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How the ICHRA affordability threshold is calculated

For employers deciding whether to move from a group health plan to an individual coverage HRA. The federal test that decides whether an individual coverage HRA (ICHRA, which we call a CHOICE Arrangement) is “affordable,” the safe harbors you can use, the rules that limit how your allowance can vary, and a worked example with real 2026 premiums.

Who it applies to

If you switch to an ICHRA, affordability sets the smallest allowance you can offer without risking a penalty, and it changes what your employees can get on the Marketplace. Whether the switch saves money comes down to that minimum allowance vs. what you contribute to your group plan today.

  • Applicable Large Employers (ALEs): employers with 50 or more full-time employees, counting full-time equivalents, in the prior calendar year. Under the employer shared responsibility rules (Internal Revenue Code §4980H), an ALE that offers an ICHRA owes a penalty for an employee only if the ICHRA is unaffordable for that employee and the employee receives a premium tax credit on the Marketplace.
  • Every ICHRA offer, regardless of employer size: affordability also decides whether the employee can get a premium tax credit. An employee offered an affordable ICHRA can't claim a premium tax credit, even if they opt out; an employee offered an unaffordable one may opt out and claim the credit instead (Treas. Reg. §1.36B-2(c)(5)).

The affordability formula

For plan years beginning in 2026, an ICHRA is affordable for an employee for a month if:

LCSP (self-only) − monthly self-only ICHRA allowance ≤ 9.96% × (household income ÷ 12)

  • LCSP is the monthly premium of the lowest-cost silver plan for self-only coverage for that employee. It is not the second-lowest-cost silver plan (SLCSP); the SLCSP is the benchmark for the size of a premium tax credit, not for ICHRA affordability.
  • The LCSP is for the employee's age and the rating area of their primary residence. Under the location safe harbor, an employer testing §4980H affordability may instead use the LCSP where the employee's primary site of employment is.
  • 9.96% is the required contribution percentage for plan years beginning in 2026 (IRS Rev. Proc. 2025-25). It is indexed every year.
  • Only the self-only allowance and self-only premium count, even if the employee covers family members, and the premium is the non-tobacco rate (any tobacco surcharge is ignored).
  • Employers don't know employees' household income, so for §4980H they use one of three safe harbors in its place (below).

Rearranged, the minimum monthly self-only allowance that makes the ICHRA affordable for one employee is:

minimum allowance = max(0, LCSP − 9.96% × monthly income under the safe harbor)

This is exactly what our free estimate computes, rounding the 9.96% amount to the cent.

The three safe harbors

The employer picks a safe harbor and must apply it on a reasonable and consistent basis for all employees in a class (for example, every full-time hourly employee).

Safe harborMonthly income usedNotes
W-2 wagesForm W-2 Box 1 wages for the calendar year ÷ 12Box 1 is after pre-tax deductions (401(k), section 125), so it is often lower than gross pay. Known for sure only after the year ends.
Rate of payHourly employees: hourly rate × 130 hours. Salaried employees: monthly salary (annual ÷ 12).130 hours is used whatever the actual hours. For hourly employees use the lowest hourly rate in effect; a salaried employee whose pay is reduced during the year can't use this safe harbor.
Federal poverty line (FPL)The single-person HHS poverty guideline ÷ 12The guideline in effect within six months before the plan year starts: for 2026 calendar-year plans, the 2025 guideline of $15,650.00 (48 states and DC), $19,550.00 in Alaska and $17,990.00 in Hawaii. Same income for everyone: $1,304.17 a month, so the most an employee can be asked to pay is $129.90 a month.

Our tool uses these three formulas and applies the Alaska or Hawaii guideline based on the state entered for each employee. If an employee lives and works in different states, check which state's guideline applies.

Other rules that shape the allowance

  • Same terms within a class. Every employee in a class must be offered the ICHRA on the same terms (45 CFR 146.123(c)(3); 29 CFR 2590.702-2; 26 CFR 54.9815-2711). The only permitted differences in the allowance are:
    • Age: the allowance may increase with age, as long as everyone of the same age gets the same amount and the oldest participants get no more than 3 times what the youngest get.
    • Number of dependents covered by the ICHRA, with the same amount for everyone with the same number of dependents.
    Allowances can't be set employee by employee, for example to match each person's ZIP or wage.
  • The 11 permitted classes: (1) full-time, (2) part-time, (3) salaried, (4) non-salaried (e.g. hourly), (5) employees whose primary site of employment is in the same rating area, (6) seasonal, (7) employees covered by a particular collective bargaining agreement, (8) employees in a waiting period, (9) non-resident aliens with no U.S.-source income, (10) staffing-firm employees placed at unrelated customers, and (11) a combination of two or more of these.
  • Minimum class sizes apply only when an employer offers a traditional group plan to some classes and an ICHRA to others, and only to ICHRA classes based on full-time/part-time status, salaried/hourly status, or a geographic area smaller than a state (or combinations including them): at least 10 employees if the employer has fewer than 100 employees, 10% of employees (rounded down) for 100–200, and 20 for more than 200.
  • No choice between plans: a class can't be offered both a traditional group health plan and an ICHRA. (A special rule lets new hires in a class move to an ICHRA while existing employees keep the group plan.)
  • Individual coverage required: the employee (and any covered dependents) must be enrolled in individual health insurance coverage or Medicare, and the ICHRA must substantiate it.
  • Opt-out: employees must be able to opt out of and waive future reimbursements once each plan year (and at termination of employment).
  • Notice: a written notice is due at least 90 days before the plan year starts (or by the date coverage can start, for employees who become eligible later).
  • Age is measured once per plan year. Federal guidance (IRS Notice 2018-88 and the proposed §4980H regulations) lets employers use each employee's age on the first day of the plan year. Our tool computes age as of January 1 of the plan year (calendar-year plans).
  • ACA age bands: individual-market premiums are set for ages 0–14 (one band), each age from 15 through 63, and 64 and older (one band) (45 CFR 147.102). Our tool clamps ages to 14–64 for that reason.
  • Tobacco and family status are ignored for the affordability test: always the non-tobacco, self-only LCSP.
  • Minimum essential coverage and minimum value: an ICHRA is an employer-sponsored plan that counts as minimum essential coverage, and an ICHRA that is affordable is treated as providing minimum value for §4980H. So an affordable ICHRA offered to at least 95% of full-time employees protects an ALE from both §4980H penalties.

Two different “3 to 1” rules

ACA premium rating (3:1): insurers may charge a 64-year-old at most 3 times what they charge a 21-year-old for the same plan (45 CFR 147.102). ICHRA allowance variation (3x): separately, an employer that varies its ICHRA allowance by age may give the oldest participants in a class at most 3 times what it gives the youngest. One limits premiums; the other limits the employer's allowance. The premium limit is measured from age 21, and younger ages are rated a little lower (0.833 to 0.970 of the age-21 rate on the federal default curve), so the LCSP for a 64-year-old can be slightly more than 3 times a teenage employee's. An age-based allowance schedule must still stay within 3x.

Worked example (real 2026 premiums)

One employee in Dallas, Texas (home ZIP 75201, Dallas County), age 40 on January 1, 2026, earning $20.00 an hour with expected W-2 Box 1 wages of $45,000.

  1. Find the LCSP. The lowest-cost silver plan for a 40-year-old non-tobacco user in ZIP 75201 for 2026 is $667.44 a month (Ambetter from Superior HealthPlan, Standard Silver VALUE), from CMS Marketplace rate data in our pricing table.
  2. Work out the safe-harbor income and 9.96% of it.
    Safe harborMonthly income9.96% (max employee cost)Minimum allowance = LCSP − max cost
    FPL$15,650.00 ÷ 12 = $1,304.17$129.90$667.44 − $129.90 = $537.54
    Rate of pay$20.00 × 130 = $2,600.00$258.96$667.44 − $258.96 = $408.48
    W-2 wages$45,000 ÷ 12 = $3,750.00$373.50$667.44 − $373.50 = $293.94 (cheapest)
  3. Pick the cheapest safe harbor the data supports. Here W-2 needs the smallest allowance, $293.94 a month, but only if the employer applies the W-2 safe harbor to everyone in this employee's class and the year's actual Box 1 wages turn out as expected. FPL is the most conservative and needs no wage data.

From one employee to a whole class

The free estimate repeats this for every employee and reports, for each safe harbor:

  • Single-class minimum: the highest per-employee minimum. A flat allowance of that amount for everyone in the class is affordable for every employee and satisfies the same-terms rule. This is the figure to design around.
  • Sum of each employee's own minimum: a theoretical floor on total cost. It is not an allowable design by itself, because allowances can't be set employee by employee; it shows how much of the single-class cost is “overshoot” for employees with cheaper plans or higher pay.

Between the two sits an age-based schedule: an allowance that rises with age, the same for everyone of the same age, at least each employee's own minimum, and with the oldest amount no more than 3 times the youngest. Splitting employees into permitted classes (for example by rating area, or full-time vs. part-time) can also lower cost, subject to the class-size rules.

Official sources

Not legal or tax advice

This page is a plain-language summary for brokers and employers. It is not legal or tax advice, and it simplifies some rules (for example, look-back month and non-calendar plan years). Confirm plan design with a benefits attorney or tax advisor.

The free estimate runs this for your roster and, if you enter your current contribution, compares your current cost with a compliant ICHRA.

Try the free affordability estimate References