ICHRA Affordability Test

ICHRA Affordability Test: What It Is and How It Works

An ICHRA Affordability Test determines whether an employer’s health reimbursement arrangement contribution is sufficient to disqualify an employee from receiving ACA marketplace premium tax credits. For 2026 plan years, coverage is affordable if the employee's net cost for the lowest-cost Silver plan does not exceed 9.96% (increasing to 10.22% in 2027 under Rev. Proc. 2026-26) of their household income.

Why the Affordability Test Matters

Under the Affordable Care Act (ACA), an employer-sponsored Individual Coverage HRA interacts directly with the individual insurance marketplace. If an employer's ICHRA offer is deemed "affordable," the employee is legally barred from claiming ACA Premium Tax Credits (subsidies), even if they decline the ICHRA. Conversely, if the ICHRA offer is "unaffordable," the employee has the legal right to opt out of the ICHRA and claim their full premium tax credit on HealthCare.gov or their state exchange.

The Three IRS Affordability Safe Harbors

Because employers rarely know an employee's total household income (which may include a spouse's earnings or outside investments), the IRS established three statutory safe harbors under 26 CFR 54.4980H-5:

1. Form W-2 Safe Harbor: Compares the employee's required monthly contribution to 9.96% (2026) of their current W-2 Box 1 wages.
2. Rate of Pay Safe Harbor: Multiplies the hourly wage by 130 hours per month (for hourly staff) or uses monthly base salary, providing predictable monthly benchmarks.
3. Federal Poverty Line (FPL) Safe Harbor: Sets the maximum monthly employee contribution based on the mainland single federal poverty line, ensuring universal compliance regardless of individual wages.

Calculation Formula

The standard formula used to determine monthly affordability is:

Employee Required Contribution = Lowest Cost Silver Plan (LCSP) Premium − Monthly Employer ICHRA Allowance

If the Employee Required Contribution is less than or equal to (Safe Harbor Monthly Income × 9.96%), the ICHRA offer is legally affordable.

Practical Employer Example

Suppose an employee earns $4,000 per month ($48,000/year under the Rate of Pay Safe Harbor). Under the 2026 affordability threshold of 9.96%, the maximum the employee can be required to contribute toward self-only Silver coverage is $398.40 per month ($4,000 × 0.0996). If the Lowest Cost Silver Plan in their geographic rating area costs $650 per month, the employer must provide an ICHRA allowance of at least $251.60 per month ($650 − $398.40) to satisfy the affordability requirement.