In June of 2019, the federal government released a final ruling regarding the offering of HRAs in 2020. This rule created a new HRA called the Individual Coverage HRA (ICHRA) and clarified proposed rules about calculating the affordability of an ICHRA allowance.
In this post, we’ll discuss how to calculate affordability, and what it means for employers and their employees.
While this post describes how to calculate affordability manually, you can use your online ICHRA affordability calculator to streamline this process and get recommendations on whether to opt in or opt out.
How to calculate ICHRA affordability
To be considered affordable according to the ruling, the cost of health insurance for an employee must not be more than 9.83% of the employee’s household income. The lowest-cost silver plan on the local exchange is the standard for the calculation with an employer’s ICHRA contributions being subtracted from the premium. That means the monthly premium for the lowest-cost silver plan, minus the ICHRA monthly allowance being offered, should not exceed 9.83% of the employee’s household income for the month. If this requirement is met, the ICHRA is considered affordable.
The final rules also state that if there is a silver-level plan that has one rate for tobacco users and another rate for non-tobacco users, the rate provided for non-tobacco users applies to the affordability determination of the allowance provided under the ICHRA.
Let’s take a look at the calculation.
Household income * .0983 = X
X/12 = Y
Lowest-cost silver plan - Y = minimum affordable ICHRA monthly allowance
Derrick, an employee at Big Build Construction, has a household income of $45,000. His employer is offering an ICHRA. The lowest-cost silver plan in his area is $550. The calculation for affordability in this case is:
$45,000 * .0983 = $4,401
$4,401 / 12 = $366.75
$550 - $366.75 = $183.22
In this scenario, the lowest allowance that can be considered affordable to the employee is $183.22.
This formula can be used to calculate the affordability of any allowances your company is considering for a specific employee class.
ALEs and the Employer Mandate
The Affordable Care Act’s employer shared responsibility provision considers employers with an average of 50 or more full-time equivalent employees during the preceding calendar year as applicable large employers, or ALEs. These employers are required to offer minimum essential coverage to at least 95% of full-time equivalent employees and their dependents. They must also provide coverage that’s affordable and provides minimum value to all full-time employees. This requirement is called the Employer Mandate.
ALEs that are offering the ICHRA will need to determine if the allowances they are offering are affordable to their employees in order to comply with the Employer Mandate. The departments involved with the ICHRA final rulings recognize that determining affordability for individual employees can become near impossible for the employer. Because of that, the federal government is creating certain safe harbors, outlined in IRS Notice 2018-88, to allow employers to calculate affordability with the information they’ll have reasonable access to:
- Location. Through this safe harbor, employers could use the employee’s primary site of employment to determine affordability calculations, rather than the employee’s residence.
- Affordability. Using this safe harbor, employers could estimate an employee’s income using the employee’s W-2, or rate of pay.
- Calendar year. With this safe harbor, employers who offer an ICHRA in the following calendar year could use the current year’s estimates as a baseline for affordability.
Determining tax credit eligibility as an employee
An employee being offered the ICHRA has the option of opting out. They may choose to decline the benefit for any number of reasons, including if they are eligible for a premium tax credit (PTC) for individual health insurance coverage. If they accept the benefit, they will automatically forfeit the PTC. If they choose to decline the ICHRA they’re being offered, but the coverage is determined to be affordable, they will still not be eligible to receive the PTC. For an employee being offered the ICHRA to be eligible to receive the PTC, the allowance they’re offered under the ICHRA must be considered unaffordable. Employees can use the same formula listed above to determine if they’d be eligible for a PTC if they opt-out of the ICHRA.
Offering allowances as a non-ALE
Why would an employer with fewer than 50 employees care about affordability? Employers that want to be competitive can set affordable allowances to ensure that potential employees will consider them as an option against an employer offering a group insurance plan or other benefits. If your company would like to offer the ICHRA but would like to make sure that certain classes of employees can choose between accepting the ICHRA and opting out to utilize a premium tax credit (PTC), knowing the affordability rate will be important when setting allowances.
Non-ALE companies are not required to provide affordable coverage, but it can be valuable for these employers to know what contributions are considered affordable.
The ICHRA can be a great option for employers wanting to offer a different kind of employee health benefit. Providing an allowance that is considered affordable is an important part of the decision making process. The proposed safe harbors are a good starting point for employers wanting to calculate an affordable allowance for their employees. The good news is that the formula for affordability is final and will help employers set a benchmark allowance going forward.