If your client is an applicable large employer (ALE), an ICHRA is only as good as its affordability analysis. An ICHRA that isn't affordable to a full-time employee can expose the employer to an employer shared responsibility payment if that employee goes on to claim a premium tax credit. Smaller employers aren't subject to the penalty, but affordability still decides whether employees can opt out and use a premium tax credit instead.
Here's a practical, step-by-step way to run the analysis for 2025 plan years.
The basic test
An ICHRA is considered affordable for an employee when:
(monthly premium for the lowest-cost silver plan for self-only coverage) minus (monthly ICHRA allowance for self-only coverage) is no more than 9.02% of the employee's household income divided by 12.
The 9.02% figure is the required contribution percentage for plan years beginning in 2025, published by the IRS in Rev. Proc. 2024-35. The lowest-cost silver plan (LCSP) is the cheapest silver plan available to that employee in the individual market. Two details trip people up:
- It's always self-only. Even if the employee will cover a family, affordability is tested using self-only LCSP premium and the self-only portion of the allowance.
- Employers don't know household income. That's why the IRS lets employers use safe harbors.
Step 1: Clean the census
You need, for each employee: date of birth, home ZIP code (and county where a ZIP spans more than one), primary work location, full-time status, and pay data (hourly rate or annual wages). Missing or stale ZIP codes are the most common reason an affordability analysis comes out wrong.
Step 2: Decide which location to use
For the employer shared responsibility rules, the IRS proposed regulations published September 30, 2019 (which employers may rely on) include a location safe harbor: the employer can use the LCSP for the employee's primary site of employment rather than where the employee lives. That simplifies the analysis for employers with many employees at one worksite.
The safe harbor protects the employer from the penalty; it doesn't change the employee's own premium tax credit eligibility, which is still based on where the employee lives.
Step 3: Pick the right month and age
Two more simplifications from the same proposed rules:
- Look-back month safe harbor. For a calendar-year plan, the employer can use LCSP premiums for January of the prior calendar year. For a non-calendar plan year, it can use January of the calendar year in which the plan year begins.
- Age. The employer can use each employee's age as of the first day of the plan year (or, for someone who becomes eligible mid-year, the date the ICHRA can first take effect for them).
Step 4: Choose an income safe harbor
The familiar employer-mandate affordability safe harbors carry over to ICHRA:
- Federal poverty line (FPL). The simplest, and it doesn't require pay data. Employers can use a poverty guideline in effect within six months before the plan year begins. For a January 1, 2025 plan year, that's the 2024 guideline for the 48 contiguous states, $15,060, which works out to a maximum employee cost of about $113.20 per month ($15,060 × 9.02% ÷ 12).
- Rate of pay. For hourly employees, hourly rate × 130 hours × 9.02%. For salaried employees, monthly salary × 9.02%.
- Form W-2. Box 1 wages for the year × 9.02%, tested after the year ends, which makes it harder to use for planning.
Many employers use the FPL safe harbor for everyone because it removes the need to analyze individual pay. The trade-off is that it requires the largest allowances.
Step 5: Do the math for each employee
Here's a hypothetical example to show the arithmetic. These are made-up premiums, not quotes for any real market:
| Employee | Age | LCSP (self-only) | Allowance | Employee cost | FPL limit | Result |
|---|---|---|---|---|---|---|
| A | 28 | $340 | $250 | $90 | $113.20 | Affordable |
| B | 45 | $460 | $250 | $210 | $113.20 | Not affordable |
| C | 60 | $820 | $750 | $70 | $113.20 | Affordable |
Employee B shows why a flat allowance rarely works across a workforce with a wide age range. Because LCSP premiums rise with age, the employer can vary the allowance by age (up to a 3:1 ratio between the oldest and youngest) to keep everyone under the limit for less than it would cost to give everyone the highest amount.
Step 6: Check the classes and penalties
An ALE must offer coverage to at least 95% of full-time employees to avoid the larger "A" penalty, and an ICHRA counts as an offer of coverage. Run affordability class by class. If one class is consistently unaffordable, adjust that class's allowance rather than raising the whole workforce.
For employees where the employer chooses to accept some risk, note that a penalty is only triggered if that full-time employee actually enrolls in Exchange coverage and receives a premium tax credit.
Step 7: Document everything
Keep a record of the LCSP premiums used, the month and location basis, the safe harbor chosen, and each employee's result. If the IRS ever sends a Letter 226-J proposing a penalty, that documentation is what the employer will rely on to respond.
Final thoughts
Affordability is where ICHRA proposals succeed or fall apart for larger employers. The arithmetic isn't complicated, but it has to be done for every employee, with the right premiums, ages, and locations. Doing it carefully up front protects your client and gives them confidence that the allowance they're budgeting for will hold up.