ICHRA and tax season - What employers need to know

Tax season is stressful for employers and employees alike. Add in ICHRA and premium tax credits, and the situation could feel even more complicated.   

According to the IRS, large employers–those with 50 or more full-time or full-time equivalent employees–must file Forms 1095-C to comply with certain Affordable Care Act (ACA) reporting requirements regarding offers of and enrollment in employer-sponsored health coverage. Simply put, large employers use Form 1095-C to report coverage-related information about each employee. 

In addition to filing the forms with the IRS, the ACA traditionally required employers to send every full-time employee a copy of their Form 1095-C. As of 2025, employers must furnish a copy only to employees who request one, provided the employer posts a legally sufficient notice that the forms are available. 

Understanding the 1095-C

Employees don't need to provide additional information on the Form 1095-C unless they need to make a correction.

Part I includes contact information and the employee's Social Security Number. It also identifies the employer. 

Part II breaks down employer and employee coverage by month. 

Line 14 is coded by the employer based on the coverage. 

Line 15 shows the employee’s required contribution to purchase the lowest-cost, self-only plan, assuming the employee exhausts their ICHRA allowance. This amount helps determine whether the health coverage was “affordable” under IRS rules (more on that later).

While employees aren’t required to submit Form 1095-C with their tax return, employees should retain it for their records and may use it to verify coverage when completing their tax returns.

How ICHRAs affect 1095-C reporting and premium tax credits

Employers offering an ICHRA must ensure their plan meets Affordable Care Act (ACA) requirements, including affordability standards and minimum essential coverage (MEC) verification for employees.

If an employer offers an ICHRA that meets the IRS affordability threshold, the employee is not eligible for a premium tax credit (PTC) on a Marketplace plan. For the 2024 tax year, the IRS defines affordable as an employee-required contribution being no more than 8.39% of household income. The affordability is based on the lowest-cost Silver plan premium, minus the ICHRA allowance.

For example, let’s say the monthly premium for an employee’s lowest-cost Silver plan is $500 a month. Their employer's ICHRA reimbursement is $400 a month, making the employee’s required out-of-pocket expense $100 a month or $1,200 for a year. 

If $1,200 is less than 8.39% of the employee’s annual household income, the ICHRA is affordable, and they cannot receive PTCs.

But what if an employer's ICHRA reimbursement covered just $200 a month, and the employee’s required contribution was $300 a month, or $3,600 annually? If that $3,600 exceeds 8.39% of their household income for the year, the ICHRA is unaffordable, and they can opt out and get healthcare premium tax credits instead. 

Employees can qualify for a healthcare premium tax credit only if their ICHRA is unaffordable. To take advantage of the premium tax credit, they must opt out of the ICHRA. If the ICHRA is affordable, employees cannot qualify.

ICHRA, Form 1095-C, and employer obligations

While it’s unlikely Form 1095-C will impact an employee’s tax return, Applicable Large Employers (ALEs) with 50 or more full-time or full-time equivalent employees are still required to file Form 1095-C for each full-time employee. Employers subject to the ACA’s Employer Shared Responsibility provisions must ensure their ICHRA contributions make coverage affordable for full-time employees to avoid potential penalties.

For the 2024 tax year, employers may, but are not required to, send every full-time employee a copy of their Form 1095-C. At a minimum, an employer must provide "clear, conspicuous, and accessible notice"  (such as on the company's website) (IRS) by March 3, 2025 that employees may receive a copy of their 1095-C upon request. An employer must provide a copy within 30 days of receiving such a request. (Please note: on occasion, IRS policies may change and not be immediately reflected on its website. The above information regarding 1095-C delivery is based on this IRS notice.)

HR teams must track and report each employee’s coverage accurately, including affordability and eligibility. Mistakes in reporting (Line 14-16 on Form 1095-C) could result in penalties from the IRS. The reporting must comply with ACA standards. 

Track ICHRA contributions year-round using payroll records, benefit administration platforms, and structured documentation to ensure compliance and ease of reporting and avoid a pile-up come tax time. 

Employers can incur several penalties from the IRS for errors in Form 1095-C.

Employers who fail to file the correct information return on Form 1095-C could be penalized $330 for each incorrect form, with the penalty not exceeding $3,987,000 per calendar year. Similarly, an employer can be fined $330 for each incorrect payee statement, with the total penalty not exceeding $3,987,000 per calendar year.   

If employers realize they made a mistake in filing, they must quickly correct and resubmit the forms to avoid penalties. Penalties can be waived in the event of failure “due to reasonable cause and not willful neglect.”

Additionally, some have state mandates requiring employers to report to state agencies. Employers with employees in these states must file on time to meet state-level tax compliance.  

Employers should keep all employee Form 1095-C and additional documentation on hand for up to three years after filing in the event of an audit. 

Make ICHRA easier with Thatch

Tackling ICHRA and healthcare tax premiums on your own can be a challenge. With the help of Thatch, you don’t have to tackle ICHRA on your own. Use Thatch to pick insurance plans and find the right employee coverage.