ICHRA Plan Design Part 3 of 3: Affordability

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Table of Contents


Welcome back to our compliance miniseries!

Our last topic in this part of our journey: Affordability! 

Affordability is complex and daunting with long calculations and the threat of large penalties making this a dreaded benefits topic. 

The Affordable Care Act (ACA) requires Applicable Large Employers (50+ employees) to ensure that employees can buy quality coverage without spending an unreasonable portion of their own income. 

Specifically, the mandate states that ALEs’ plans cover at least 60% of employee-only healthcare costs, and that - starting in 2024 - plans do not cost more than 8.39% of household income for employee-only coverage. To be compliant, the ALE’s plan must be considered affordable for at least 95% of their full-time employees.

In this blog post, we’ll explain why affordability is important (i.e. how much you stand to pay if you’re not compliant), how affordability works within the context of ICHRA, and how the Zorro solution and engine can help make affordability a breeze. 

Let’s dive in! 

<blog-icon-title>Why affordability matters<blog-icon-title>

There are two penalties that ALEs may incur if they do not meet the affordability requirements:

Part A penalty (aka "The Sledgehammer”)

Applied if an ALE offers no coverage or coverage that does not meet minimum value, and at least one employee enrolls and receives Premium Tax Credits (PTCs) through the Exchange. This penalty will take the total number of employees, subtract 30, and charge $240 per employee per month for every month in which the employer was non-compliant. 

Example: if you have 200 employees and you do not offer coverage that meets minimum value for all of 2023, you pay the following:

                200 - 30 = 170 employees x $240 x 12 months = $489,600

Part B penalty (aka “The Tack Hammer”): 

Applied when an ALE offers coverage that does meet the minimum value (like an ICHRA), but the coverage is not considered affordable for at least 95% of employees, and at least one employee enrolls and receives PTCs through an Exchange. This penalty will charge $360 per such employee per month in which the employee receives PTCs. 

Example: if you have 200 employees and you offer minimum value coverage which is unaffordable, and one employee takes tax credits through the Exchange for 12 months, you will pay the following:

                1 employee x $360 x 12 months = $4,320

This sounds complex. It is, but no worries….At Zorro, our AI platform helps ensure that you stay above the 95% threshold while still reducing overall costs. 

<blog-icon-title>How does ICHRA affordability work?<blog-icon-title>

Since employees get an allowance and not a specific plan in the ICHRA model, the definition of minimum value coverage is determined by the cost of a benchmark plan in the individual market - specifically the Lowest Cost Silver Plan (LCSP). 

In 2023, the share of income is 9.12%. In 2024, that share is being reduced further to 8.39%. 

So in order for an ICHRA plan-design to be affordable in 2024, the following must hold: 

LCSP available to employee < ICHRA allowance + 8.39% * (Employee Income) 

<blog-icon-title>Defining affordability<blog-icon-title>

The art of ICHRA affordability is using the right benchmarks to find the optimized allowance for each employee to make sure you offer a minimum value plan and stay above the 95% threshold. 

  • Minimum value plan: an ICHRA offer must allow the employee to cover the employee-only cost of their LCSP using the formula above. But how can you determine what LCSP is available to each employee? Here are some assumptions you are allowed to make: 

                     1. Location: can be the employee’s home zip code or their primary work address 

                     2. Age-bands: can be used to group together several ages

                     3. Prior year: current year plan prices can be used to to determine next year’s affordable ICHRA allowance

  • Income: calculating employee income can also be done with some assumptions and safe harbors:

                     1. W-2 Wages: for salaried employees, this is box 1 of the W-2 

                     2. Rate of pay: for hourly employees, this is a multiplication of the hourly rate by 130 hours per month

                     (regardless of how much they actually work) 

                     3. Federal Poverty Line (FPL): if a determination cannot be made based on one of the above,

                     the FPL can be used as a benchmark 

<blog-icon-title>Determining individual employee affordability<blog-icon-title>

When an employee receives their plan offer and details, they can decide if they’d like to use their allowance or waive it and receive healthcare elsewhere. An employee’s own individual affordability determination can be different from the one assumed during plan design because they are using actual data rather than safe harbors or assumptions. This is okay and does not mean you are not compliant! 

  • If the offer is unaffordable to an employee and they opt out, they are allowed to go on the Exchange and apply for PTCs
  • If the offer is affordable, the employee can still opt out but they are not allowed to leverage PTCs on the Exchange


The topic of affordability requires an in-depth understanding of continuously changing regulations and analytical capabilities to translate this understanding into a compliant plan design. Zorro is here to help you do that seamlessly – making it feel like a breeze despite the complexity!

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