Standard Operating Procedure: Individual Coverage HRA (ICHRA) Affordability Calculation & ACA Employer Mandate Safe Harbor

1. Executive Summary & Purpose

An Individual Coverage Health Reimbursement Arrangement (ICHRA) allows employers of any size to reimburse employees tax-free for individual health insurance premiums and substantiated medical expenses, replacing traditional one-size-fits-all group health plans with a defined contribution model.

For Applicable Large Employers (ALEs) with 50 or more full-time equivalent employees, offering an ICHRA satisfies the ACA Employer Shared Responsibility Mandate (IRC §4980H) only if the benefit is legally affordable.

This SOP outlines the calculation protocol and safe-harbor validation rules.

2. The ICHRA Affordability Equation

An ICHRA offer is legally considered affordable for an employee if:

Where:

• LCSP Monthly Premium: The monthly premium of the self-only Lowest Cost Silver Plan available to the employee in their rating area based on age and geographic rating area.
• Employer ICHRA Contribution: The monthly dollar amount provided by the employer for that employee's class.
• A_{\text{IRS}}: The statutory IRS Affordability Percentage (indexed annually, e.g. 8.39% – 9.12%).

3. The Three Employer Affordability Safe Harbors

Because employers cannot know their workers' total household income, the IRS provides three statutory Safe Harbors:

   +-------------------------------------------------------------------------+
   |                    Three Statutory Safe Harbors                         |
   +-------------------------------------------------------------------------+
                                        |
       +--------------------------------+--------------------------------+
       |                                |                                |
       v                                v                                v
  [1] Form W-2 Safe Harbor      [2] Rate of Pay Safe Harbor    [3] FPL Safe Harbor
  Based on Box 1 W-2 wages      Hourly rate x 130 hours;       Based on single individual
  reported at year end.         or monthly salary for exempt.  Federal Poverty Line.

4. Affordability Calculator Implementation

// src/services/ichra/affordability.ts

export interface EmployeeProfile {
  employeeId: string;
  age: number;
  monthlySalaryOrWageBase: number;
  lcspMonthlyPremium: number;
  employerContribution: number;
  irsAffordabilityRatio: number; // e.g., 0.0839 for 8.39%
}

export interface AffordabilityResult {
  employeeId: string;
  isAffordable: boolean;
  netEmployeeCost: number;
  maxAllowableEmployeeCost: number;
  varianceDelta: number;
}

export function evaluateIchraAffordability(profile: EmployeeProfile): AffordabilityResult {
  const netEmployeeCost = Math.max(0, profile.lcspMonthlyPremium - profile.employerContribution);
  const maxAllowableEmployeeCost = profile.monthlySalaryOrWageBase * profile.irsAffordabilityRatio;

  const isAffordable = netEmployeeCost <= maxAllowableEmployeeCost;
  const varianceDelta = Math.round((maxAllowableEmployeeCost - netEmployeeCost) * 100) / 100;

  return {
    employeeId: profile.employeeId,
    isAffordable,
    netEmployeeCost: Math.round(netEmployeeCost * 100) / 100,
    maxAllowableEmployeeCost: Math.round(maxAllowableEmployeeCost * 100) / 100,
    varianceDelta
  };
}

5. Employee Class Structure Regulations

Under 26 CFR § 54.9802-4, employers may differentiate contribution amounts only across recognized employee classes:

• Full-Time vs. Part-Time employees
• Salaried vs. Non-Salaried (Hourly)
• Seasonal employees
• Geographic rating areas (e.g., Mississippi vs Georgia operations)
• Temporary employees covered by collective bargaining agreements

6. Execution & Verification Checklist

• ✓ Determine applicable Lowest Cost Silver Plan (LCSP) for each employee based on work ZIP code.
• ✓ Calculate required employer monthly contribution using Rate of Pay or FPL Safe Harbor.
• ✓ Deliver mandatory written ICHRA Notice to all eligible employees at least 90 days prior to plan start.
• ✓ Verify employee opt-out process for workers wishing to claim federal exchange APTC subsidies.