Benafica is a health benefits and insurance company that helps employers offer flexible, tax-free health reimbursement plans instead of traditional group health insurance.
ICHRA Affordability
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What Is ICHRA Affordability?
Affordability plays an important role in determining how much to contribute toward employees’ individual health coverage. For Applicable Large Employers (ALEs), it’s also a key part of meeting Affordable Care Act (ACA) requirements.
Affordability is measured against the lowest-cost silver plan in the employee’s area. If what’s left for the employee to pay for self-only coverage stays below a set percentage of their household income, the offer is affordable. That percentage is set by the IRS and changes every year: 9.96% of household income for 2026 and 10.22% for 2027.
How an ICHRA Satisfies the Employer Mandate
Under the mandate, ALEs must:
- Offer minimum essential coverage (MEC) to at least 95% of their full-time employees and
their dependent children to age 26, AND - Ensure that coverage is affordable and provides minimum value (covers at least 60% of
total allowed costs)
The ICHRA Affordability Test: How It Works
The formula:
(Lowest-Cost Silver Plan monthly premium) – (Monthly ICHRA allowance) ≤ Affordability Threshold × (Employee Household Income ÷12)
Affordability example
An employee named Maria works for a company in St.Paul, MN. Her household income is
$48,000 per year. The lowest-cost silver plan in her rating area costs $520 per month.
- Affordability threshold: $48,000 × 9.96% ÷12 = $398.40/month
- Minimum affordable ICHRA allowance: $520 − $398.40 = $121.60/month
If the employer’s ICHRA offers Maria $150/month, the ICHRA is affordable for her. If the
employer offers only $100/month, the ICHRA is unaffordable, and Maria could qualify for exchange subsidies.
The Challenge: Employers Don't Know Household Income
The formula above requires knowledge of the employee’s household income — information that most employers do not have and cannot legally require employees to disclose.
To resolve this, the IRS created three affordability safe harbors that allow employers to
substitute known, employer-accessible data for household income.
The 3 ICHRA Affordability Safe Harbors
Federal Poverty Line (FPL) Safe Harbor
The FPL safe harbor uses the federal poverty guideline for a one-person household as a proxy for employee income.
How it works: Coverage is deemed affordable if the employee’s monthly cost for the lowest-cost silver plan (after subtracting the ICHRA allowance) does not exceed the applicable affordability percentage of the one-person FPL divided by 12.
- 2025 FPL safe harbor maximum employee contribution: $113.20/month
- 2026 FPL safe harbor maximum employee contribution: $129.90/month
Rate of Pay Safe Harbor
The Rate of Pay safe harbor calculates affordability based on the employee’s compensation at the beginning of the plan year, using a formula that accounts for hourly vs. salaried employees.
2026 example (employee earning $16/hr):
$16 × 130 × 9.96% = $207.17/month maximum employee contribution
2026 example (employee earning $3,500/month):
$3,500 × 9.96% = $348.60/month maximum employee contribution
W-2 Wages Safe Harbor
The W-2 safe harbor uses the employee’s Box 1 wages from the prior year’s W-2 as the income proxy.
Affordability is determined by checking whether the employee’s annual cost for the lowest-cost silver plan (net of ICHRA allowance) does not exceed the affordability percentage of their W-2 income.
2026 W-2 safe harbor example:
An employee had Box 1 wages of $42,000 on their W-2. The employer offers an ICHRA allowance of $200/month, and the lowest-cost silver plan in the employee’s rating area costs $450/month.
- Maximum affordable annual contribution: $42,000 × 9.96% = $4,183.20/year ($348.60/month)
- Employee’s cost after the allowance: $450 − $200 = $250/month, or $3,000/year
- Result: $3,000 ≤ $4,183.20, so the ICHRA is affordable under the W-2 safe harbor.
What Happens if ICHRA Isn't Affordable?
If an ICHRA allowance doesn’t meet affordability thresholds, two things can happen:
- The employee becomes eligible for premium tax credits (APTCs) through the ACA marketplace.
- The employer faces potential Section 4980H(b) penalty liability. The penalty is $5,010 per full-time employee who receives a premium tax credit for an unaffordable ICHRA, and rising to $5,670 in 2027.
ICHRA and Premium Tax Credits
An “affordable” ICHRA generally disqualifies employees from premium tax credits. This can sometimes create friction where employees had previously been receiving significant APTCs. If your allowance is generous enough to be affordable, but not enough to offset the premium, they could end up paying more than they were before.
Benafica recommends that employers review the lowest-cost silver plan premiums and APTC eligibility to ensure their ICHRA design is genuinely beneficial for all employee classes.
For Small Employers (<50 FTEs)
For employers with fewer than 50 full-time equivalent employees, the ACA employer mandate does not apply, and affordability rules are different. Smaller employers can often use a QSEHRA instead of an ICHRA, which carries its own IRS contribution caps but is subject to a different affordability framework.
If you are unsure whether your business qualifies as an ALE or whether ICHRA or QSEHRA is
the better fit, Benafica can help you evaluate your options.
How Benafica Handles Affordability Testing
Affordability compliance is not a one-time calculation. It must be revisited every plan year as the IRS adjusts the affordability percentage, silver plan premiums change, employees move between rating areas, and compensation levels shift.
At Benafica, affordability testing is built into our proposal process, so your ICHRA is designed to be compliant before it launches. For every proposal, we:
- Identify the rating area for each employee location, updated annually
- Calculate affordability using the appropriate safe harbor for each employee class
- Set allowance levels that meet the affordability standard, and flag where they should be reviewed to stay compliant as premiums and the IRS percentage change
Our team works alongside HR professionals, CFOs, and benefits consultants to ensure that ICHRA plans are designed compliantly from the start.
Affordability FAQ
What does “affordable” mean for an ICHRA?
An ICHRA is affordable if the employee’s cost for the lowest-cost silver plan (self-only) in their rating area, after subtracting the employer’s monthly allowance, doesn’t exceed a set percentage of their income. The IRS adjusts that percentage each year.
Why does affordability matter?
Applicable large employers (50+ full-time equivalent employees) that don’t offer affordable coverage may owe penalties under the ACA employer mandate. Affordability also determines whether an employee can claim a Premium Tax Credit instead of using the ICHRA.
How do you test affordability?
We identify each employee’s rating area, find the lowest-cost silver plan premium for their age, and compare the employee’s required contribution to the IRS threshold using one of the IRS safe harbors.
Which safe harbors can be used?
The W-2 wages, rate of pay, and federal poverty line safe harbors. We apply the appropriate one to each employee class.
Do small employers need to worry about affordability?
The employer mandate applies only to ALEs. Smaller employers still need to consider affordability because it affects whether employees can claim Premium Tax Credits.
How often does affordability need to be reviewed?
Every plan year, since the IRS percentage, silver plan premiums, rating areas, and compensation can all change.
Is affordability testing included in the proposal?
Yes, we test affordability for each employee class and recommend allowance levels that meet the standard.
Related ICHRA Guides
See Where Your Allowance Lands
Send us your census and your counties and we’ll run the affordability test at three allowance levels, so you can see exactly where the line sits before you commit.
Benafica is an ICHRA and QSEHRA administration company and Third-Party Administrator (TPA) based in St. Paul, MN. This content is provided for educational purposes and does not constitute legal or tax advice. IRS penalty amounts and affordability percentages are subject to annual adjustment. Consult a qualified benefits advisor or legal counsel for guidance specific to your organization.