Setting up an ICHRA requires two things: making sure your employee contributions meet the IRS affordability threshold (currently 9.96% of household income for 2026), and structuring your employee classes so every person in a given class gets the same terms. Get both right, and your ICHRA is compliant. Get either wrong, and you risk ACA penalties or plan disqualification.
Below, we walk through exactly how to calculate affordability, which employee classes you can use, and the compliance steps that keep your plan on solid ground.
What Does ICHRA Affordability Mean?
The IRS requires that an ICHRA be affordable to employees. In plain terms, affordability means the employee’s share of the cost for the lowest-cost silver plan on the individual market (after your ICHRA contribution is applied) cannot exceed a set percentage of their household income.
For plan years beginning in 2026, that percentage is 9.96%, as set by the IRS in Revenue Procedure 2025-25. If the employee would have to pay more than 9.96% of household income for a qualifying silver plan after your ICHRA contribution, the ICHRA is not considered affordable under the ACA, and that can trigger shared responsibility penalties for applicable large employers (ALEs).
For small employers (fewer than 50 full-time equivalents), the affordability requirement does not trigger penalties the same way, but offering an affordable ICHRA is still important for employee retention and plan integrity.
How Do You Calculate ICHRA Affordability?
The calculation starts with the lowest-cost silver plan available to the employee on the local ACA marketplace. You subtract your ICHRA contribution from that premium. The remaining amount is what the employee pays out of pocket.
If that amount exceeds 9.96% of the employee’s household income, the plan fails the affordability test.
The Three Safe Harbor Methods
The IRS provides three safe harbors so employers do not have to ask employees for their household income:
- Federal Poverty Line (FPL) Safe Harbor. The employee’s monthly contribution cannot exceed $129.89 (based on 2026 FPL figures). This is the simplest method for employers with a geographically dispersed workforce.
- Rate-of-Pay Safe Harbor. Multiply the employee’s hourly rate by 130 hours, then by 9.96%. The resulting monthly figure is the maximum the employee can be required to contribute.
- W-2 Wages Safe Harbor. Use the employee’s current year W-2 wages to calculate the same threshold.
Most employers use the FPL or rate-of-pay methods because they do not require access to an employee’s full household income information.
What Are the ICHRA Employee Class Rules?
An ICHRA is not a one-size-fits-all benefit. The IRS allows employers to define different classes of employees and offer different contribution amounts to each class. Within a given class, however, every employee must receive identical terms.
The 11 Official ICHRA Classes
The IRS has defined 11 employee classes for ICHRA purposes:
- Full-time employees
- Part-time employees (as defined under ACA rules)
- Seasonal employees
- Salaried employees
- Non-salaried employees
- Employees in a rating factor group (geographic location, age, or a combination of both)
- Employees who have not satisfied a waiting period
- Non-resident aliens with no U.S. tax filing obligation
- Temporary employees of staffing firms
- Any combination of two or more of the above classes
- Collection of multiple classes (offering different ICHRAs to different classes simultaneously)
Key Class Rules to Follow
- You can offer up to six classes at once (or use the combination classes for more flexibility).
- Within each class, every employee must receive the same contribution amount and the same plan terms.
- You cannot use health status, claims history, or medical conditions to define classes.
- Part-time and full-time employees cannot be in the same class.
- Seasonal employees generally cannot be combined with full-time employees.
- Family members of full-time employees may be placed in the full-time class or in a separate family member class.
Can You Offer Multiple ICHRAs at the Same Time?
Yes. An employer can offer different ICHRAs to different classes simultaneously, as long as each eligible employee in a given class is offered the same ICHRA. For example, you might offer $400 per month to full-time employees and $200 per month to part-time employees. That is permitted.
What you cannot do is offer two different ICHRAs to the same class. Each class gets one ICHRA with one set of terms.
How Does the ICHRA Contribution Work for Employees?
When you set up an ICHRA, you define a monthly allowance for each class. Employees use that allowance to purchase individual market health insurance or to pay for qualified medical expenses.
The ICHRA can cover:
- Monthly premiums for individual health insurance plans
- Copayments, coinsurance, and deductibles
- Other qualified medical expenses as defined by the plan
Employees are free to choose any plan available on the individual market in their area. They are not limited to a specific carrier or network.
What Happens If an Employee Declines the ICHRA?
Employees are not required to accept the ICHRA. However, if they decline it, they lose access to ACA premium tax credits (subsidies) on the marketplace. The employer cannot force an employee to accept or decline the ICHRA, and the employee’s decision is final for the plan year.
ICHRA and Medicare: What Employers Need to Know
If your workforce includes employees aged 65 or older, there are additional considerations. A general ICHRA offered to a defined class of working-age employees can also be extended to Medicare-eligible employees in the same class. Each employee independently decides whether to apply the ICHRA toward Medicare or stay on the group plan.
Employers must not steer employees toward Medicare or offer Medicare-specific incentives. The ICHRA should be offered on equal terms to the class, and employees make their own choices.
Educating employees about their Medicare options is valuable, but the line between education and inducement must be respected. An informed employee is an empowered employee.
Compliance Steps for Setting Up an ICHRA
Here is a practical checklist for employers getting started:
- Define your employee classes. Choose which of the 11 classes you will use and ensure the definitions are consistent and documented.
- Set contribution amounts by class. Calculate the affordable contribution using one of the three safe harbors (FPL, rate of pay, or W-2 wages).
- Prepare the plan document. Your ICHRA plan document should outline eligibility, contribution amounts, reimbursement procedures, and plan year dates.
- Provide written notice to employees. The IRS requires a written notice to each eligible employee at least 90 days before the plan year begins (or upon eligibility for new hires).
- Coordinate with a benefits administrator. An ICHRA requires ongoing administration — claims processing, employee communications, and compliance monitoring. Working with a knowledgeable benefits partner keeps the plan running smoothly.
- Monitor affordability annually. The IRS updates the affordability percentage each year. Your contribution amounts should be reviewed and adjusted to stay compliant.
How Trek Insurance Solutions Helps
Setting up an ICHRA involves real decisions about employee classes, contribution levels, and compliance requirements. Trek Insurance Solutions works with employers to design ICHRA structures that fit their workforce and budget while staying within IRS guidelines.
Whether you are replacing a group plan entirely or running an ICHRA alongside an existing group arrangement, we help you navigate the rules so your benefits package works for both your business and your employees.
Ready to explore ICHRA for your business? Contact Trek Insurance Solutions at 888-960-0442 or visit trekis.net/services/employee-benefits to learn how we can help you build a flexible, compliant employee benefits strategy.
Trek Insurance Solutions is licensed in multiple states. Contact us to verify availability in your area. This article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified professional for guidance specific to your situation.
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