however, Sam was offered an ICHRA benefit of $200, then, $200 < $272.33, and therefore, the ICHRA benefit would be unaffordable.

Determining the Lowest-Cost Silver Plan & Household Income

The lowest-cost Silver plan an employee could purchase in the Marketplace is based on their age and where they live (rating area). To help employers estimate the lowest-cost Silver plan, the IRS has outlined the following safe harbors:

Location: Employers can use the employee’s worksite location vs. The employee’s residence to determine affordability calculations.

Affordability: Employers can estimate an employee’s income using their W-2 or rate of pay.

Calendar Year: Employers who offer an ICHRA in the following calendar year can use the current year’s estimates as a reference for affordability.

In terms of estimating an employee’s household income, the IRS has outlined the following safe harbors:

W-2 Wages: Employers can assume that salaried employees’ household income equals what the employer reports annually in Box 1 of their W-2.

Rate of Pay: For hourly staff members, employers can multiply their hourly rates by 130 hrs. to estimate their monthly income, regardless of how many hours they work.

Federal Poverty Line (FPL): Employers can estimate an employee’s income to be equal to the FPL.

Affordability and Premium Tax Credits

Although small employers with under 50 employees are not subject to the employer mandate, affordability should still be top of mind, as it has an impact on the premium tax credit (PTC).

If the ICHRA is deemed unaffordable, employees are eligible to receive the PTC by opting out of the ICHRA. However, if they choose to accept the ICHRA benefit, they automatically forfeit the PTC.

If the ICHRA is deemed affordable, and an employee decides to decline it, they are not eligible to receive the PTC.

In other words:

If the ICHRA is affordable: Employees are not eligible for the PTC.

If the ICHRA is unaffordable: Employees can choose between the ICHRA and the PTC.

In terms of employees having the option to decline the ICHRA – they must have this option at least once per year before the new plan year begins. Declining an unaffordable ICHRA may be a good strategy for an employee if the PTC works better for their family size and income.

W3LL Tip: To save money, small employers may choose to intentionally create an unaffordable ICHRA if the PTC may be more preferable to the employee and not something the employer is able to financially provide.

For more information on ICHRA, check out our overview page.

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