An ICHRA can pass the affordability test for one class and fail it for another.
Affordability is measured against each employee, using the lowest cost silver self-only plan available to them. Testing every class, especially the lowest paid, is how employers avoid a late surprise.
What to check when testing each class.
Lowest Cost Silver Plan
The test uses the lowest cost silver self-only plan in the employee rating area. Rating areas with higher premiums need higher allowances.
Test the Lowest-Paid Class First
Lower pay lowers the dollar amount that counts as affordable, so entry-level classes are where the test is hardest.
Choose a Safe Harbor
Employers can measure against W-2 pay, rate of pay or the federal poverty line. The right choice depends on how your employees are paid.
Age and Family Size
Allowances can rise with age and family size within the rules, which changes the result for older employees.
What Failing Means
An allowance that is not affordable lets an employee opt out and claim a premium tax credit, and a larger employer may face a penalty.
Retest Each Year
Premiums and the affordability percentage change every year. Rerun the test before each notice.
How to test ICHRA affordability class by class.
Affordability asks one question for each employee: after the allowance, is the cost of the lowest cost silver self-only plan within the percentage of income the IRS allows? For 2027 that percentage is 10.22 percent. The answer changes with pay, age and rating area, which is why the test belongs at the class level.
The formula
For each employee, take the premium for the lowest cost silver self-only plan in their rating area, subtract the monthly allowance, and compare the result with 10.22 percent of monthly income. Because an employer cannot know household income, the rules let you measure income with a safe harbor: the W-2 pay amount, the rate of pay (hourly rate times 130 hours, or monthly salary), or the federal poverty line. The percentage for 2027 comes from IRS Rev. Proc. 2026-26.
Run backward, the formula gives the smallest allowance that passes: the silver premium minus 10.22 percent of monthly income.
An illustrative example
The numbers below are made up to show how the test works. They are not real premiums or quotes. Each employee uses the rate-of-pay or salary safe harbor, and the employer is deciding the smallest allowance that would pass.
| Employee | Monthly income used | 10.22 percent of income | Silver premium | Smallest allowance that passes |
|---|---|---|---|---|
| Hourly, $15 an hour, age 25 | $1,950 (130 hours) | $199.29 | $430 | $230.71 |
| Hourly, $15 an hour, age 55 | $1,950 (130 hours) | $199.29 | $760 | $560.71 |
| Part-time hourly, $12 an hour, age 25 | $1,560 (130 hours) | $159.43 | $430 | $270.57 |
| Salaried, $60,000, age 55 | $5,000 | $511.00 | $760 | $249.00 |
Illustrative only. Real premiums depend on the carrier, the plan year and the rating area.
What the example shows
- The same silver plan needs a very different allowance for a $15 an hour employee and a $60,000 salaried employee, which is why classes with different pay are tested separately.
- Age matters. An older employee has a higher premium, so the same class needs more allowance at 55 than at 25. Allowances can rise with age within the limits the rules allow.
- Part-time employees are tested at 130 hours under the rate-of-pay safe harbor, regardless of the hours they actually work.
- The class allowance has to cover the hardest case in the class unless you use age bands.
A five step routine
- Choose a safe harbor for each class and use it consistently.
- Pull the lowest cost silver self-only premium for each rating area and age band.
- Calculate the smallest passing allowance for the lowest-paid and oldest employee in each class.
- Set the class allowance at or above that figure, and keep a record of the calculation.
- Rerun the test each year, because premiums and the percentage both change.
Employers under 50 full-time equivalent employees face no mandate penalty, but affordability still decides whether employees can also claim a premium tax credit. If a class fails, employees can decline the ICHRA and claim the credit, and a larger employer may owe a penalty. Our affordability calculator and the 2027 affordability page run the same math for your numbers.
The questions employers ask about ICHRA affordability.
Do small employers need to pass the test?
Employers under 50 full-time equivalent employees face no mandate penalty, but affordability still affects whether employees can claim a premium tax credit.
Which plan is used for the test?
The lowest cost silver self-only plan available in the employee rating area.
Can I use different safe harbors for different classes?
Safe harbors can generally be applied by reasonable class, but they must be applied consistently within it. Counsel should confirm.
What happens if a class fails the test?
Employees in that class can decline the ICHRA and claim a premium tax credit, and a larger employer may face a penalty.
Does the test change every year?
Yes. Premiums and the percentage threshold change, so rerun it before each notice.
Is there a 2027 version?
Yes. Our 2027 affordability page covers the current-year approach.
Who runs the test?
We model every class for you and bring in counsel on any close call.
General information about individual coverage HRAs, not legal or tax advice. Plan-specific questions belong with ERISA counsel and your tax advisor, and we will bring them in.
Where these details come from.
This page summarizes public guidance reviewed in October 2026. Rules change, so confirm current requirements with counsel.
CMS: Individual Coverage HRAs →
U.S. Department of Labor: Employee Benefits Security Administration →
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