Breaking Down the Math: ACA Affordability for ICHRA (Updated for 2025)

We often get requests for Affordable Care Act (ACA) Affordability analyses. Our team can usually look at an ICHRA funding strategy and know in seconds whether it is affordable. In this article, we walk you through the math shortcuts that make this possible

Before we dive in, let’s set some context. 

‍What are the ICHRA ACA Affordability Thresholds? Why Does It Matter?

Applicable Large Employers (ALE) report each year to the IRS on whether they provide affordable health care coverage. If they don’t do this, they face fines.  

For 2025, the rule is that a lowest-cost silver plan cannot cost more than 9.02% of a household's annual income. This marks a shift from the 8.39% affordability threshold set for 2024, indicating that employees will need to contribute a bit more towards their health insurance premiums.

This change impacts not only employees but also employers, as they are not required to offer as much to meet the definition of an affordable plan. The IRS adjustment means that for a plan to be considered affordable under the ACA's standards, an employee should not pay more than approximately $113.20 monthly for their premium, up from $101.94 in 2024, based on the Federal Poverty Line (FPL) safe harbor amount.

For those with non-calendar year health plans, the 8.39% threshold remains applicable until the new plan year begins. It's important to note that the FPL safe harbor contribution limits for plan years starting after January 1, 2025, cannot be calculated until the Department of Health and Human Services releases the updated FPL guidelines, typically in January or February.

How do I calculate ACA Affordability?

The formula is:

[Lowest Cost Silver Premium] - [Employer ICHRA Contribution] < (Employee’s Annual Income/12 Months) X .0902

Let's do some math.

Example #1: Federal Poverty Line Safe Harbor 

I’m an employee living in Georgia, and I make $15,060 per year. That would put me right at the Federal Poverty Line (FPL) for a single individual. Note: An employee making minimum wage ($7.25/hour) working 40 hours a week will make $15,080 per year. In other words, very few full-time employees will make less than this amount.

($15,060/12) X .0902 = $113.201 per month

Remember this number. It represents IRS’s FPL Safe Harbor. It’s the easiest way to keep track of ACA Affordability because you don’t have to worry about changing incomes throughout the year. You just have to make sure that an employee’s share of a lowest-cost silver plan does not exceed $113.20

Example #2: What if I’m an employee earning $45,000 per year?

At this income level, the employee share of a lowest-cost silver plan cannot exceed $338.25 per month.​

Here’s where it can get complicated. You have to offer all employees within the same “class” the same contribution strategy to meet ICHRA Non-Discrimination Requirements. 

Say you have a younger workforce and nearly everyone is in their twenties. You learn that the monthly cost of the lowest-cost silver plan for a 20-year-old living in Atlanta is $350. Legally, you only need to contribute $11.75 in ICHRA Funding to meet ACA Affordability.

But perhaps you have a few employees in their 50s. That same plan will cost a 50-year-old $597.46, meaning your $10 ICHRA contribution will not meet ACA Affordability for your older workforce (aside from being an extremely uncompetitive benefit offering).  

In these scenarios, we recommend an Age-Based ICHRA Funding Strategy. Using this strategy, you pick a reference plan and set a percentage of that plan's cost to pay (e.g. 75% of a Gold Plan.) Each employee receives the dollar equivalent of 75% of a Gold Plan. This ensures that your whole workforce has the same purchasing power. This approach allows you to more easily meet ACA Affordability Requirements if you have a workforce that is diverse in age.

Example #3: What if I need to meet ACA Affordability, but I don’t want to worry about income, location, or age?

Pro Tip: Offering 100% of the cost of a Lowest Cost Silver Plan for your employees will meet ACA Affordability Requirements 99.9% of the time.

When faced with a situation where your current employer-sponsored health plan may not be considered affordable in 2025, you have two primary courses of action to consider: "Play" or "Pay."

What are the Consequences of Choosing to "Play" or "Pay" Regarding Health Plan Affordability?

Navigating health plan affordability in 2025 involves making a crucial decision: "play" by adjusting your contributions, or "pay" by facing potential penalties. Here's what each choice entails:

The "Play" Option

By choosing to "play," you commit to increasing your contributions toward your employees' health insurance. This adjustment ensures that the self-only, lowest-cost health coverage does not exceed 9.02% of an employee's household income. This approach is ideal for employers who can shoulder the financial increase. By making the plan affordable, you avoid the risk of penalties and maintain compliance with federal requirements.

• Advantages:
  • Avoidance of penalties linked to unaffordable plans.
  • Strengthened employee satisfaction due to enhanced health benefits.

The "Pay" Option

Opting to "pay" involves accepting that your health plan might not meet affordability standards, potentially leading to financial penalties. This path is chosen when increasing contributions isn't viable.

• Considerations:
  • Organizations with 50 or more full-time equivalent employees (FTEs) have specific obligations.
  • The IRS imposes penalties only if more than 30 full-time employees are not provided affordable coverage.

Penalty Structure

1. Section 4980H(a) Penalty:
   • This penalty applies if you fail to offer minimum essential coverage to at least 95% of full-time employees.
   • Triggered when at least one employee qualifies for a premium tax credit via the ACA marketplace.
   • The penalty in 2025 is $241.67 monthly per full-time employee, excluding the first 30, totaling $2,900 annually.
2. Section 4980H(b) Penalty:
   • This applies if coverage is offered to 95% of full-time employees but isn't deemed both affordable and of minimum value.
   • When employees opt for a subsidized ACA marketplace plan instead, a penalty ensues.
   • In 2025, the penalty is $362.50 per month for each such employee, reaching $4,350 annually per affected employee.

By weighing the implications of "play" versus "pay," employers can make informed decisions that align with both their operational capabilities and workforce needs.

Play: Adjust Your Contributions

If you choose to "play," you'll need to adjust your contributions for the lowest-cost, self-only plan. This means ensuring that your employees are not paying more than 9.02% of their household income for healthcare coverage. Opting to increase your employer contributions can help you meet these new affordability requirements, allowing you to avoid potential penalties and maintain compliance.

Pay: Accept the Penalties

Alternatively, if you decide to "pay," you might continue offering an unaffordable plan and face the possibility of penalties. The penalties, known as employer shared-responsibility payments (ESRP), can be significant but are contingent upon specific conditions:

• The Section 4980H(a) Penalty: This applies if you don't offer Minimum Essential Coverage (MEC) to at least 95% of your full-time employees. The penalty is triggered if at least one full-time employee receives a premium tax credit for coverage through an ACA marketplace exchange. For 2025, this penalty is $241.67 per month ($2,900 annualized) for each full-time employee beyond the first 30.
• The Section 4980H(b) Penalty: This applies if you offer coverage to 95% of full-time employees, but the coverage isn't affordable or doesn't provide minimum value. The penalty is triggered when an employee opts for subsidized coverage on the ACA marketplace. For 2025, this penalty stands at $362.50 per month ($4,350 annualized) for each such employee.

It's critical to evaluate your workforce size as these penalties only apply to organizations with more than 30 full-time employees. If your organization falls below this threshold, you may be exempt from penalties despite offering a plan deemed unaffordable.

By understanding these options and considering the "Play" or "Pay" strategies, you can make informed decisions that best suit your organization’s financial and operational needs.

Steps for Employees Facing Unaffordable ICHRA Allowances

When faced with an Individual Coverage Health Reimbursement Arrangement (ICHRA) allowance that feels unaffordable, employees have several avenues to explore. Here’s how to navigate this situation in a way that may ease the financial burden and ensure continued access to healthcare coverage.

1. Explore ACA Marketplace Options

If the ICHRA allowance does not cover a sufficient portion of your health insurance costs, it’s viable to explore plans available through the ACA Marketplace. Here, you might find plans eligible for tax credits or subsidies, especially if your income qualifies. This could lower your out-of-pocket costs significantly.

2. Review Household Budget

Take a careful look at your current budget. Identify any areas where expenses can be minimized or cut to allocate more funds towards health insurance premiums. This strategy could provide the necessary flexibility to adjust for higher insurance expenses.

3. Compare Coverage Plans

Before making any changes, compare the benefits of accepting the ICHRA allowance with purchasing your own plan. Evaluate factors like deductibles, co-pays, and network providers to ensure that any plan you consider meets your health needs effectively.

4. Check for Eligibility for Medicaid

In certain cases, employees might qualify for Medicaid, which is healthcare provided by the state based on income levels. If Medicaid eligibility is an option, it could significantly reduce insurance costs while still providing necessary healthcare coverage.

5. Consult Employer Benefits

It’s important to discuss with your human resources department or benefits coordinator. An open conversation might uncover additional resources or strategies that your employer could offer to better support your healthcare needs.

6. Consider Local Health Programs

Some states and localities offer health plans and programs with competitive rates or benefits that aren't widely advertised. Investigating these options could reveal affordable alternatives beyond mainstream options.

By taking these steps, employees can better manage an unaffordable ICHRA allowance and continue to have access to necessary health coverage.

Impact of IRS Affordability Changes on Applicable Large Employers (ALEs)

Applicable Large Employers (ALE) report each year to the IRS on whether they provide affordable health care coverage. If they don’t do this, they face fines.

Understanding these fines is crucial for any organization with ALE status, which is defined as having 50 or more full-time equivalent employees. However, penalties are only imposed on those with more than 30 full-time employees. Here's how the penalties break down:

• The Section 4980H(a) Penalty:
  • This occurs when an ALE fails to offer Minimum Essential Coverage (MEC) to at least 95% of its full-time workforce in any given month.
  • The penalty is triggered if at least one full-time employee receives a premium tax credit through an ACA marketplace exchange.
  • For 2025, the fine is $241.67 per month ($2,900 annually) for each full-time employee, minus the first 30.
• The Section 4980H(b) Penalty:
  • This applies if an ALE offers coverage to at least 95% of full-time employees, but the coverage is either unaffordable or does not provide minimum value.
  • The penalty is applicable when an employee declines the noncompliant coverage and opts for subsidized coverage on the ACA marketplace.
  • The 2025 penalty is $362.50 per month ($4,350 annually) for each full-time employee receiving subsidized coverage.

These penalties underscore the importance of not only offering health insurance but ensuring that it meets the affordability and coverage standards set by the ACA. For organizations with 30 or fewer full-time employees, maintaining an existing plan, even if deemed unaffordable, may not incur these penalties. However, for those with more than 30 full-time staff, careful compliance with ACA requirements is essential to avoid substantial fines.

Let's break down how this affects ALEs:

Consistent Affordability Across Years

If you offered a health plan that was affordable for your employees in 2024, and no changes are proposed, it will also be deemed affordable in 2025. This conclusion results from the IRS maintaining a consistent affordability benchmark from 2024 to 2025.

Affordability Calculation

To ensure your plan is affordable in 2025:

• The employee's portion of the health plan premium must not exceed 9.02% of their annual household income.
• Alternatively, if you're using the Federal Poverty Level (FPL) safe harbor, the premium can't be more than $113.20 monthly.

Using Employee Data for Affordability

If the FPL safe harbor isn’t utilized, affordability can be calculated using:

• Hourly Employees: Multiply the individual's hourly rate by 130 hours per month.
• Salaried Employees: Ensure the employee's contribution does not exceed 9.02% of their monthly salary at the start of the plan year.

Key Takeaways

• The IRS changes mean consistent affordability criteria from 2024 to 2025.
• Keep employee contributions within specified limits to meet these new guidelines.
• Evaluating using either the employee's household income or the FPL safe harbor ensures compliance.

Maintaining an affordable health plan is crucial for ALEs to avoid penalties under the Affordable Care Act (ACA). By adhering to these updated guidelines, ALEs can continue to provide compliant and accessible health coverage to their employees.

‍How does Venteur Make Sure Your ICHRA is ACA-compliant?

We conduct an ACA Affordability audit behind the scenes during your onboarding and annual renewal. Have a question about ACA Affordability? Get in touch with the Venteur team for a free compliance review.