The Affordable Care Act (ACA) requires employers with more than 50 full-time equivalent (FTE) employees to provide health insurance to their employees. This is known as the “employer mandate." Employers that don’t provide affordable insurance are subject to steep penalties. If you're offering an Individual Coverage HRA, you'll want to know what the ALE safe harbors are for you.
Can ICHRA satisfy the employer mandate? Yes, ICHRA can satisfy the employer mandate. Employers that have felt stuck using complicated group plans to meet the mandate now have a much simpler option with ICHRA. However, the ICHRA has to be “affordable” to meet the mandate and clear the employer of any penalties—a rule that's important to consider as you compare group plans and HRAs like ICHRA.
But what does "affordable" mean?
The IRS has proposed a clear-as-mud description of affordability:
“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 9.12% of the employee’s household income (rate applies to 2023).”
The affordability threshold, which applies for purposes of both the premium tax credit provisions and the employer shared responsibility affordability safe harbors, is adjusted in accordance with the threshold that applies with respect to the premium tax credit. The IRS releases the adjusted percentage each year in a revenue procedure.
In layman’s terms, this means that an affordable contribution must be greater than the lowest cost silver plan an employee can purchase minus 9.12% times the employee’s household income for 2023.
To calculate 2023 ICHRA affordability, that threshold is changing to 9.12%.
The two variables that go into the affordability equation are not difficult to understand, but could be very hard for an employer to know. Thankfully, the IRS has proposed several safe harbors that employers can use to estimate these amounts to make an affordability determination.
Affordability is based on the lowest cost silver plan for self-only coverage provided for the residence of an employee, or, under the location safe harbor (which we explain below), an employee's primary site of employment.
An additional safe harbor allows an employer to determine affordability of an ICHRA with a calendar year plan year using the lowest cost silver plan for self-only coverage for January of the prior year.
For an ICHRA that does not have a calendar year plan year, the employer may determine affordability of the HRA using the lowest cost silver plan for self-only coverage for January of the current year.
Regulations under Code section 36B (PDF) provide similar rules referencing the lowest cost silver plan for self-only coverage for the location of an employee's residence for determining the employee's eligibility for a premium tax credit if the employee is offered an ICHRA.
To recap: To allow employers to reasonably estimate the lowest cost silver plan, the IRS distinguishes the following safe harbors:
It would not be reasonable for an employer offering an ICHRA to be able to estimate an employee’s household income—what if their spouse works? Or a dependent kid has a summer job?
To allow employers to estimate an employee’s household income, the IRS has proposed the following safe harbors:
We know this is confusing, and Take Command is here to help! Please reach out to our team of HRA experts and we can talk you through these ICHRA plan rules and regulations. We also have a comprehensive guide to the ICHRA and an FAQ page.
We've also built an ICHRA Affordability Calculator that allows you to calculate affordability for your team. You can even upload a census to quickly determine your baseline! We are here to help.
This post was originally written in 2020 and has been updated in 2023 to reflect the latest regulatory and policy updates.