ICHRA Affordability: How to Test It and Avoid Penalties

Reviewed by a licensed benefits professional. Last reviewed: October 6, 2026.

ICHRA affordability is a simple subtraction with a strict benchmark. Take the lowest-cost silver plan premium in the employee's area, subtract the allowance you offer, and check whether what is left is under the required percentage of income. Get it wrong and you can owe the IRS or push an employee off a subsidy they needed.

Key facts

• The required contribution percentage for plan years beginning in 2026 is 9.96% (IRS Revenue Procedure 2025-25, 2025).
• The required contribution percentage for plan years beginning in 2027 is 10.22% (IRS Revenue Procedure 2026-26, 2026).
• ICHRA affordability equals the lowest-cost silver self-only premium in the employee's rating area minus the monthly ICHRA amount (26 CFR 1.36B-2(c)(5)(ii)).
• An employee who opts out of and waives an ICHRA that is not affordable may qualify for the premium tax credit (26 CFR 1.36B-2; HealthCare.gov, 2026).
• The 2026 employer shared responsibility amounts are $3,340 under Section 4980H(a) and $5,010 under Section 4980H(b) (IRS Revenue Procedure 2025-26, 2025).
• An applicable large employer averaged at least 50 full-time employees, including full-time equivalents, in the prior calendar year (IRS, 2026).

How do you test ICHRA affordability?

You test ICHRA affordability by subtracting your monthly ICHRA allowance from the lowest-cost silver self-only premium in the employee's rating area, then comparing the result with the required share of income. If the result is at or below that share, the ICHRA is affordable.

The rule sits in 26 CFR 1.36B-2(c)(5)(ii). The comparison is to one-twelfth of the employee's household income times the required percentage, which is 9.96% for 2026 plan years (IRS Revenue Procedure 2025-25) and 10.22% for 2027 plan years (IRS Revenue Procedure 2026-26).

Employers do not know household income, so the IRS lets them use safe harbors for employer shared responsibility: Form W-2 Box 1 wages, the employee's rate of pay, or the federal poverty line (IRS, 2026). The IRS also says those safe harbors do not decide whether an employee's coverage is affordable for the premium tax credit, so an employee can still be judged on actual household income. Confirm with your ACA advisor how each safe harbor applies to your ICHRA.

What is the ICHRA affordability limit for 2026 and 2027?

The ICHRA affordability limit is 9.96% of income for 2026 plan years and 10.22% for 2027 plan years. The percentage went up, so a given allowance can now cover less of the premium and still pass.

Table: Required contribution percentage by plan year

Our ACA affordability percentage guide shows how the same percentage applies to traditional group plans.

How do you calculate the minimum ICHRA allowance?

The minimum affordable ICHRA allowance equals the lowest-cost silver self-only premium minus the required percentage of the employee's income, divided by 12. If that number is zero or less, any allowance passes.

Here is a worked example using the W-2 Box 1 wages safe harbor. The premium is hypothetical so you can see the math. Your area will differ. The lowest-cost silver self-only premium for the employee's rating area is $520 a month.

The $30,000 row works like this. Wages times 9.96% is $2,988 a year, or $249.00 a month. The minimum allowance is $520 minus $249, which is $271.00. For 2027, 10.22% gives $3,066 a year, or $255.50 a month, and a $264.50 minimum allowance.

The lesson is that lower-paid employees need larger allowances. A flat $300 allowance passes for all three employees above in 2026, but a flat $200 allowance fails for the $30,000 employee. The 2019 final rule lets employers set different allowances for different employee classes, which is one way to handle this.

Is an ICHRA a group health plan?

Yes. An ICHRA is an employer-sponsored account-based group health plan, even though employees buy individual insurance policies. The 2019 federal final rule is titled "Health Reimbursement Arrangements and Other Account-Based Group Health Plans" (Federal Register, 2019).

That status is why affordability, notices and nondiscrimination rules apply. HealthCare.gov (2026) describes an ICHRA as an employer-funded arrangement that reimburses premiums and requires employees and dependents to hold individual coverage or Medicare. Our guide on ICHRA vs group health insurance compares the two models, and how an ICHRA works covers setup.

What are the penalties if an ICHRA is not affordable?

Only applicable large employers face employer shared responsibility penalties, and only when employees get a premium tax credit. A small employer has no penalty, but an unaffordable ICHRA still lets an employee opt out and claim the credit.

An applicable large employer averaged at least 50 full-time employees, including full-time equivalents, in the prior calendar year (IRS, 2026). For 2026 the Section 4980H(a) amount is $3,340 and the Section 4980H(b) amount is $5,010 (IRS Revenue Procedure 2025-26, 2025). Section 4980H(b) applies only to employees who actually receive a premium tax credit.

Read our ACA employer mandate requirements for the 95% offer rule and the reporting side. For small employers, the loss is different: an employee who opts out and waives an unaffordable ICHRA may qualify for the premium tax credit (26 CFR 1.36B-2; HealthCare.gov, 2026).

What should an employer do before offering an ICHRA?

Before you offer an ICHRA, price the lowest-cost silver plan in every employee's rating area, set allowances that pass the test, and send the required notice. Do this before the plan year starts, not after the first employee complains.

1. Pull the benchmark. Find the lowest-cost silver self-only premium for each rating area where employees live.
2. Pick a safe harbor. Choose Form W-2 Box 1 wages, rate of pay or the federal poverty line and use it for everyone in the same class (IRS, 2026).
3. Set the allowance. Use the formula above, with the 2026 or 2027 percentage that matches your plan year.
4. Define classes. The 2019 final rule allows 11 employee classes, such as full-time, part-time and seasonal (Federal Register, 2019).
5. Send the notice. Employers must give eligible employees a 90-day notice about how the offer affects the premium tax credit (Federal Register, 2019).
6. Document it. Keep the benchmark, safe harbor and calculation in your file.

Employees who receive an ICHRA offer may also qualify for a Special Enrollment Period, which HealthCare.gov (2026) says applies when the offer was made within the past 60 days or will be made within the next 60 days.

Copy this checklist into an email to your broker or payroll lead:

Subject: ICHRA affordability check for plan year [year]

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Please send me: (1) the lowest-cost silver self-only premium for each rating area where we have employees, (2) the safe harbor we are using and why, (3) the minimum affordable allowance for each employee class at 9.96% (2026) or 10.22% (2027), (4) the date our 90-day notice goes out, and (5) a one-page summary comparing ICHRA cost with our best group plan quote.

Employers can also pair an ICHRA with other pre-tax benefits. Read our guide to ICHRA and a premium only plan for how the two interact, or see ICHRA vs QSEHRA if your headcount is small.

Frequently Asked Questions

Sources: IRS Revenue Procedure 2025-25, 2026 required contribution percentage (2025); IRS Revenue Procedure 2026-26, 2027 indexing adjustments (2026); IRS Revenue Procedure 2025-26, 2026 Section 4980H amounts (2025); 26 CFR 1.36B-2, Eligibility for minimum essential coverage (2026); IRS, Employer Shared Responsibility Provisions (2026); IRS, Minimum Value and Affordability (2026); Federal Register, Health Reimbursement Arrangements and Other Account-Based Group Health Plans, June 20, 2019 (2019); HealthCare.gov, Individual coverage HRA and Special Enrollment Period pages (2026).