ALE HRA Eligibility: 2026 ICHRA Rules & Affordability

TL;DR

An Applicable Large Employer (ALE) is any business with 50 or more full-time equivalent employees. ALEs must offer affordable health coverage to at least 95% of full-time workers or face IRS penalties. The individual coverage HRA (ICHRA) is the primary HRA type ALEs can use to satisfy this mandate, but it comes with specific affordability thresholds, employee class rules, and reporting requirements. QSEHRAs are off-limits for ALEs.

Understanding ALE HRA eligibility is the first step toward building a compliant, cost-effective benefits strategy. Whether you’re an HR manager at a company that just crossed the 50-employee mark or a broker advising growing businesses, the rules here determine what you can offer, who qualifies, and what happens if you get it wrong.

Schedule a free consultation to see how these rules apply to your specific workforce.

What “ALE HRA Eligibility” Actually Means

The term combines two regulatory concepts. “ALE” refers to an Applicable Large Employer under the Affordable Care Act, any employer averaging 50 or more full-time equivalent employees over the prior calendar year. “HRA eligibility” refers to the rules governing which health reimbursement arrangements that employer can offer, and which employees can participate.

In practical terms: if you’re an ALE, the ICHRA (individual coverage HRA) is your primary HRA option for satisfying the ACA’s employer mandate. You set a fixed monthly allowance, employees choose their own individual health insurance plans, and you reimburse them tax-free. The QSEHRA, a simpler HRA designed for small employers, is strictly unavailable to businesses with 50 or more FTEs.

That single distinction trips up a surprising number of employers. Practitioners on Reddit’s r/smallbusiness frequently conflate the two HRA types, only to discover mid-setup that their company’s size disqualifies them from the QSEHRA entirely.

How to Determine If You’re an ALE

The 50-employee threshold sounds simple, but the calculation is not. ALE status isn’t based on headcount alone. It’s based on full-time equivalent employees, which folds in part-time hours.

Here’s how it works:

Full-time employees are those working at least 30 hours per week or 130 hours in a calendar month. Count each one as 1 FTE.

Part-time employees get combined. Add up all part-time hours worked in a month (capping each individual at 120 hours), then divide by 120. The result is the part-time FTE contribution for that month.

Add both numbers together. If your monthly average across the prior calendar year hits 50 or more, the federal government considers you an ALE for the following year.

You don’t need to exceed 50 every single month. It’s the annual average that matters.

One wrinkle that catches growing companies off guard: controlled group rules. If your business has related entities (parent-subsidiary relationships, brother-sister companies, or affiliated service groups), their employees count toward your FTE total. This is where many employers miscalculate and accidentally trigger ALE status without realizing it. For a deeper explanation, see this guide on controlled group rules and how they affect ALE testing.

What HRA Types Are Available to ALEs?

Not all HRAs are created equal, and ALE HRA eligibility narrows the field considerably.

The ICHRA stands out because it has no maximum contribution limit, works for employers of any size, and can satisfy the employer mandate on its own. That flexibility is why ICHRA adoption has grown so dramatically among larger employers.

For a side-by-side breakdown of how ICHRA compares to the EBHRA, check out this ICHRA vs. EBHRA comparison.

Employee Eligibility Rules Under ICHRA

ALE HRA eligibility doesn’t just determine whether the employer can offer an ICHRA. It also governs which employees can participate and under what terms.

The W-2 Requirement

Only W-2 employees are eligible. Independent contractors, 1099 workers, and the self-employed cannot participate.

Business Owner Eligibility

This varies by entity type and is a frequent source of mistakes:

• C-corporation owners are considered employees and can participate fully.
• S-corporation owners with more than 2% ownership generally cannot participate tax-free. Reimbursements would be treated as taxable income.
• Sole proprietors are not employees and cannot participate. However, if a spouse works as a W-2 employee of the business, the owner may gain coverage as a dependent.
• Partners are considered self-employed and are ineligible for tax-free participation.

The S-corp issue comes up constantly. Benefits administrators on forums and in YouTube walkthroughs regularly flag this as a gotcha that only surfaces at tax time.

Employee Classes

Employers can offer the ICHRA to all eligible employees or limit it to specific classes. The IRS defines the permissible classes, which include categories like full-time employees, part-time employees, salaried workers, hourly workers, employees in specific geographic locations, and seasonal employees, among others.

The critical rule: all employees within the same class must receive identical offers, regardless of health status, age, or other personal factors. You cannot create custom classes outside the IRS-defined list.

One exception allows variation. Employers can adjust contributions based on age and family size, but the allowance for the oldest employees cannot exceed three times the amount offered to the youngest. This 3:1 ratio cap prevents age-based discrimination while still allowing some flexibility.

For practical advice on structuring classes, see this guide on designing eligibility criteria for benefit classes.

Minimum Class Size Requirements

When an employer offers both a traditional group health plan and an ICHRA to different employee classes, minimum class size rules apply:

• Fewer than 100 employees: No minimum class size requirements.
• 100 to 200 employees: At least 10 employees per applicable class.
• More than 200 employees: At least 10% of total workforce per applicable class.

These thresholds disappear entirely if the employer doesn’t offer a traditional group plan alongside the ICHRA.

The 90-Day Notice Requirement

The ICHRA Final Rules require employers to deliver a written notice to each eligible employee at least 90 days before the start of each plan year. This notice must explain the ICHRA terms, the employee’s right to opt out, and the potential impact on premium tax credit eligibility.

Special Enrollment Period

Employees who become eligible for an ICHRA but don’t currently have individual health insurance get a 60-day special enrollment period to purchase coverage outside of the standard open enrollment window. Without qualifying individual coverage, employees cannot receive ICHRA reimbursements.

The ALE Affordability Requirement

This is where ALE HRA eligibility gets technical, and where the financial stakes are highest.

ALEs must offer coverage that meets both minimum essential coverage (MEC) and minimum value standards. For ICHRAs, the affordability test works like this:

The employee’s monthly cost for the lowest-cost Silver plan in their area, minus the ICHRA allowance, must be less than 9.96% of one-twelfth of the employee’s yearly household income.

That 9.96% figure is the 2026 threshold, up from 9.02% in 2025. According to analysis from The Horton Group, this is the highest the affordability percentage has ever been, which gives employers slightly more room.

Affordability is measured only for self-only coverage, not family or dependent coverage. This distinction matters because it simplifies the calculation but also means that family coverage costs don’t factor into the employer’s compliance determination.

For a full walkthrough of the math, including worked examples, see the 2026 ICHRA affordability guide.

The Three Safe Harbors

Employers rarely know an employee’s actual household income, so the IRS provides three safe harbor methods. An ALE can use one safe harbor per employee class but may use different methods for different classes.

The FPL safe harbor is the most popular choice among employers because it requires no individual income data. You set a single dollar threshold and apply it uniformly.

Request a demo to see how SimplyHRA calculates affordability automatically across employee classes.

ALE Penalties for Non-Compliance

Getting ALE HRA eligibility wrong carries real financial consequences. Two penalty provisions apply:

Section 4980H(a): $3,340 per year per full-time employee. This penalty triggers when an ALE fails to offer minimum essential coverage to at least 95% of its full-time employees. The calculation excludes the first 30 full-time employees, so while you’re an ALE at 50 FTEs, the penalty math starts at employee 31.

Section 4980H(b): $5,010 per year per affected employee. This penalty applies when offered coverage fails the affordability or minimum value test, and at least one employee obtains subsidized Marketplace coverage as a result.

Both penalties only activate if at least one full-time employee purchases health coverage on a public exchange with a premium tax credit. If no employee receives a subsidy, no penalty is assessed, regardless of what coverage looks like.

For a complete breakdown of penalty scenarios and how to avoid them, read the ACA employer penalty guide.

Impact on Employee Premium Tax Credits

The interaction between ICHRA offers and premium tax credits (PTC) is one of the most misunderstood aspects of ALE HRA eligibility.

If the ICHRA offer is affordable: The employee and their household members lose eligibility for the premium tax credit on Marketplace coverage. This is true even if the employee declines the ICHRA and doesn’t use it. The mere offer of affordable coverage is enough to disqualify them.

If the ICHRA offer is not affordable: The employee can choose between accepting the ICHRA or opting out to claim the premium tax credit on Marketplace coverage. They cannot do both.

This creates a real tension for employees. Practitioners on Reddit note that some workers are caught off guard when they discover that their employer’s ICHRA offer, even one they never enrolled in, eliminated their subsidy eligibility. Employers should address this directly in their 90-day notice.

For more on how these rules play out in practice, see ICHRA and premium tax credits.

ALE Reporting Obligations

ALEs offering an ICHRA face specific IRS reporting requirements that differ from those of smaller employers.

Form 1094-C is the transmittal form submitted to the IRS summarizing health coverage offered during the tax year.

Form 1095-C goes to each employee and details the coverage offered, including ICHRA-specific affordability codes that show how the employer determined affordability (which safe harbor was used, the allowance amount, etc.).

These are ALE-specific forms. Non-ALEs (under 50 FTEs) file Forms 1094-B and 1095-B instead, which serve a similar purpose but with different data requirements. Mixing up the forms is a common compliance error. For clarity on the distinctions, review the 1094-C vs. 1095-C reporting guide.

Filing deadlines are strict, and missing them can trigger separate penalties on top of the 4980H penalties described above.

Why ALE ICHRA Adoption Is Accelerating

The numbers tell a clear story. According to the HRA Council’s 2025 report, ICHRA adoption among applicable large employers grew 34% year over year from 2024 to 2025, with some large employer cohorts showing 49% growth. Since the ICHRA was first introduced in 2020, overall adoption has increased by 1,000%.

Other data points worth noting:

• 92% of employers who offered an HRA in the prior year continued to do so.
• 83% of employers offering ICHRA or QSEHRA in 2025 had not previously offered any health coverage at all.
• Roughly 450,000 U.S. employees and dependents were offered an ICHRA or QSEHRA for the 2025 plan year, with conservative national estimates exceeding one million Americans.

The reasons are straightforward. Group plan premiums keep climbing, and the share of small businesses offering health insurance has dropped from about 47% in 2000 to roughly 30% in 2023. ICHRA gives employers fixed, predictable costs while employees get to choose the plan that fits their needs.

There’s also a legislative signal. In 2025, Congress introduced the “CHOICE Arrangement” legislation twice, which would codify and rename the ICHRA. While not yet enacted, the bipartisan interest suggests the ICHRA model has staying power.

Frequently Asked Questions

Can an ALE offer both a group health plan and an ICHRA?

Yes, but not to the same class of employees. An ALE can offer a traditional group plan to one employee class (say, full-time salaried workers) and an ICHRA to another class (such as part-time or hourly employees). Minimum class size rules apply when mixing the two approaches.

What happens if an ICHRA-eligible employee doesn’t have individual health insurance?

They cannot receive reimbursements. The ICHRA requires employees to maintain qualifying individual health coverage. When an employee first becomes eligible for the ICHRA, they get a 60-day special enrollment period to purchase a plan outside of the normal open enrollment window.

Does the ICHRA affordability test apply to family coverage?

No. ALE HRA eligibility and affordability are measured based on self-only coverage only. The cost of covering dependents or a spouse does not factor into the affordability calculation.

Can an ALE use different safe harbors for different employee classes?

Yes. An employer must apply the same safe harbor consistently within a given class, but it can use the FPL safe harbor for one class and the rate of pay safe harbor for another, for example.

Is there a maximum contribution limit for ICHRAs?

No. Unlike the QSEHRA (capped at $6,450 for self-only and $13,100 for family coverage in 2026) or the EBHRA ($2,200/year in 2026), the ICHRA has no federal maximum. Employers can set allowances as high as they choose.

Can S-corp owners participate in an ICHRA?

Owners holding more than 2% of an S-corporation generally cannot participate tax-free. Their reimbursements would be treated as taxable income. C-corp owners, by contrast, are fully eligible.

What’s the penalty if an ALE doesn’t offer coverage at all?

The Section 4980H(a) penalty for 2026 is $3,340 per year for each full-time employee (minus the first 30). This only applies if at least one full-time employee receives a premium tax credit on Marketplace coverage.

How is ALE status determined for new businesses?

New employers that reasonably expect to average 50 or more FTEs during their first calendar year are treated as ALEs. The determination is based on expected employment levels, not prior-year data (since there is none).

Getting ALE HRA eligibility right protects your business from penalties and gives your employees meaningful, flexible health benefits. If you’re ready to move from research to implementation, schedule a demo to see how SimplyHRA handles affordability calculations, employee classes, and ACA reporting in one platform.