What does “affordable” really mean?
In the world of health benefits, affordability is more than just a budgeting term—it’s a regulatory requirement. For employers with 50 or more full-time equivalent employees, the ACA requires that they offer health coverage that meets minimum value and affordability standards. If they don’t, they may be subject to significant penalties under what’s known as the Employer Shared Responsibility Provisions, source: IRS – ESRP.
When an employer offers an ICHRA instead of a traditional group plan, the test for affordability shifts slightly. Rather than evaluating the employer’s lowest cost group plan offering, the IRS looks at whether the employee’s share of the premium for a benchmark individual health plan—specifically, the lowest-cost silver plan (LCSP) available in their area—is below a certain threshold
The affordability threshold is adjusted annually. For 2026, it’s 9.96% of the employee’s income. Source: IRS Rev. Proc. 2025-25. If the employee’s share of the monthly premium (after the ICHRA contribution) exceeds this amount, the offer is not considered affordable. If it stays within that range, the employer has satisfied the ACA’s affordability test.
Why does ICHRA affordability matter for employers and employees?
Affordability has implications on two fronts. For employers, failing the affordability test can trigger IRS penalties if a full-time employee opts out of the ICHRA and qualifies for premium tax credits on the Marketplace. For employees, affordability affects whether they’re eligible for those same tax credits.
In simple terms:
If an ICHRA is considered affordable, the employee is not eligible for subsidies through the Marketplace.
If it’s unaffordable, the employee may decline the ICHRA and apply for subsidies instead source: HealthCare.gov – ICHRA.
This makes precision and clarity in affordability calculations essential—both for compliance and employee satisfaction.
How can employers test affordability without knowing household income?
Most employers don’t have visibility into an employee’s full household income. Fortunately, the IRS offers three “safe harbors” that employers can use instead. If an employer can demonstrate affordability using one of these methods, they’re in the clear—regardless of what the employee actually earns at home source: IRS ESRP Q&A.
W-2 Wages Safe Harbor Compares the employee’s contribution to a percentage of their annual wages as reported on Box 1 of the W-2.
Rate-of-Pay Safe Harbor For hourly employees, this method uses the employee’s hourly rate multiplied by 130 (the minimum monthly hours required to qualify as a full-time employee). For salaried employees, the monthly salary is used.
Federal Poverty Line (FPL) Safe Harbor The simplest approach: the ICHRA is generally treated as affordable if the employee’s required contribution is at or below 9.96% of the federal poverty line for a single individual, divided by 12. Employers must use the federal poverty guidelines in effect within 6 months before the start of the plan year.
Each of these safe harbors has its pros and cons, and the right fit often depends on the employer’s workforce and administrative capacity.
How do you calculate ICHRA affordability?
At a high level, here’s how the calculation works:
Start with the lowest-cost silver plan (LCSP) available to the employee in their residential rating area.
Subtract the monthly ICHRA allowance.
The remaining amount is the employee’s required contribution.
That contribution is then compared to the chosen safe harbor threshold. If it falls below that threshold, the offer is considered affordable for that month.
Importantly, this test is month-by-month and employee-specific. It applies only to the cost of self-only coverage—not to family or dependent premiums. Employers who offer varying allowances (for instance, based on geography or employment class) must test each group accordingly.
Do small employers (under 50 FTEs) need to worry about affordability?
If your organization has fewer than 50 full-time equivalent employees, the ACA’s employer mandate doesn’t apply. That means there’s no legal requirement to meet the affordability threshold. However, using affordability benchmarks as a guide can still be a smart move. A well-calibrated ICHRA allowance can make the difference between an employee enrolling in coverage or skipping it altogether.
Even if penalties aren’t a concern, aligning your ICHRA with local plan costs helps ensure your team can access meaningful, continuous healthcare coverage.
What are common ICHRA affordability mistakes to avoid?
Affordability testing isn’t just a box to check—it’s a process that requires diligence and attention to detail. Some common errors to avoid include:
Using family premiums in the calculation (remember, the test is for self-only coverage).
Skipping monthly reviews when allowances, premiums, or rating areas change.
Failing to document how you calculated affordability or which safe harbor was used.
Employers offering ICHRAs should also ensure timely delivery of annual employee notices, accurate reporting on Form 1095-C, and good recordkeeping practices—especially when applying a safe harbor.
How do you ensure ICHRA affordability compliance?
Getting affordability right is essential for employers offering ICHRAs—especially those subject to the ACA’s employer mandate. Fortunately, the IRS provides flexible tools to meet this requirement without needing private household data. Whether you're using a rate-of-pay approach or setting allowances based on the federal poverty line threshold, the key is consistency, clarity, and solid documentation.
When done right, affordability testing not only ensures compliance—it also supports a better employee experience. Employees are more likely to engage with and value their benefits when costs are transparent, predictable, and aligned with real-world coverage options.
This article is for general educational purposes and is not legal advice. The opinions shared here belong to the author and are not official statements from Thatch. For legal and tax questions, please consult a qualified professional.
