ICHRA affordability, explained

What ICHRA affordability means

An ICHRA is considered affordable for an employee if their required contribution for a benchmark individual plan, after applying the ICHRA allowance, is below an IRS-set percentage of their household income. In plain terms: a bigger allowance makes the ICHRA more likely to be affordable, because it covers more of the benchmark plan''s cost.

Why it matters: ACA subsidies

If an employee is offered an affordable ICHRA, they generally cannot also claim an ACA premium tax credit (subsidy) — they take the ICHRA instead. If the ICHRA is unaffordable, the employee can waive it and keep their subsidy. For employees who''d qualify for a large subsidy, this interaction is decisive, which is why affordability isn''t just paperwork — it shapes whether the benefit helps or hurts a given employee.

Why it matters: the employer mandate

For applicable large employers (50+ full-time-equivalent employees), offering an affordable ICHRA can satisfy the ACA employer mandate and avoid penalties. Affordability is therefore central to compliance for larger employers, not just to employee economics.

How affordability is calculated

Affordability compares the lowest-cost benchmark silver plan available to the employee (in their area, by age) against the ICHRA allowance and an IRS affordability percentage that adjusts annually. Because the inputs — local plan prices, age, and income — vary by person, affordability is calculated individually, not once for the whole company.

A worked example

Suppose the lowest-cost benchmark plan for an employee is $500/month and the IRS affordability threshold for their income works out to $180/month. If your ICHRA allowance is $350/month, their net cost is $150 — below $180, so the ICHRA is affordable, and they take it instead of a subsidy. If your allowance were only $250, their net cost would be $250 — above the threshold, so the ICHRA is unaffordable and they could keep a subsidy. The allowance you set directly flips this outcome.

Setting an affordable allowance

Because affordability depends on local plan costs and income, the right allowance varies by employee. Employers who want the ICHRA to count as affordable (e.g., to meet the mandate, or to give the cleanest benefit) set the allowance high enough relative to the benchmark plan. A broker runs the per-employee math so your allowance achieves the outcome you want.

It''s calculated per employee

There''s no single company-wide affordability answer — it''s determined employee by employee, based on each person''s age, location, and income. This is exactly where broker guidance earns its keep: modeling affordability across your roster so nobody unexpectedly loses a subsidy and (for large employers) the mandate is satisfied.

Why ZIP code drives the number

Affordability hinges on the lowest-cost Silver plan available to the employee, and that premium varies by their rating area (county and ZIP), age, and tobacco status. That is why a location-blind estimate is unreliable — and why our ICHRA calculator pulls the real lowest-cost Silver plan for a given ZIP to compute the exact result.

The three safe harbors

Because employers rarely know household income, the IRS allows three safe-harbor ways to prove affordability.

• Federal Poverty Line — caps the employee's share at a fixed monthly amount, the simplest route.
• Rate of Pay — uses hourly wage times 130 hours as the income basis.
• W-2 wages — uses the employee's W-2 Box 1 wages.

The 2026 threshold and how it changes

For the 2026 plan year, an ICHRA is affordable if the employee's cost for the lowest-cost Silver plan, after the allowance, is no more than 9.96 percent of the applicable income measure. The percentage is set by the IRS and adjusts each year, so always confirm the current figure.