What is "ICHRA affordability"? Why is it important?
742 views | Last modified 10/22/2021 4:30:42 AM EST | Added by ACAwise Team

As of January 1, 2020, the Individual Coverage Health Reimbursement Arrangements (ICHRA) is an alternative option from traditional group benefits for employers of any size to offer health benefits to their employees. 

With an ICHRA, employees can purchase the individual health insurance and health care services that best fit their needs from the local exchange and submit proof of their expenses to their employer. Employers will review and reimburse employees up to their allowance amount. 

ALEs and the Employer Mandate

Under the Affordable Care Act (ACA)  employer shared responsibility provision, ALEs (50 or more full-time equivalent (FTE) employees during the preceding calendar year) must offer minimum essential coverage that is “affordable” and provides “minimum value” to 95% of all full-time equivalent employees and their dependents. This requirement is called the Employer Mandate. If the employer fails to comply with this requirement,  they could be subject to steep penalties.

So, if you are an ALE offering an ICHRA plan to your employees, you will need to determine if the allowance amount you are offering to your employees is affordable in order to comply with the Employer Mandate. 

The formula to calculate ICHRA affordability for the tax year 2021 

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

This means the monthly premium for the lowest-cost silver plan, minus the ICHRA monthly allowance being offered to the employee should not exceed 9.83% of the employee’s household income in a  month. If this requirement is met, the ICHRA plan is considered affordable.

Safe harbors
Since employers don’t know their employee’s exact household income and the LCSP amount, the IRS proposed certain safe harbors that allow employers to calculate affordability with the information they’ll have reasonable access to:

• Location- With this safe harbor, employers can use the employee’s primary office address to determine ICHRA affordability calculations, rather than the employee’s residence.
• Affordability-Through this safe harbor, employers can estimate an employee’s household income using the employee’s W-2, FPL, or rate of pay.
• Calendar year- Using this safe harbor, employers who thought of offering an ICHRA in the following calendar year can use the current year’s estimates as a baseline for affordability.

Generally, determining ICHRA affordability is very important for large employers because it will impact your employee's ability to receive premium tax credits (PTC). 

Please note, if your ICHRA is affordable, employees will not be eligible for Premium Tax Credits (PTC). If it's unaffordable and employees choose to claim PTC, you will be liable for ACA employer mandate penalties from the IRS.

To help you avoid the risk of IRS penalties, our ICHRA affordability calculator for employers helps you to determine how much you have to offer for your ICHRA to be affordable for each employee.