ICHRA and the premium tax credit: the affordability rule

The core rule

Here’s the rule that shapes every ICHRA decision: an employee who is offered an affordable ICHRA generally cannot also claim a premium tax credit on the Marketplace. The ICHRA and the subsidy are mutually exclusive. So whether your employees end up using your ICHRA or taking a subsidy depends on one thing — whether the allowance you offer makes coverage “affordable” under the IRS test.

What “affordable” means

The test compares your allowance to the cost of a benchmark plan. In plain terms: take the lowest-cost silver plan available to the employee in their area, subtract your monthly ICHRA allowance, and look at what’s left as the employee’s share. If that share is no more than a set percentage of their household income — a figure the IRS indexes each year — the ICHRA counts as affordable. A larger allowance makes the leftover smaller, which makes the ICHRA more likely to be affordable.

Two paths for your employees

If the ICHRA is affordable, the employee uses it — they take your allowance and can’t claim a subsidy. If the ICHRA is unaffordable, the employee has a choice: accept the ICHRA, or decline it and claim a premium tax credit on the Marketplace instead. They can’t do both. For a lower-income employee, a generous subsidy might be worth more than a small allowance — which is exactly why the size of your contribution matters.

Setting your contribution

This turns the allowance into a strategic decision. Set it high enough to be affordable, and employees use the ICHRA across the board — simple and consistent. Set it lower, and some lower-paid employees may be better off opting out for a subsidy, which fragments your benefit. There’s no single right answer; it depends on your budget, your workforce’s incomes, and your goals. Because the calculation involves household income you don’t see, an ICHRA administrator or benefits advisor typically models this for you.

Why 2026 changes the math

The enhanced premium tax credits that boosted Marketplace subsidies from 2021 through 2025 expired at the start of 2026, so subsidies are smaller now and the 400%-of-income cliff is back. That shifts the comparison: with leaner subsidies, an ICHRA allowance looks more attractive to more employees than it did a couple of years ago. Your employees can see how their own subsidy shakes out in our consumer guide to how Marketplace subsidies work in 2026.

The bottom line

An affordable ICHRA and a premium tax credit can’t be combined, so your allowance effectively chooses which one your employees get. Model it against your team’s incomes before you set it — and lean on a benefits advisor or administrator, since the affordability test depends on details specific to each employee. This is general information, not tax or benefits advice.