Small Businesses Need to Understand This

ICHRA: So, what’s the big deal with affordability?

When designing your ICHRA, it’s important to understand if your reimbursement amount is considered “affordable” or “unaffordable” to your employees. Here’s why:

What does “affordability” mean? Why is it important?

Smaller employers are not subject to this requirement, but will want to understand how affordability impacts employee tax credits (see below).

Under the Affordable Care Act (ACA, a.k.a “Obamacare”) individuals must be covered by “affordable” health insurance coverage.

So how is “affordable” defined? For 2024, the government says that an individual has affordable coverage if they are spending less than 8.39% of their income for health insurance premiums based on a reference plan. In this case, the reference plan is the lowest cost silver plan (LCSP) available to the employee on the public marketplace.

It’s a little arbitrary, but that’s what we have to work with!

An ICHRA offer is considered “affordable” to employees if based on the employee’s income and the HRA contribution they are able to purchase the LCSP without spending more than 8.39% of their income.

High-wage employees can probably purchase “affordable” insurance (ie, spend less than 8.39% of their income) with little to no help from an HRA. Lower-wage employees will need a larger HRA contribution.

Applicable large employers (ALE), typically over 50 employees, that are subject to the ACA requirement to provide affordable insurance (sometimes called the “corporate mandate”) must provide an affordable HRA in order to avoid penalties.

How do I fill out the census template?

Affordability is determined on an employee-by-employee basis. That can be tricky, so we’ve built an automated calculator to help!

Note: You can use your own census template if you have it as long as it has the following required fields below. Or, you can download our census form directly here. Please upload your census via the design request submission page and we’ll get back to you in 5-7 business days!

Required Employer Fields:

• Employer Name (if you’re a consultant and don’t want us to know your client name, that’s fine but please use a descriptive placeholder)
• Employer Address (needed to calculate location safe harbor)
• Desired HRA Start Date (needed to determine employee ages at the start of the HRA plan year)

Required Employee Fields:

• Name (or some unique identifier)
• Date of Birth (actual birth date works best, but number of years old can be used to estimate)
• Wage Information (either their annual salary or hourly rate)

Optional Employee Fields:

• Employee Address (preferably state and county, but we can translate regular street address information): This is optional but enables us to compare affordability results at the employer work location as well as the employee’s home address or assigned work location
• Number of Family Members: This is optional but allows us to estimate potential premium tax credits which may be important for ICHRA design considerations, especially if the employer is under 50 employees.
• HRA Class: Optional, but if you know how you might want to group or split employees into different classes, this is helpful for us to know. You can learn about the available class options in the class section of our ICHRA guide.

If you have questions, please email us at information@emergentfingrp.com or chat with us online!

Which employees do I have to include in the affordability analysis?

Great question!

The answer is “it depends.” Let us explain a little bit:

Determining whether or not you an ALE (Applicable Large Employer)?

Large employers are subject to the “corporate mandate” and must offer “affordable” benefits to their employees or face penalties. To determine if you or your client is an ALE, you have to look at all employees. This includes full-time and part-time employees and sometimes even seasonal employees, interns, etc. The reason is part-time employees are added together into “full-time equivalents” (FTE). If you have more than 50 FTEs, then you are an ALE. Congrats!

You can find more details in IRS Section 4980H. Here’s a really helpful FAQ for determining how to count your employees.

If you are an ALE…

Then you will want to offer an affordable ICHRA to your full-time employees (30 or more hours/wk or 130 hours/month). You’re liable for penalties if one of your full-time employees is able to get a tax credit because your ICHRA is not affordable.

You can still offer the ICHRA to part-time and other employees, but they don’t really matter as much for determining potential penalties (but they count for determining if you are an ALE!).

So, if you’re an ALE, to run an affordability analysis, we really only care about your full-time employees.

If you’re a small employer (not an ALE)…

Technically, you don’t have to worry about affordability. You are not required to provide insurance and so you’re not at risk for penalties.

However, affordability is still important because it will impact your employee’s ability to receive premium tax credits (PTC). Remember, if your ICHRA is affordable, employees will not be eligible for tax credits (PTC). If it’s unaffordable, then they can choose.

Note: In this case, it’s based on the employee’s actual data when they go to the marketplace, not the safe harbors we use for ALEs. 

If you’re concerned about impacting tax credits for your employees, let’s talk-about-it! We have other calculators and methods we can help you use to design an ICHRA that’ll optimize your spend and your employee’s welfare.

What are the “Safe Harbors”?

The IRS recognizes that it may be difficult for an employer to collect all of the information needed to accurately determine affordability for each employee.

As a result, the IRS provides several “safe harbors” or assumptions that employers can make to determine affordability. For a complete list 

How does ICHRA affordability impact an employee’s ability to get tax credits?

If you’rIf an employee receives an “affordable” ICHRA, then that employee is not eligible for premium tax credits (PTC).

If an employee receives an “unaffordable” ICHRA, then the employee is allowed to either accept the HRA or opt-out of the HRA (one-time a year) and accept premium tax credits.

For additional information and examples, please see the ICHRA Overview

Reminder: Applicable Large Employers (ALE) subject to the ACA’s corporate mandate must provide an affordable HRA or face penalties for not providing affordable coverage.

Note: If an employer utilizes the safe harbors but the employee’s actual information determines the HRA to be unaffordable, then the employer is not liable for penalties and the employee can still opt-out of the HRA to receive tax credits.

What happens if an ICHRA is not affordable for an employee?

If an employee receives an ICHRA allowance that is deemed “not affordable”, then the employee may either:

1. Accept the ICHRA allowance
2. Opt-out of the ICHRA and receive a premium tax credit (PTC)

Employees are allowed to make this election once per plan year or when there are significant changes to the plan.

If the employer offering the unaffordable ICHRA is an applicable large employer (ALE), the employer may be liable for ACA penalties for not providing affordable coverage.

How can I learn more about ICHRA and affordability requirements?

If We’d love to help!

A great resources is our ICHRA articles. We even wrote a whole section on Affordability and provide some examples and references that can be helpful.

We’d also love to meet you! Feel free to email, chat, or schedule a call with us below. We’d love to know you and your exact (or your client’s exact) situation to see how we can help!

Please don’t hesitate to contact us here.