Making Your ICHRA Affordable
If you are a large employer (defined in most states as any employer with 50 or more employees), an ICHRA can be used to satisfy the mandate for employee health insurance. However, in order for the requirements of the mandate to be met, the reimbursement offered through your ICHRA must make individual plans affordable to your employees. Tools for determining affordability are available online, but for those who are interested, the calculations and the considerations that go into them are also discussed below. Smaller employers should see the final section to learn more about how rules regarding affordability could impact their ICHRA and employees.
Making Your ICHRA Affordable
According to the IRS, “An ICHRA is affordable if the remaining amount an employee has to pay for a self-only silver plan on the exchange is less than 9.78% of the employee’s household income”. Put in more useful terms, the HRA contribution must be greater than:
Cost of Cheapest Silver Plan – (0.0978 * Employee’s Household Income)
This equation is a bit difficult to work with, especially since an employer is unlikely to know exactly what a given employee’s household income is. To help streamline things, the IRS has proposed several “safe harbors” – ways of reasonably estimating the variables in the equation above without needing to know the exact values. These are discussed below. Please also note that while the 9.78 figure is good for 2020, it may be subject to change in future years.
- The Cheapest Silver Plan:
determining this would typically involve using each employee’s age and home address. To make things easier, employers are allowed to use an employee’s work address instead. You are also allowed to use rates from the previous year’s silver plans to determine affordability for the coming year. Note that as far as affordability is concerned, all that matters is the cost of a silver plan for the employee alone, not the cost of a plan that would cover their whole family.
- Employee Household Income:
For salaried employees, the “household income” can simply be what the employer reports in Box 1 of the employee’s W-2. For hourly employees, employers can estimate monthly income by multiplying the employee’s hourly earnings by 130 hours, regardless of how many hours the employee actually works. Alternatively, you can assume that employee income is equal to the federal poverty level.
You are free to choose which of the aforementioned safe harbors you want to use when calculating each variable, but know that whatever you pick, it must be applied equally to all employees in order to maintain fairness – for example, you cannot calculate one employee’s household income based on their hourly rate of pay and another’s based on the federal poverty level.
One thing that you may note from all of this is that the point at which an ICHRA’s contribution is considered “affordable” can vary wildly from one employee to another. This is especially true if your employees span a wide range of ages, since individual health plans (and thus, the “cost of cheapest silver plan” variable) are significantly more expensive for older persons. Take these differences into consideration when deciding how you are going to allocate reimbursements. If your company does include a wide range of ages, for instance, it will likely be best for you to alter the size of your reimbursements according to the employee’s age. Please see our article on reimbursements and employee classes for more information on this.
Small Employers, Affordability, and Premium Tax Credits
Smaller employers (defined as fewer than 50 employees in most states) do not have to meet the mandate for employee health insurance, and thus have less to worry about when it comes to affordability. One important thing to note is that if an ICHRA meets the affordability requirement, qualified employees will not be allowed to claim premium tax credits (sometimes called premium subsidies) to help them buy individual coverage off the exchange. However, if the ICHRA is considered “unaffordable”, employees are free to choose between accepting the ICHRA’s reimbursement or claiming premium tax credits. Thus, some small employers may want to purposely craft unaffordable ICHRAs so that employees who are eligible for premium tax credits will opt to take those instead, saving the employer the cost of reimbursing them.