An ICHRA allowance doesn't add to an employee's premium tax credit. It replaces it. Every ICHRA offer is a head-to-head bid against the subsidy that employee would otherwise collect, and the 2026 subsidy rollback moved that line in your favor.
Key takeaways
- An affordable ICHRA offer makes the employee ineligible for a premium tax credit. They don't get to choose.
- An unaffordable ICHRA lets them opt out and claim the credit instead, but they forfeit your allowance to do it.
- Nobody collects both. Your allowance and their subsidy are competing offers, not stacked ones.
- The applicable percentage table reverted for 2026 under Rev. Proc. 2025-25. Below 133% FPL, enrollees now pay 2.10% of income for a benchmark plan instead of nothing.
- Above 400% FPL the credit is zero, so every ICHRA dollar is worth a full dollar to those employees.
- The crossover point is per employee, driven by household income, family size, and the local benchmark premium. It isn't a company-wide answer.
Does an ICHRA let employees keep their premium tax credit?
No, and this is the single most misunderstood thing about ICHRA. There are three states, and only one of them ends with the employee holding a subsidy.
Under the IRS premium tax credit rules, an ICHRA offer you make is tested for affordability. If it's affordable, the employee is ineligible for a credit. No election, no paperwork, no choice. If it's unaffordable, they can opt out of the ICHRA and claim the credit, but they walk away from your money to do it. And if they accept the allowance, they're ineligible either way.
So an employee facing your ICHRA is choosing between two pots of money. Yours or the government's. Never both.
Most employers design an allowance by asking what they can afford. That's the wrong first question. The right one is what that employee is giving up to take it.
How do you find the crossover point?
You need four inputs per employee, and only one of them is yours.
- Household income as a percentage of the federal poverty line
- Household size
- The benchmark silver premium in their rating area, which moves with age and ZIP code
- Your proposed monthly allowance
Run two numbers. What would this employee pay out of pocket for a benchmark plan after their credit? What would they pay after your allowance? The lower number wins, and it won't be the same answer twice across your roster.
Affordability itself has a formula. Take the lowest-cost self-only silver plan in the employee's rating area, subtract your monthly allowance, and compare what's left to 9.96% of household income divided by 12 for 2026. Land under it and the offer is affordable, which means the credit is gone.
Where ICHRA Tends to Win, by Employee Income (2026)
| Household income | Subsidy they'd otherwise get | Does your allowance usually beat it? |
|---|
| Under 150% FPL | Largest credits, small required contribution | Rarely, and it takes a big allowance |
| 150% to 250% FPL | Substantial, with cost-sharing reductions on silver | Sometimes, depends on the allowance |
| 250% to 400% FPL | Shrinking fast toward the cliff | Often |
| Over 400% FPL | Zero, since the cliff returned in 2026 | Almost always |
One caution on the low end. Employees under 250% FPL who buy silver also get cost-sharing reductions, which cut deductibles and out-of-pocket maximums, not premiums. Those don't show up in a premium comparison at all. Ignore them and you'll overstate how well your allowance performs for your lowest-paid people.
Did the 2026 subsidy rollback help or hurt ICHRA?
Both, and the help lands on the comparison that actually decides adoption.
The hurt is obvious. Marketplace premiums climbed, with a median finalized increase of 20% for 2026 and a median 15% proposed for 2027. Your allowance buys less plan than it did.
The help is quieter. Credits got smaller across every income band, and vanished entirely above 400% FPL. KFF found average net premium payments rose 58% in 2026, from $113 to $178 a month. When the competing offer gets worse, yours gets relatively better without you spending another dollar.
Net effect: the crossover moved down the income scale. Employees who were clearly better off taking a subsidy in 2025 are now close to a coin flip. Employees over the cliff aren't a close call at all.
ICHRA got harder to sell and easier to justify in the same year. If you priced an ICHRA in 2024 and shelved it, the answer you got is stale.
What happens to your employer mandate penalty?
Your exposure shifted, and one part of it shrank for a reason that has nothing to do with your plan design.
An ICHRA counts as an offer of minimum essential coverage, so it clears the 4980H(a) penalty as long as you offer it broadly enough. The (b) penalty is different. That one triggers when an employee declines an unaffordable offer and claims a premium tax credit.
Here's the second-order effect nobody priced in. With the cliff back, employees above 400% FPL can't claim a credit at all. No credit means no (b) penalty trigger, no matter how thin your allowance is for that person. Your penalty surface got smaller in 2026 because fewer employees are capable of triggering it.
Don't read that as permission to underfund. It narrows a penalty, not a retention problem, and the affordability math still runs off the same percentage that hits 10.22% in 2027. The rest of the obligations stay exactly where they were, which we walk through in the ICHRA compliance stack.
Frequently asked questions
Can an employee take our ICHRA and a premium tax credit at the same time?
No. If the ICHRA offer is affordable, the employee is ineligible for a credit whether they accept the allowance or not. If it's unaffordable, they can opt out and claim the credit, but then they receive nothing from you. The two are mutually exclusive by design.
What makes an ICHRA affordable in 2026?
Take the lowest-cost self-only silver plan in the employee's rating area, subtract your monthly allowance, and compare the remainder to 9.96% of household income divided by 12. If the remainder is at or below that figure, the offer is affordable. The verified annual figures behind that test live on our compliance and key numbers page.
Does this math work the same way for a QSEHRA?
No, and QSEHRA is a different tool for a different company. It's limited to employers with fewer than 50 full-time equivalents that offer no group health plan at all. A QSEHRA also reduces an employee's premium tax credit dollar for dollar rather than eliminating it, so the interaction is a subtraction instead of an either/or.
Where do we start if we've never run this comparison?
Pull household income bands and home ZIP codes for your roster, then price the benchmark silver plan against a candidate allowance for three or four representative employees. Design comes after the math, and class rules break more rollouts than pricing does, so read how ICHRA employee classes and size rules work before you commit to a structure.
The math is there. You just need someone to show you.
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