An Individual Coverage Health Reimbursement Arrangement (ICHRA) is an IRS-approved, tax-free way for employers to reimburse employees for individual health insurance instead of sponsoring one group plan. It launched in 2020 under new federal HRA regulations, and it's changed how a lot of small and mid-sized employers think about benefits.
This article covers what ICHRA actually is, how the mechanics work, its real advantages and trade-offs, what it costs, and how to tell if it fits your business.
Key Takeaways
- ICHRA lets employers set a fixed monthly allowance instead of managing one group plan for everyone.
- Any-size employer can offer it — there's no employee cap and no IRS contribution limit.
- Employees choose their own individual health plan and get reimbursed tax-free.
- An "affordable" ICHRA offer satisfies the ACA employer mandate but blocks marketplace premium tax credits.
- Class design and affordability testing determine whether your ICHRA stays compliant and competitive.
What Is an ICHRA?
An Individual Coverage Health Reimbursement Arrangement is an employer-funded, account-based health benefit. Employers use it to reimburse employees, tax-free, for individual health insurance premiums and qualified medical expenses. Employees pick a plan on the individual market; the employer picks the budget.
The concept isn't brand new. It grew out of a 2019 rule from Treasury, HHS, and the Department of Labor, expanding on the earlier QSEHRA model that Congress created in 2016. ICHRA became available for plan years starting January 1, 2020.
The Core Shift: Defined Contribution, Not Defined Benefit
Traditional group insurance is a defined benefit: the employer selects one plan (maybe two or three tiers), and everyone gets access to that same network and formulary. ICHRA flips that model:
- Employer sets a defined dollar allowance per month.
- Employee shops the individual market and picks whatever plan fits their needs.
- Employer never pays more than the allowance, regardless of what plan the employee chooses.
It's a similar shift to how 401(k)s replaced traditional pensions. The employer funds an account; the employee makes the choices and owns the outcome.
Who can offer it? Unlike QSEHRA, which is limited to fewer than 50 employees, ICHRA is open to businesses of any size, from a single-employee shop to a large corporation.
Reimbursements are non-taxable to employees and tax-deductible for employers. For Applicable Large Employers (ALEs), an ICHRA that's deemed "affordable" can also satisfy the ACA employer mandate.
How Does an ICHRA Work?
The mechanics break down into four steps:
- Employer designs the benefit and sets a monthly allowance amount.
- Employee purchases an individual health insurance plan on the open market.
- Employee submits proof of coverage and qualifying expenses.
- Employer reimburses the employee up to the allowance, tax-free.
Allowance amounts can vary by employee class (full-time versus part-time, salaried versus hourly, and so on) but must be applied consistently within each class. You can't give one full-time employee a bigger allowance than another full-time employee in the same class purely on a whim.
Employee Classes Explained
Federal rules recognize specific employee classes for ICHRA design, including:
- Full-time employees
- Part-time employees
- Seasonal employees
- Salaried employees
- Non-salaried (hourly) employees
- Employees in a specific geographic rating area
- Staffing firm employees
- Employees still in a waiting period
- Combinations of the above
Example: A landscaping business with year-round office staff and seasonal crews might set a higher allowance for full-time salaried staff and a smaller allowance for seasonal workers, while keeping both groups compliant within their own class.
Reimbursement and Enrollment Details
To stay eligible, employees must maintain individual coverage that qualifies as minimum essential coverage (MEC). Proof typically includes the carrier name, plan name, premium amount, and coverage dates, either through a document from the insurer or a signed attestation.
Key enrollment details:
- Employees offered an ICHRA for the first time get a 60-day Special Enrollment Period (SEP) to enroll in an individual plan outside standard Open Enrollment.
- Unused funds generally don't carry over to the employee at year's end. Policy varies by employer and administrator, similar to how an FSA works.
- The benefit is portable. If the employee leaves the job, the ICHRA reimbursements stop, but their individual policy stays with them.
ICHRA vs. Other Health Benefit Options
ICHRA isn't the only account-based health benefit available. Here's how it compares to the main alternatives:
| Feature | Traditional Group Plan | QSEHRA | ICHRA |
|---|---|---|---|
| Model | Defined benefit (one plan for all) | Defined contribution | Defined contribution |
| Employer size limit | None | Under 50 full-time employees | None |
| Annual contribution cap | N/A | IRS-capped ($6,350 self-only / $12,800 family for 2025) | No federal cap |
| Employee plan choice | Limited to employer's selection | Employee chooses individual plan | Employee chooses individual plan |
A related option, the Group Coverage HRA (GCHRA), works differently. It supplements an existing group plan rather than replacing it. Federal rules don't allow a GCHRA and an ICHRA for the same employee class, so you choose one structure per class rather than layering both.
Benefits and Drawbacks of ICHRA for Employers
ICHRA offers clear advantages, but it isn't automatically the right move for every business. Weigh both sides before deciding.
Advantages of Offering an ICHRA
- Budget predictability. You set a fixed monthly allowance and never pay more. With group premiums averaging $9,325 single and $26,993 family per KFF's 2025 Employer Health Benefits Survey, ICHRA removes surprise-renewal risk.
- Employee choice and personalization. Staff select the network, prescription coverage, and plan tier that actually fits their situation, instead of settling for whatever the group plan offers.
- Reduced administrative burden. Employers avoid managing plan renewals, participation minimums, and the underlying health risk of the workforce that drives group rating.
Potential Drawbacks to Consider
- Individual market limitations. In rural or thinly served areas, networks can be narrower; KFF's 2024 marketplace network analysis found average access to just 40% of nearby doctors.
- Learning curve. ICHRA only launched in 2020, so employers and employees often need extra education on how reimbursements work.
- Premium tax credit impact. Employees offered an "affordable" ICHRA lose eligibility for ACA marketplace subsidies — even if they turn the offer down.
Is an ICHRA Affordable? Cost and Compliance Considerations
"Affordable" has a specific legal meaning here, not just a general sense of "reasonably priced."
An ICHRA is considered affordable if the employee's remaining cost for the lowest-cost self-only Silver plan in their area doesn't exceed a set percentage of household income. That threshold moves each year. The IRS set it at 9.02% for 2025 under the required-contribution percentage rules.
Since employers rarely know an employee's exact household income, the IRS offers safe harbors to estimate it reasonably:
- W-2 wages: prior-year Form W-2 Box 1 wages
- Rate of pay: hourly rate × 130 hours/month, or monthly salary
- Federal Poverty Line: FPL for a single individual
Employers can also use the employee's primary work location to determine the relevant Silver plan premium, rather than their home address. That choice matters when employees live across different counties or rating areas.
Affordability rules protect employees; on the employer side, total spend stays in your control. You only pay the allowance amount you choose to set.
A third-party administrator for compliance tracking and reimbursements typically adds a modest per-employee monthly fee on top of the allowance. Brokers like Franklin Benefits Group are usually paid through carrier or plan commissions rather than a separate consulting fee, which keeps design costs low for the employer.
Is an ICHRA Right for Your Business?
ICHRA tends to make the most sense for a specific set of situations:
- Businesses new to offering benefits that want to start without committing to a full group plan.
- Employers facing steep group renewal increases year after year.
- Companies with a geographically dispersed workforce or a mix of full-time and part-time staff.
Before deciding, run the numbers. Compare your current group plan cost against a defined ICHRA allowance. Factor in your employees' age distribution and family size, since both change what individual plans will cost them.
ICHRA design involves employee classes, affordability testing, and compliance documentation that most business owners haven't dealt with before. Working with an experienced local broker like Franklin Benefits Group can help Bucks and Montgomery County employers:
- Structure a compliant, cost-effective ICHRA allowance
- Handle broker-of-record transitions without disrupting current coverage
- Manage employee communication and coverage-shopping support
- Provide ongoing HR and compliance support after implementation
Founder Michael Braun built the firm in 2003 to help local employers balance cost control with quality benefits. That approach still guides how the team evaluates group plans and ICHRA designs for Bucks and Montgomery County businesses.
Frequently Asked Questions
What is an ICHRA and how does it work?
ICHRA is an employer-funded allowance that employees use to buy individual health insurance and get reimbursed tax-free. The employer sets the budget, the employee shops for a plan, submits proof of coverage, and gets reimbursed up to that monthly amount.
How much does an ICHRA cost?
Employer cost is whatever monthly allowance you choose to set — there's no IRS cap. If you use a third-party administrator for compliance and reimbursement tracking, expect a per-employee monthly administration fee on top of that allowance.
Is an ICHRA use-it-or-lose-it?
Generally, yes. Unused funds typically stay with the employer at year-end, similar to an FSA, unless the specific plan design allows rollover. Employees should plan to use their full allowance within the plan year.
Who is eligible to participate in an ICHRA?
Any W-2 employee with qualifying individual health coverage is eligible. Sole proprietors, partners, and S-corp owners with more than 2% ownership generally are not eligible as employees under ICHRA rules.
What's the difference between ICHRA and QSEHRA?
QSEHRA is limited to employers with fewer than 50 full-time employees and carries IRS-capped annual contribution limits. ICHRA has no employer-size restriction and no federal contribution cap.
Can employees use both an ICHRA and premium tax credits at the same time?
No. If the ICHRA is deemed affordable, the employee loses eligibility for marketplace tax credits even if they decline the offer. If it's unaffordable, they must opt out of the ICHRA to claim the tax credit instead.
