ICHRA Affordability in Virginia: Why Small Employer Reimbursements Can Accidentally Eliminate Marketplace Subsidies
For many small employers, an Individual Coverage Health Reimbursement Arrangement, or ICHRA, sounds like the perfect health benefits solution.
Instead of choosing and managing a traditional group health plan, the employer sets a monthly reimbursement amount. Employees then buy their own individual health insurance coverage, often through Virginia's Insurance Marketplace, and the employer reimburses eligible expenses tax-free.
That flexibility is real. But there is one major issue employers need to understand before offering an ICHRA:
An ICHRA can make employees and their family members ineligible for Advance Premium Tax Credits, even when the employer reimbursement amount is relatively low.
This is especially important for Virginia employers with lower- and middle-income employees, employees with spouses and children, or employees who are already receiving Marketplace subsidies.
The problem usually comes down to one word: affordability.
Important Qualifier: This Is Primarily a Small-Employer Strategy
Before going further, there is an important distinction: this article is primarily about small employers that are not Applicable Large Employers, often called ALEs.
Under the Affordable Care Act's employer shared responsibility rules, ALEs generally include employers with 50 or more full-time employees, including full-time-equivalent employees, based on the prior calendar year. ALEs may owe employer shared responsibility payments if they do not offer minimum essential coverage to enough full-time employees and dependents, or if the coverage they offer is not affordable or does not provide minimum value and at least one full-time employee receives a premium tax credit through the Marketplace.
That means a large employer usually should not approach ICHRA design with the goal of making coverage unaffordable so employees can receive APTC. For ALEs, unaffordable coverage can create penalty exposure.
For smaller employers below the ALE threshold, there is more flexibility. A small employer generally is not subject to the employer shared responsibility penalties, so the analysis is more focused on whether the benefit helps employees, preserves access to Marketplace subsidies where possible, and fits the employer's budget.
This is why ICHRA affordability modeling is especially important for small Virginia employers. A small employer can unintentionally hurt employees by offering a modest ICHRA that eliminates APTC, even though the employer is not legally required to offer affordable coverage in the same way an ALE is.
Need help comparing ICHRA, group health insurance, and stipend options for your business?
How ICHRA Affordability Works
For 2026, an ICHRA is considered affordable if the employee's monthly cost for the self-only lowest-cost Silver plan, after subtracting the employer's ICHRA contribution, is less than 9.96% of 1/12 of the employee's yearly household income. HealthCare.gov describes the test as being based on the employer contribution, the employee's household income, and the monthly premium for the self-only lowest-cost Silver plan available to that employee.
In plain English, the formula looks like this:
Self-only lowest-cost Silver premium − self-only ICHRA amount ≤ monthly affordability threshold
The monthly affordability threshold is:
Household income × 9.96% ÷ 12
If the employee's cost after the ICHRA is below that threshold, the ICHRA is affordable. If the ICHRA is affordable, the employee and their household members generally cannot receive Marketplace premium tax credits, even if they choose not to use the ICHRA.
That last part is where many employers get surprised.
An employee may think, "I'll just decline the ICHRA and keep my subsidy." But that only works if the ICHRA is unaffordable. Virginia's Insurance Marketplace explains that to qualify for APTC, the employee must opt out of the ICHRA and the HRA must fail the affordability standard.
The Family-Size Problem
The most confusing part of ICHRA affordability is that the test does not look at the cost of covering the whole family.
It looks at the employee's self-only lowest-cost Silver plan.
That creates a major mismatch for families. A family may have a very expensive Marketplace premium, and the family may currently qualify for a large APTC subsidy. But when an ICHRA is offered, affordability is still tested against the cost of the employee's self-only Silver plan, not the family's full premium.
For example, imagine an employee has a spouse and three children. Their family Marketplace premium might be $1,700 per month before subsidies. Without an ICHRA, they might qualify for a large APTC because their household income is modest relative to their family size.
But for ICHRA affordability, the Marketplace may only look at the employee's self-only lowest-cost Silver plan, which might be $525 per month.
If the household income is $75,000, the monthly affordability threshold is:
$75,000 × 9.96% ÷ 12 = $622.50
In that case, the employee's self-only Silver premium is already below the affordability threshold before the employer contributes anything. That means even a very small ICHRA offer may be considered affordable.
This is why some employers run the numbers and find that the "maximum reimbursement before the ICHRA becomes affordable" is negative.
What a Negative Maximum Reimbursement Means
When modeling an ICHRA, one useful calculation is:
Maximum self-only reimbursement before the ICHRA becomes affordable = self-only lowest-cost Silver premium − monthly affordability threshold
If that number is positive, the employer may be able to offer a small ICHRA while still allowing the employee to opt out and keep APTC, assuming the employee otherwise qualifies.
If that number is negative, the employee's self-only Silver coverage is already considered affordable even before the employer contributes anything.
Example:
| Item | Amount |
|---|---|
| Household income | $75,000 |
| Monthly affordability threshold | $622.50 |
| Employee self-only lowest-cost Silver plan | $550 |
| Max ICHRA before affordability | -$72.50 |
In this example, there is no positive ICHRA amount that preserves unaffordability. The self-only Marketplace plan already passes the affordability test.
That is often the "aha" moment for employers. The issue is not that the employer is being too generous. The issue is that the affordability test ignores the cost of covering the employee's family.
Why This Matters for Virginia Employers in 2026
For 2026, employers should be especially careful before assuming a small reimbursement will be harmless. HealthCare.gov notes that the additional Marketplace savings available during and after the COVID pandemic ended on December 31, 2025. As a result, people who qualify for savings in 2026 may still pay more for Marketplace coverage than they did under the enhanced subsidy structure.
For Virginia, another layer matters: Medicaid expansion. Cover Virginia says Medicaid Expansion covers adults ages 19 to 64 with income under 138% of the federal poverty level, assuming they do not have Medicare and meet other eligibility rules.
So Virginia employees may fall into several different buckets:
| Employee situation | Likely issue |
|---|---|
| Very low income | May be Medicaid/FAMIS eligible instead of APTC eligible |
| Lower-middle income with family | May rely heavily on APTC |
| Moderate income with family | May still lose APTC if ICHRA is affordable |
| Higher income | May not qualify for APTC regardless |
| Medicare eligible | Separate analysis needed |
This is why an ICHRA should not be evaluated only from the employer's budget perspective. It should be modeled against each employee's likely Marketplace outcome.
The Danger of a "Small" ICHRA
A small ICHRA can feel harmless.
An employer might think:
"We'll offer $100 per month. It's not much, but at least it helps."
But if that $100/month ICHRA is affordable under the federal test, it may eliminate a much larger APTC subsidy.
For a family currently receiving $800/month in APTC, a $100/month ICHRA could be a net loss. The employer intended to help, but the result could be worse coverage affordability for the household.
That does not mean ICHRAs are bad. It means ICHRAs require careful design.
An ICHRA can be a strong solution when:
- Employees do not qualify for significant APTC.
- The employer reimbursement is generous enough to replace the lost subsidy.
- Employees value individual-market choice.
- The employer wants predictable reimbursement-based costs.
- The employer has legitimate employee classes where an ICHRA makes sense.
But when many employees rely on subsidies, a low-dollar ICHRA can create unintended consequences.
Before offering an ICHRA, model the real employee impact.
Option 1: Make the ICHRA Generous Enough to Be a True Net Benefit
One option is to accept that the ICHRA will be affordable and design the reimbursement amount to be meaningful enough that employees are better off.
That means comparing:
- The employee's current Marketplace premium after APTC.
- The premium after losing APTC and using the ICHRA.
- The deductible, network, and out-of-pocket exposure under available plans.
- Whether the employee's spouse and dependents are affected.
- Whether the ICHRA can reimburse only premiums, other medical expenses, or both.
The employer's goal should not simply be, "Can we offer an ICHRA?" The better question is:
Will this ICHRA leave employees better off than they are today?
If the answer is no for many employees, the employer should reconsider the design.
Option 2: Consider a Traditional Group Health Plan
A traditional group plan may sometimes work better for families because of the "family glitch" fix.
Under the 2022 final regulations, affordability for family members under traditional employer-sponsored coverage is based on the cost to cover the employee and the family members, not just employee-only coverage. The employee's own affordability test still uses self-only coverage, but family members may have a separate affordability analysis.
That can create a result where:
| Person | Potential outcome |
|---|---|
| Employee | Ineligible for PTC because employee-only group coverage is affordable |
| Spouse/dependents | Potentially eligible for PTC if family coverage is unaffordable |
| Family | May use split coverage: employee on group plan, family on Marketplace |
This does not mean group coverage is automatically better. Group plans can be more expensive, more administratively burdensome, and less flexible. Split coverage can also mean multiple deductibles, different provider networks, and more complexity.
But for some Virginia employers, especially those with families who would otherwise lose large APTC subsidies under an ICHRA, a group plan deserves a serious comparison.
Does the Family Glitch Fix Apply to ICHRAs?
Currently, no.
The 2022 final regulations did not change ICHRA affordability rules. The agencies specifically noted that ICHRA affordability rules remained unchanged, while leaving open the possibility that future guidance could address related individuals in the ICHRA context.
That means a family-inclusive ICHRA still has the same core issue: affordability is based on the employee's self-only lowest-cost Silver plan and the self-only ICHRA amount.
Employers should not assume that the traditional group plan family-glitch rules apply to ICHRAs.
Option 3: Be Careful With Employee-Only ICHRA Assumptions
There is one ICHRA design question that deserves special caution: whether an employee-only ICHRA can preserve Marketplace subsidy eligibility for the employee's spouse or dependents.
Some federal guidance and commentary around ICHRAs discusses a distinction between ICHRAs that reimburse expenses for family members and arrangements limited to the employee's own expenses. In theory, that distinction may matter for whether related individuals can claim a PTC.
However, Virginia employers should be careful not to rely on that strategy without confirmation. Virginia's Insurance Marketplace current ICHRA guidance does not describe an employee-only carveout for spouse or dependent PTC eligibility. Instead, it states that if an employer offers an affordable ICHRA, a PTC is not allowed for Marketplace coverage for the employee, their spouse, or dependents. It also says the only way the employee and household qualify for APTC is if the employer's HRA does not meet minimum affordability standards and the employee opts out.
For practical planning, that means a Virginia employer should not assume an employee-only ICHRA will preserve APTC for the rest of the household. If preserving family subsidy eligibility is a major reason for considering this design, confirm the treatment with Virginia's Insurance Marketplace, the HRA administrator, and benefits counsel before implementation.
If an employer still wants to explore an employee-only ICHRA, the design would need to be documented very clearly. The ICHRA would need to reimburse only the employee's eligible expenses, not the spouse's premiums, dependent premiums, child medical expenses, or other family-member costs. But documentation alone does not guarantee that Virginia's Marketplace eligibility system will treat the household the way the employer expects.
The safer planning assumption under Virginia's current public guidance is that an affordable ICHRA can block PTC for the employee, spouse, and dependents. That makes affordability modeling even more important before offering any ICHRA to employees who may rely on Marketplace subsidies.
Option 4: Consider a Taxable Health Stipend
Another option is a taxable health stipend or taxable wage increase.
This is not the same as an ICHRA. The employer is not reimbursing individual health insurance premiums tax-free. Instead, the employer provides taxable compensation that employees can use however they choose.
The advantage is that a taxable stipend generally does not create an offer of employer-sponsored health coverage that blocks APTC in the same way an affordable ICHRA does. The downside is that the stipend is taxable and may increase the employee's household income, which could reduce APTC somewhat.
This option needs to be structured carefully. Employers generally should avoid creating an arrangement that directly reimburses or conditions payment on purchasing individual health insurance outside of a compliant HRA structure. The IRS has warned that employer payment plans that reimburse individual policy premiums are group health plans that can fail ACA market reform rules.
For some small employers, though, a taxable stipend may be the least disruptive option if the primary goal is to help employees without accidentally eliminating their Marketplace subsidies.
The Employer's Decision Framework
Before offering an ICHRA, employers should run a simple but serious analysis for each employee household.
At minimum, model:
| Data point | Why it matters |
|---|---|
| Employee age | Affects self-only individual-market premiums |
| ZIP code / rating area | Determines available Marketplace plans |
| Household income | Drives affordability and APTC |
| Household size | Drives FPL percentage and subsidy eligibility |
| Current APTC | Shows what could be lost |
| Self-only lowest-cost Silver premium | Drives ICHRA affordability |
| Proposed ICHRA amount | Determines whether offer is affordable |
| Family premium | Shows real-world household cost |
| Medicaid/FAMIS eligibility | Especially important in Virginia |
| ALE status / full-time-equivalent employee count | Determines whether employer shared responsibility penalties could apply |
Then compare the realistic options:
- No employer health benefit.
- Family-inclusive ICHRA.
- Employee-only ICHRA.
- Traditional group plan.
- Taxable stipend.
The right answer will depend on the employer's budget, employee incomes, household sizes, carrier availability, and how much disruption the employer is willing to create.
Compliance and Employee Communication Matter
Employers should treat ICHRA design as a benefits and compliance decision, not simply as a way to influence Marketplace subsidy outcomes.
The plan design should be grounded in legitimate business and workforce considerations, such as:
- Providing a predictable health benefit budget.
- Giving employees access to individual-market plan choice.
- Choosing a structure the employer can administer consistently.
- Helping employees understand the real impact on premiums, subsidies, networks, and out-of-pocket costs.
Documentation and employee communication should be neutral, accurate, and compliance-focused. Employees should receive clear information about how the ICHRA may affect Marketplace PTC or APTC eligibility, when they can opt out, and why they should compare the ICHRA against their current coverage before making an enrollment decision.
Employers should also be careful not to create improper classes. ICHRA classes must follow permitted categories, such as full-time, part-time, seasonal, salaried, hourly, waiting period, work location, or other allowed categories. Employers generally cannot create classes based on income, health status, subsidy eligibility, or family size.
Employers should also confirm whether they are, or may soon become, an Applicable Large Employer. Once an employer is near the 50 full-time/FTE threshold, ICHRA affordability is no longer only an employee-cost issue. It can also become an ACA employer mandate issue.
Because these rules touch tax credits, ERISA-style plan administration, ACA reporting, and state Marketplace eligibility systems, employers should coordinate with a licensed health insurance advisor, HRA administrator, tax professional, or benefits attorney before implementing an ICHRA.
Not sure which structure fits your employees?
Bottom Line
ICHRAs can be an excellent tool, but affordability is the part that often catches employers off guard.
For Virginia employers, the key point is this:
A small ICHRA is not automatically a small impact.
Because ICHRA affordability is based on the employee's self-only lowest-cost Silver plan, even a modest reimbursement can make an employee's offer affordable and eliminate APTC eligibility for the household. For some employees, the self-only Silver plan is already affordable before the employer contributes anything.
That does not mean employers should avoid ICHRAs altogether. It means employers should model the subsidy impact before choosing a plan design. For small employers, that modeling is mostly about employee outcomes and employer budget. For ALEs or employers approaching ALE status, it also needs to include employer shared responsibility penalty exposure.
In many cases, the best solution may be one of the following:
- Make the ICHRA generous enough to truly replace the lost subsidy.
- Be cautious with employee-only ICHRA designs, because Virginia's current Marketplace guidance does not support assuming spouse and dependent PTC eligibility is preserved when an affordable ICHRA is offered.
- Compare a traditional group health plan, especially because the family-glitch fix may help family members.
- Use a taxable stipend if the employer wants to help without offering formal health coverage.
The best health benefit is not always the one that looks simplest on paper. It is the one that leaves employees with the best real-world outcome after premiums, subsidies, deductibles, provider networks, and compliance rules are all considered.
Akins Advisory Partners helps Virginia small businesses compare health benefit options, including ICHRAs, group health plans, Marketplace coverage, and stipend strategies.
Sources and Further Reading
- HealthCare.gov: Individual Coverage Health Reimbursement Arrangements
- Virginia's Insurance Marketplace: ICHRA and QSEHRA
- Federal Register: Affordability of Employer Coverage for Family Members of Employees
- Cover Virginia: Adults 19–64 Years Old
- IRS: Employer Health Care Arrangements
- IRS: Employer Shared Responsibility Provisions
Disclaimer: This article is for general educational purposes and should not be treated as legal, tax, or benefits compliance advice. Employers should work with a licensed health insurance advisor, tax professional, HRA administrator, or benefits attorney before implementing an ICHRA or other health benefit arrangement.