One of the more complicated parts of evaluating an Individual Coverage Health Reimbursement Arrangement, or ICHRA, is understanding what happens to employees who may already qualify for Marketplace premium assistance or Medicaid.

This can matter a great deal for a small employer.

We recently worked with an Ohio employer considering an ICHRA whose workforce includes employees with very different health insurance situations. Some currently obtain coverage through Medicaid. Others may be able to purchase individual coverage with help from a Marketplace premium tax credit. Others may earn too much to qualify for either and would otherwise pay the full individual-market premium.

An ICHRA can work across a workforce like this, but the outcome is not necessarily the same for every employee.

The employer contribution is only one part of the equation.

An ICHRA Can Affect Marketplace Premium Tax Credits

The Premium Tax Credit, or PTC, is what people often mean when they refer to a Marketplace health insurance “subsidy.” It is a federal tax credit that can reduce the cost of qualifying health insurance purchased through the Health Insurance Marketplace.

Eligibility depends on several factors, including household income and whether the person has access to other qualifying affordable coverage.

Under current federal rules, an employee offered an ICHRA generally cannot receive both the ICHRA and a Marketplace premium tax credit for the same period.

The key question is whether the ICHRA is considered affordable.

If the ICHRA is affordable, the employee generally cannot decline it and receive a Marketplace premium tax credit instead.

If the ICHRA is unaffordable, the employee may decline, or opt out of, the ICHRA and potentially receive a Marketplace premium tax credit if the employee otherwise qualifies.

The IRS explains these rules in its Questions and Answers on the Premium Tax Credit.

That distinction can make the amount of the employer’s ICHRA contribution important for reasons beyond simply deciding how much the company wants to spend.

How Is ICHRA Affordability Determined?

The affordability calculation looks at the employee’s cost for the lowest-cost Silver plan for self-only coverage available in the applicable individual market, after subtracting the employer’s available ICHRA contribution.

Household income is also part of the employee-side affordability calculation.

For 2026, an ICHRA is considered affordable when the employee’s monthly cost for the applicable self-only lowest-cost Silver plan, after the ICHRA contribution, is less than 9.96% of one-twelfth of the employee’s annual household income. HealthCare.gov provides a practical explanation of ICHRA affordability.

For plan years beginning in 2027, the IRS has increased the required contribution percentage to 10.22%.

The percentage changes over time, so employers should use the current standard when evaluating an arrangement.

The important point is that ICHRA affordability is not determined simply by saying:

“The employer is paying 50% of the premium.”

Two employees can receive the same employer benefit structure and still have different circumstances because affordability and potential Marketplace assistance can depend on household income, employee age, location and the cost of the applicable individual-market benchmark.

The Same ICHRA Can Affect Employees Differently

Consider three employees working for the same company.

Employee One: No Marketplace Premium Tax Credit Available

One employee has household circumstances that do not produce eligibility for a Marketplace premium tax credit.

For that employee, the ICHRA may simply provide valuable employer-funded assistance toward the cost of individual health insurance.

Instead of paying the entire premium personally, the employee uses the employer’s ICHRA contribution toward qualifying coverage.

Employee Two: Potentially Eligible for a Marketplace Premium Tax Credit

Another employee has household circumstances that may otherwise qualify for a Marketplace premium tax credit.

Now ICHRA affordability matters.

If the employer’s ICHRA is affordable for that employee, the employee generally cannot opt out simply to obtain a premium tax credit.

If the ICHRA is unaffordable, the employee can choose to decline it and apply for Marketplace coverage with a premium tax credit, assuming the employee satisfies the other eligibility requirements.

The employee cannot use both the ICHRA and the Marketplace premium tax credit for the same period.

This creates an important decision point that employers should understand when establishing the ICHRA contribution.

What About Employees Who Qualify for Medicaid?

Medicaid operates differently.

ICHRA affordability does not determine whether someone qualifies for Medicaid or the Children’s Health Insurance Program, or CHIP.

HealthCare.gov specifically explains that when someone qualifies for Medicaid or CHIP, it does not matter whether the HRA is considered affordable. If the employee enrolls in Medicaid or CHIP instead, the employee declines or opts out of the ICHRA.

That means an employer could have an employee who remains eligible for Medicaid even though the employer is offering an ICHRA to the workforce.

This can be particularly important for employers with lower-wage employees or employees whose household circumstances vary significantly.

The employer does not need to become the Medicaid eligibility expert.

Medicaid is a joint federal-state program, but eligibility and enrollment are administered through each state’s Medicaid program. Employees who believe they may qualify should verify their circumstances with the Medicaid agency in their state.

Ohio employees can use the Ohio Benefits Self-Service Portal to check potential eligibility and apply for Medicaid and other benefits.

Think of This as Three Different Paths

It may be easier to think about an ICHRA workforce in three broad categories.

ICHRA + Individual Coverage

The employee accepts the ICHRA and uses the employer contribution toward qualifying individual health insurance.

Marketplace Coverage With a Premium Tax Credit

If the ICHRA is unaffordable and the employee otherwise qualifies for a premium tax credit, the employee may opt out of the ICHRA and choose Marketplace coverage with the tax credit instead.

Medicaid or CHIP

If the employee qualifies for Medicaid or CHIP and enrolls, the employee opts out of the ICHRA and uses that coverage instead.

One employer can potentially have employees in all three situations.

The Employer Does Not Determine an Employee’s Marketplace Premium Tax Credit

The employer establishes the ICHRA contribution and provides the required information about the arrangement.

But the employer generally does not know everything necessary to determine an employee’s actual Premium Tax Credit eligibility.

Household income is one obvious reason.

An employee’s salary from the company is not necessarily the same thing as household income. A spouse may work. There may be other household income. Household size and other eligibility factors can also matter.

The Marketplace evaluates the employee’s circumstances when the employee applies.

That is a much safer process than an employer or broker attempting to predict every employee’s final eligibility.

Applicable Large Employers Have Another Consideration

For an Applicable Large Employer, or ALE, there is another layer.

An ALE is generally an employer that averaged at least 50 full-time employees, including full-time-equivalent employees, during the preceding calendar year, subject to the applicable federal counting rules.

An ALE using an ICHRA as its health coverage offer needs to consider the Affordable Care Act’s employer shared responsibility requirements.

The employer still determines the ICHRA contribution, but affordability becomes part of evaluating whether the offer satisfies those requirements.

Because an employer generally does not know each employee’s household income, federal rules provide employer affordability safe harbors. Separate ICHRA rules also address how the applicable lowest-cost Silver premium is determined for employer shared responsibility purposes.

That employer compliance analysis is related to, but not necessarily identical to, the actual Premium Tax Credit determination for an individual employee.

For a smaller employer that is not subject to the employer shared responsibility provisions, those employer-mandate requirements do not apply. The employer may therefore have more flexibility from an employer-mandate standpoint when establishing its contribution.

But the contribution can still affect employees because it may determine whether an employee’s ICHRA is affordable and therefore whether Marketplace premium assistance remains available.

There Are Actually Two Different Silver Benchmarks

One detail can make this discussion particularly confusing.

The lowest-cost Silver plan is used in determining ICHRA affordability.

The amount of an employee’s actual Premium Tax Credit, when the employee qualifies for one, is generally calculated using the second-lowest-cost Silver plan applicable to the employee’s coverage family.

The IRS explains the second-lowest-cost Silver benchmark in its Premium Tax Credit Q&A.

Those are two different calculations.

The employee also does not have to enroll in either benchmark plan merely because that plan was used for a federal calculation.

That is another reason employers should be cautious about assuming that a reference to a “Silver plan” tells them what coverage employees will actually choose.

The Contribution Is More Than a Budget Number

One of the attractive features of an ICHRA is that an employer can establish a defined contribution toward health insurance.

But that contribution does more than establish the company’s cost.

For some employees, it may simply reduce the cost of individual coverage they would otherwise purchase without assistance.

For another employee, the contribution may affect whether the ICHRA is considered affordable and therefore whether a Marketplace premium tax credit remains an option.

Another employee may qualify for Medicaid under separate eligibility rules and decide not to use the ICHRA at all.

That does not make an ICHRA a bad fit.

In fact, a workforce with very different income levels, locations and existing coverage situations can sometimes be one of the situations where an ICHRA deserves serious consideration.

It does mean the employer should understand what it is offering.

With an ICHRA, the employer contribution does not just determine how much the employer spends. It can also affect which coverage pathways remain available to employees.

That is why evaluating an ICHRA should include more than choosing an allowance and looking at a spreadsheet of individual premiums.

The employer should also understand how affordability works, how employees will evaluate Marketplace assistance, what happens to employees who may qualify for Medicaid, and where employees should go to receive an actual eligibility determination.

That is part of deciding whether the ICHRA will work for the workforce, not just for the employer’s budget.

Frequently Asked Questions

Can an employee use an ICHRA and receive a Marketplace premium tax credit at the same time?

Generally, no. An employee cannot use an ICHRA and receive a Marketplace Premium Tax Credit for the same period.

If the ICHRA is considered affordable, the employee generally cannot decline it and receive a premium tax credit instead. If the ICHRA is unaffordable, the employee may be able to opt out of the ICHRA and qualify for a premium tax credit if the other eligibility requirements are met.

What happens if an ICHRA is considered unaffordable?

An employee offered an unaffordable ICHRA may choose to opt out of the arrangement and apply for Marketplace coverage with a Premium Tax Credit if the employee otherwise qualifies.

The employee cannot receive the ICHRA reimbursement and the Premium Tax Credit for the same period.

Does offering an ICHRA make an employee ineligible for Medicaid?

No. ICHRA affordability does not determine Medicaid or CHIP eligibility.

An employee who qualifies for Medicaid or CHIP may enroll in that coverage and decline the ICHRA. Medicaid eligibility is determined under the rules applicable in the employee’s state, so employees who may qualify should verify their circumstances with their state Medicaid agency.

Can two employees with the same ICHRA allowance have different Marketplace subsidy outcomes?

Yes.

Employees receiving the same ICHRA allowance may have different affordability or Premium Tax Credit outcomes because household income, age, location, household size and the applicable individual-market premiums can differ.

The employer contribution may be the same, but the employee’s personal circumstances may not be.

Does the employer decide whether an employee qualifies for a Premium Tax Credit?

No.

The employer establishes the ICHRA and provides information about the contribution. The Marketplace determines whether an employee qualifies for a Premium Tax Credit based on the employee’s circumstances and the applicable federal rules.

This is important because the employer generally does not know everything that may affect an employee’s eligibility, including total household income.

Is the Silver plan used for ICHRA affordability the same Silver plan used to calculate the Marketplace Premium Tax Credit?

Not necessarily.

ICHRA affordability generally uses the applicable lowest-cost Silver plan for self-only coverage.

The amount of a Marketplace Premium Tax Credit, when an employee qualifies for one, is generally based on the applicable second-lowest-cost Silver plan.

Neither benchmark requires the employee to enroll in that particular Silver plan.

Do Applicable Large Employers have different ICHRA affordability considerations?

Yes.

An Applicable Large Employer, generally an employer with at least 50 full-time employees including full-time-equivalent employees under the applicable federal counting rules, must also consider the Affordable Care Act’s employer shared responsibility requirements.

An ALE still determines the ICHRA contribution, but affordability becomes part of evaluating whether the employer’s offer satisfies those requirements. Federal affordability safe harbors may be used because employers generally do not know each employee’s household income.

About the Author

For more than three decades, Ted Stevenot has helped Ohio small businesses and their owners evaluate health insurance and employee benefits as a partner at McCarthy Stevenot Agency, Inc.

He writes the Broker’s Desk series to document the real-world decisions, conversations and observations that come from helping small businesses navigate health insurance.

Talk With McCarthy Stevenot Agency

If your Ohio business is considering an ICHRA, the contribution amount is only part of the decision.

Employers also need to consider the individual plans available to employees, how the contribution will be established, what may happen when individual-market premiums change and how affordability rules may affect the arrangement.

Contact McCarthy Stevenot Agency to discuss whether an ICHRA or traditional group plan makes sense for your business, or call 513-891-9888.

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Disclaimer

Broker’s Desk is a series of observations from more than three decades of helping Ohio small businesses and their owners navigate health insurance. Some articles explain a process. Others examine the tradeoffs behind real employer decisions. Client-identifying details may be omitted or generalized to protect privacy.

ICHRA contribution strategies, individual-market premiums, plan availability and affordability calculations vary by employer, employee circumstances and location. Federal requirements may also change over time. This article is intended to explain practical considerations involved in evaluating an ICHRA and is not legal or tax advice. Employers should review their specific circumstances with appropriate insurance, tax or legal professionals.