Hausmann Group February 24, 2021 3 min read

Employers Offering Individual Coverage HRAs (ICHRAs) Must Consider “Affordability”

For employers that are offering an ICHRA, keep in mind that an ICHRA has to be “affordable” in order to avoid an employer mandate penalty. An ICHRA offer is considered "affordable" to employees if, based on the employee's income and the ICHRA contribution, they are able to purchase the lowest-cost silver plan for single coverage in their area without spending more than 9.83% of their income (using one of the affordability safe harbors: W-2, Rate of Pay or FPL). 

For example, a 40-year-old employee is paid $15 per hour and works in Collin County, Texas. The lowest cost silver plan in that rating area according to CMS is $421. This employer is using the Rate of Pay affordability safe harbor to determine the employee’s household income. Thus, the ICHRA contribution could not be any less than $229 for this employee per month [LCSP-(9.83%*(130X15))].

Employers must run this calculation on every employee who is offered the ICHRA in order to know if they are providing an affordable ICHRA. If the ICHRA is not affordable, an applicable large employer who is subject to the employer mandate could wind up with a penalty assessment from the IRS (ESRP Assessment 226-J). Insurance Plans - Ring Binder on Office Desktop with Office Supplies. Business Concept on Blurred Background. Toned Illustration.

If the ICHRA offering is deemed “affordable,” then an employee cannot accept a premium tax credit (PTC). But if the ICHRA is deemed “unaffordable,” the employee can choose to decline the ICHRA and accept the premium tax credit.

The codes used on the employees' 1095-C forms will need to reflect ICHRA affordability as well. According to the IRS website, an applicable large employer that offers an ICHRA may use two codes from Code Series 1 on Form 1095-C, line 14, for reporting offers of coverage for 2020.

Code 1T illustrates that an affordable ICHRA was offered to an employee and spouse (not dependents), and affordability was determined using the employee’s primary residence ZIP code. Code 1U indicates that an affordable ICHRA was offered to an employee and spouse (not dependents) and affordability was determined using the employee’s primary employment site ZIP code under an affordability safe harbor.

Therefore, if an employer is going to offer an ICHRA in 2021, it is important to work with a capable vendor and ensure that the reimbursement is high enough to maintain affordability standards under the employer mandate and proper codes are used on 1095-C forms.