ICHRA Affordability Rules
For Applicable Large Employers (ALEs — generally 50+ full-time equivalent employees), an ICHRA must satisfy the ACA's affordability standard to avoid employer shared responsibility penalties. Getting this calculation wrong is one of the most common and costly ICHRA compliance mistakes.
Why affordability is the critical ICHRA compliance variable
The ACA employer mandate requires ALEs to offer minimum essential coverage that is both affordable and provides minimum value to full-time employees. For a group health plan, affordability is straightforward — the employee's required premium contribution cannot exceed a fixed percentage of their household income. For ICHRA, the calculation is more complex because individual plan premiums vary by geography.
An ICHRA is affordable if the employee's required contribution for self-only coverage on the lowest-cost silver plan in their rating area does not exceed the ACA affordability threshold for that year. The employer's ICHRA allowance reduces the employee's required contribution — but only if the allowance is large enough relative to local plan costs.
This creates a geographic complexity that group plans do not have. An ICHRA that is affordable for employees in a low-cost rural market may be unaffordable for employees in a high-cost urban market — even if the reimbursement amount is identical. ALEs with geographically dispersed workforces must run the affordability calculation for each employee's rating area, not just once for the whole workforce.
The affordability formula
An ICHRA is affordable for an employee if:
The ACA affordability percentage is adjusted annually by the IRS. For 2025, the threshold is 9.02% of household income. Employers use the W-2 safe harbor (W-2 Box 1 wages) as a proxy for household income.
The location-based safe harbor: step by step
Because individual plan premiums vary by location, the IRS provides a location-based safe harbor for ICHRA affordability. Employers use the lowest-cost silver plan available in the employee's primary rating area to determine whether the ICHRA is affordable. Here is the four-step process.
Identify the employee's primary rating area
Use the employee's county of residence (or the county where they work if the plan uses the work location). Rating areas are defined by state insurance regulators and determine which plans and premiums apply.
Find the lowest-cost silver plan
Look up the lowest-cost silver plan available to a 21-year-old in that rating area on healthcare.gov or the state exchange. Use the self-only premium. The IRS uses age 21 as the benchmark to normalize for age-rating variation.
Calculate the employee's required contribution
Subtract the ICHRA monthly allowance from the lowest-cost silver plan premium. This is the employee's required contribution — the amount they would pay out of pocket after the ICHRA reimbursement.
Apply the affordability test
If the required contribution does not exceed the ACA affordability percentage of the employee's W-2 wages (÷ 12), the ICHRA is affordable. For 2025, the threshold is 9.02% of household income; the W-2 safe harbor uses Box 1 wages as a proxy.
What happens if the ICHRA is not affordable
An unaffordable ICHRA does not satisfy the ACA employer mandate for ALEs. The consequences flow in two directions — to the employee (who gains marketplace subsidy eligibility) and to the employer (who faces penalty exposure).
ICHRA affordability for non-ALEs (under 50 FTEs)
Employers with fewer than 50 full-time equivalent employees are not subject to the ACA employer mandate and do not need to satisfy the affordability test. However, if the ICHRA is not affordable, employees may be eligible for ACA premium tax credits — which reduces the ICHRA's practical value to employees who would otherwise qualify for subsidies. Non-ALEs should still model affordability to ensure the benefit is competitive.
Practical guidance for ALEs
The most common ICHRA affordability mistake is setting a single reimbursement amount for all employees without running the location-based calculation for each employee's rating area. An employer with employees in both rural Arkansas and Manhattan cannot use the same reimbursement amount and expect it to be affordable in both markets.
The practical solution is to use the ICHRA employee class rules to create geographic classes — offering higher reimbursements to employees in high-cost markets and lower reimbursements in low-cost markets. This requires more plan design work upfront but eliminates the affordability risk for the employer and ensures the benefit is meaningful to employees in every market.
Build in a buffer above the minimum required for affordability. Individual plan premiums change annually, and the ACA affordability percentage also adjusts each year. A reimbursement that is barely affordable in year one may become unaffordable in year two if premiums increase faster than wages. A 10–15% buffer above the minimum provides reasonable protection against year-over-year changes.
Continue learning about ICHRA
Model affordability by employee location and wage level to set reimbursement amounts with confidence.
Estimate your 4980H employer shared responsibility exposure.
Next step
Calculate ICHRA affordability for your workforce
The free ICHRA calculator models affordability by employee location and wage level so you can set reimbursement amounts with confidence — before you commit to a plan design.