How does an ICHRA interact with ACA requirements and the employer mandate?
ICHRAs were designed to work within the Affordable Care Act (ACA) framework. When structured correctly, an ICHRA can satisfy the ACA's employer mandate requirements for applicable large employers.
The employer mandate: a quick overview
Under the ACA, applicable large employers (ALEs)—those with 50 or more full-time equivalent employees—are required to offer health coverage that meets certain standards to their full-time employees. Employers that fail to do so may face penalties if any full-time employee receives a premium tax credit for marketplace coverage. This is often referred to as the "employer shared responsibility" provision or "pay or play" mandate.
How an ICHRA satisfies the employer mandate
An ICHRA can satisfy the employer mandate if it meets two key criteria:
Minimum essential coverage (MEC): An ICHRA is considered to offer MEC, satisfying the first requirement of the employer mandate—that coverage be offered to at least 95% of full-time employees.
Affordability: The ICHRA must be considered "affordable" to the employee. For ICHRAs, affordability is calculated differently than for traditional group plans.
How ICHRA affordability is determined
An ICHRA is considered affordable if the employee's required contribution for the lowest-cost silver plan available in their area—after subtracting the employer's ICHRA allowance—does not exceed a set percentage of the employee's household income. For 2024, that threshold is 8.39% (this percentage is adjusted annually).
Since employers generally don't know employees' household income, the IRS provides three safe harbors that allow employers to estimate affordability based on:
Using one of these safe harbors helps employers demonstrate compliance without requiring access to employees' personal financial information.
**What happens if the ICHRA is not affordable?
If an employee's ICHRA offer is deemed unaffordable—or if the employer doesn't offer the ICHRA to a particular employee—that employee may be eligible to waive the ICHRA and receive premium tax credits to purchase coverage through the ACA marketplace. However, employees cannot receive both ICHRA reimbursements and premium tax credits.
Small employers and the ACA
Employers with fewer than 50 full-time equivalent employees are not subject to the employer mandate and face no penalty for not offering coverage. These employers can still offer an ICHRA as a voluntary benefit, and their employees' eligibility for premium tax credits will depend on whether the ICHRA offer is considered affordable.