ICHRA affordability: When an employee (or employer) should just say no to employer contributions.

No group medical plan?  No problem. An ICHRA (Individual Coverage Health Reimbursement Arrangement) can be a valuable, cost-saving benefit for both employers and employees. Let’s say you want to offer a plan to reimburse employees for individually-owned medical insurance premiums?  An ICHRA may fit the bill, but you need to make sure the money you are offering employees isn’t going to harm them…or you.

If you are a large employer with 50 or more employees, you must offer enough money to employees or it will harm you in the form of ACA penalties. You must also meet an “affordability” standard, calculated based on an IRS affordability index. These guidelines are in place to help each employee decide if they should say yes to the ICHRA and say no to premium tax credits or say no to the ICHRA and say yes to the premium tax credits. And while employers with under 50 employees are not subject to ACA penalties nor the affordability standard, it’s just good business practice to make sure a benefit you are offering your employees, is actually a benefit to them and not a determent.

This article is to give guidance to both employees, for making that decision, and employers, to understand if they are, in fact, offering an “affordable” ICHRA.

General guidance and Safe Harbors for Employers

Whether or not an ICHRA can be deemed affordable is based on a number of factors. Income, age and location are the primary drivers. Large employers considering whether or not to implement an ICHRA are granted Safe Harbor parameters that can help them ascertain at a base level whether or not the ICHRA benefit will be accepted as affordable.

The Safe Harbor allows employers to:

1. Assume the employee is opting for self-only coverage on the exchange. Keep in mind this will profoundly skew the affordability determination at an individual level, as a family a with coverage on an exchange will garner significantly more in tax credits than a solo individual.
2. Take into account only the employee’s income as a standard for household income. To determine an employee’s income, an employer may:
   • Use Box 1 W-2 income for a salaried employee
   • Use one of two methods for determining the income of hourly employees:
     • Option 1 for hourly employees use this formula: the hourly rate x 130 hours to estimate monthly income (even if this may not be correct)
     • Option 2 for hourly employees: Use the Federal Poverty Level calculator
3. Use the employer’s zip code as the location for determining the employee’s location, instead of the employee’s home address
4. Use the lowest cost Silver medical plan (based on the employee’s age) available on their local exchange – this can be from the prior year instead of the following year (helpful when you want to introduce an ICHRA next year)

With these Safe Harbor parameters in mind, let’s take a look at how this plays out for an employee trying to decide whether or not to accept an ICHRA contribution.

From the Employee’s Standpoint

As an employee, your employer does not offer a group medical plan. They want to reimburse you for your individually-owned health insurance premiums. They are offering you $200 per month through an ICHRA, but do you take it? Is it beneficial for you? Let’s say you are currently receiving tax credits, which lower the cost of your premiums. If you accept the employer’s contribution, will you be giving up the tax credits?  Yes. The decision to accept the employer ICHRA contribution or continue to use the tax credit is solely up to you. How do you know if you should say yes or no to that offer so you are not harmed by giving up those premium tax credits. Let’s walk you through how to make the decision. Before we start looking at examples, here are four things to keep in mind:

Now, let’s look at some examples. For each example we’ll assume that you are  paying $500 per month* for insurance and your employer is going to reimburse you $200 through an ICHRA.  Note that this is a $300/mo. difference. 

*The plan you choose on the exchange (Gold, Silver, Bronze), for affordability purposes is irrelevant, as the employer must consider the local rate for the lowest cost Silver plan as a standard for the affordability calculation.

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Example #1: Salaried Employee

In this example, you are 25 years-old and your income is $28,000/yr. Every year, the IRS publishes an affordability index percentage that you can use to help you determine whether or not you are better off accepting the employer’s ICHRA contribution or continuing to take premium tax credits. To make this calculation, multiply your income by the applicable IRS Affordability percentage (9.61% for 2022 at the time of writing this article). Divide that outcome by 12 months to arrive at a monthly affordability number. Spoiler alert: in this example it’s $224.25. Should you take the tax credits or the ICHRA contribution?

Because this number is less than the $300 premium difference, this ICHRA contribution is not deemed affordable for you. You should say no to this employer offer of $200 per month through an ICHRA and continue using the tax credits.

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Example #2: Older salaried employee

As we stated earlier, monthly premiums will vary based on your age. For this example, we are using the premium for a 56-year-old’s Silver $6500 deductible plan (which is the lowest Silver plan in SBA’s zip code at the time of writing this article). It is $752/mo. Here is the new calculation:

Again, the employee in this example would be better off rejecting the employer’s ICHRA contribution and accepting the tax credits.

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Example #3: Younger employee making $50,000/yr

When does an ICHRA contribution make sense? Generally, if an employee has more income, is younger and the $500 premium is more than a low cost Silver plan. Take a look: