Originally published October 27, 2023. Updated March 2026.
ICHRAs come with a number of tax advantages for both employers and employees. Employer contributions are tax-deductible and free of payroll taxes. Employee reimbursements are excluded from taxable income. And when paired with a Section 125 cafeteria plan, employees on off-exchange plans can pay their remaining premiums pre-tax as well.
But one tax benefit that often creates confusion is the premium tax credit (PTC), specifically, how ICHRA interacts with it. The short version: the two generally cannot be used together, but whether an employee qualifies for PTCs depends on whether their ICHRA is considered "affordable" under ACA rules. Getting that determination right matters for both compliance and employee satisfaction.
This post focuses on the ICHRA-PTC relationship in depth.
What are ICHRA and premium tax credits?
ICHRAs represent a modern approach to employer-funded health benefits. Introduced in January 2020, these arrangements allow employers to reimburse employees for their individual health insurance premiums and other medical expenses, rather than providing a traditional group health plan. This model offers flexibility and personalization, enabling employees to choose plans that best fit their needs while allowing employers to control costs.
Premium tax credits (PTCs) are a separate mechanism created by the Affordable Care Act. They reduce monthly premiums for individuals and families with low to moderate incomes who purchase coverage through the Health Insurance Marketplace. To qualify, a person generally cannot be enrolled in -- or offered -- an affordable, minimum-value employer plan.
That last point is where ICHRA and PTCs intersect.
How does ICHRA affect premium tax credit eligibility?
When an employer offers an ICHRA, that offer is treated similarly to an offer of traditional employer-sponsored coverage under ACA rules. If the ICHRA is considered "affordable," the employee is generally disqualified from receiving premium tax credits -- even if they would otherwise qualify based on income.
What makes an ICHRA affordable?
Affordability is determined by a specific calculation. An ICHRA is considered affordable if the employee's remaining cost for the lowest-cost Silver plan available in their area -- after subtracting the employer's monthly ICHRA contribution -- does not exceed 9.96% of the employee's household income (the 2026 threshold).
Here's a simple example:
Employee's annual household income: $45,000
Monthly income: $3,750
9.96% of monthly income: $373.50
Lowest-cost Silver plan in their area: $500/month
Employer's ICHRA contribution: $200/month
Employee's remaining cost: $300/month
In this case, $300 is less than $373.50, so the ICHRA is affordable and the employee would not qualify for premium tax credits.
If the employer's contribution were lower and the employee's remaining cost exceeded $373.50, the ICHRA would be unaffordable, and the employee would have the option to decline it and seek PTCs on the marketplace instead.
A note on safe harbors
Most employers don't know each employee's exact household income. The IRS allows three safe harbor methods for testing affordability without that data: the Federal Poverty Level (FPL) safe harbor, the Rate of Pay safe harbor, and the W-2 safe harbor. The FPL method is most commonly used for 2026, it sets the maximum employee contribution at roughly $129.90 per month for self-only coverage.
Working with an ICHRA provider like Thatch can help employers navigate these complexities and ensure that their ICHRA is compliant with ACA guidelines.
What are employees' options when offered an ICHRA?
Employees offered an ICHRA face a decision that depends on whether the offer clears the affordability threshold.
If the ICHRA is affordable: The employee can accept the ICHRA, use the employer's contribution toward a marketplace plan of their choosing, and pay the remaining premium out of pocket (or through a Section 125 cafeteria plan if the employer has set one up). They would not be eligible for premium tax credits, but the ICHRA contribution itself offsets cost.
If the ICHRA is unaffordable: The employee can decline the ICHRA and instead purchase a marketplace plan using premium tax credits. This option is worth evaluating carefully -- PTCs can be substantial for lower-income employees, and in some cases may provide more value than the ICHRA contribution.
If income is low enough to qualify for Medicaid: Employees who qualify for Medicaid are generally not eligible for premium tax credits regardless of their ICHRA offer. They should check eligibility through their state's marketplace.
The decision isn't always straightforward. Employees need to weigh the dollar value of the ICHRA contribution against what PTCs would be worth to them, factoring in plan availability in their area and their own healthcare needs.
How can employers help employees navigate this decision?
This is an area where many employers underinvest. Offering an ICHRA without supporting employees through the coverage selection process can lead to low participation and confusion at enrollment.
A few things employers can do:
Set contributions with affordability in mind. Even employers with fewer than 50 full-time equivalent employees -- who aren't subject to the ACA employer mandate -- benefit from calibrating their ICHRA allowance thoughtfully. A contribution that clears the affordability threshold gives employees maximum flexibility and keeps the benefit competitive.
Communicate the tradeoff clearly. Employees need to understand that if their ICHRA is affordable, they cannot double-dip with PTCs. Providing a simple comparison -- here's your ICHRA allowance, here's what a marketplace plan would cost, here's what PTCs would have been worth -- helps employees make confident decisions rather than guessing.
Point employees to the right tools. Healthcare.gov has a subsidy estimator, and many ICHRA administrators (including Thatch) offer enrollment support that walks employees through plan options based on their specific situation.
Document the affordability calculation. For applicable large employers (ALEs) with 50 or more full-time equivalent employees, proper affordability documentation is a compliance requirement, not just a best practice.
FAQ
Can an employee use ICHRA and premium tax credits at the same time? Generally no. If an employee is offered an affordable ICHRA, they are ineligible for premium tax credits for the months the ICHRA is in effect. If the ICHRA is unaffordable, they can opt out and claim PTCs instead but they cannot receive both simultaneously.
What happens if an employee incorrectly claims premium tax credits while enrolled in an ICHRA? They would likely owe back the credits when filing their tax return. Employees should verify their eligibility carefully before claiming PTCs.
Does the affordability threshold change every year? Yes. The IRS adjusts it annually. The 2026 threshold is 9.96%, up from 9.02% in 2025 and 8.39% in 2024.
What are the main tax benefits of ICHRA? ICHRA contributions are tax-deductible for employers and excluded from employees' taxable income. Neither side pays payroll taxes on reimbursements. Employees on off-exchange plans can also pair their ICHRA with a Section 125 cafeteria plan to pay remaining premiums pre-tax. Premium tax credits are a separate tax benefit available to employees whose ICHRA offer does not meet the affordability threshold.
The ICHRA-PTC relationship is one of the more nuanced parts of offering this benefit but once you understand the affordability calculation, the rules are fairly straightforward. Set contributions thoughtfully, communicate the tradeoff clearly to employees, and make sure affordability is documented. That's most of what it takes to get this right.
