ICHRA, short for Individual Coverage Health Reimbursement Arrangement, is a benefit that lets employers reimburse employees for individual health insurance premiums and other medical expenses instead of offering a traditional group health plan. Established through federal rules that took effect in January 2020, ICHRAs give employers of any size a tax-advantaged way to help workers buy their own coverage on the individual market or through the Health Insurance Marketplace.
How an ICHRA Works
With a traditional group plan, the employer picks a health insurance policy (or a few options) and pays a portion of the premium on behalf of every enrolled employee. An ICHRA flips that model. The employer sets a monthly allowance, and each employee uses that money to purchase an individual health insurance plan of their choosing. The employee pays the premium upfront, then gets reimbursed by the employer up to the allowance amount. Reimbursements can also cover qualifying out-of-pocket costs like deductibles, copayments, and coinsurance.
Employers fund ICHRAs entirely. Employees cannot contribute their own pre-tax dollars to the arrangement. Whatever the employer sets as the monthly or annual allowance is the ceiling, and any unused funds follow whatever rollover rules the employer established when designing the plan.
Who Can Offer an ICHRA
Any employer can set up an ICHRA regardless of size, from a two-person startup to a company with thousands of workers. There is no minimum or maximum number of employees required. Employers also have no cap on how much they can contribute per employee, which makes it more flexible than some other HRA types that carry annual limits.
Employers can vary allowance amounts across different classes of employees, such as full-time versus part-time workers, salaried versus hourly, or employees in different geographic locations. They cannot, however, offer different amounts to individuals within the same class based on health status or claims history.
Requirements for Employees
To receive reimbursements through an ICHRA, you must be enrolled in individual health insurance coverage. This can be a plan purchased on the federal or state Marketplace, an off-Marketplace individual plan, or even Medicare. You cannot use ICHRA funds if you don’t carry qualifying coverage.
If your employer offers you an ICHRA, you have the option to opt out. One reason you might do so: accepting an ICHRA that is considered “affordable” under federal rules makes you ineligible for premium tax credits (the subsidies that lower the cost of Marketplace plans). So if the ICHRA allowance your employer offers is small relative to the cost of coverage in your area, you may be better off declining it and claiming subsidies instead.
Affordability and the Marketplace
The IRS and CMS use a specific test to determine whether an ICHRA offer counts as affordable. The calculation compares your employer’s monthly allowance against the cost of the lowest-cost silver plan available in your area, adjusted for your household income. If the amount you’d pay out of pocket after the ICHRA reimbursement falls below a set percentage of your income, the offer is considered affordable and you won’t qualify for premium tax credits.
To help employers run this calculation, CMS publishes an ICHRA Employer Lowest Cost Silver Plan Premium Lookup Table each year. The table covers states that use the federal Marketplace platform and lets employers look up benchmark premiums by geographic rating area. A 2026 version of this table is already available for employers planning their benefits.
Tax Treatment
ICHRA reimbursements are tax-free for employees as long as the money goes toward qualifying medical expenses or individual health insurance premiums. On the employer side, contributions are deductible as a business expense and are not subject to payroll taxes. This makes the arrangement efficient for both parties compared to simply giving employees a raise and expecting them to buy coverage with after-tax dollars.
How ICHRAs Differ From Group Plans
The biggest practical difference is choice. Under a group plan, every employee in the same tier gets the same insurance carrier, network, and benefit design. Under an ICHRA, each employee picks their own plan. A younger employee might choose a high-deductible bronze plan with lower premiums, while someone with ongoing medical needs might select a gold plan with richer benefits. The employer’s cost stays predictable because the reimbursement allowance is fixed.
For employers, ICHRAs remove the annual renewal negotiation with an insurance carrier. There’s no group underwriting, no minimum participation requirements, and no risk of a single employee’s high claims driving up the entire group’s premiums the following year. For small businesses that previously found group coverage too expensive or complicated, ICHRAs lower the barrier to offering a health benefit.
The trade-off for employees is more responsibility. You need to shop for and enroll in your own plan, compare networks and formularies, and manage reimbursement submissions. Some employers use ICHRA administration platforms that streamline this process, but it still requires more involvement than simply enrolling in a group plan during open enrollment.
Setting Up an ICHRA as an Employer
Employers need to create a formal plan document that outlines the allowance amounts, eligible employee classes, plan year dates, and reimbursement procedures. Most companies work with a benefits administrator or an ICHRA platform provider that handles document creation, employee onboarding, claims verification, and reimbursement processing.
You must notify eligible employees about the ICHRA at least 90 days before the start of each plan year (or before their eligibility date if they’re new hires). The notice must explain the allowance amount, the requirement to maintain individual coverage, and the potential impact on Marketplace subsidy eligibility.
There is no government filing to “register” an ICHRA, but the arrangement is subject to ERISA rules, which means maintaining plan documents and providing required notices. Employers with 50 or more full-time equivalent employees also need to report ICHRA offers on their annual ACA information returns.
Who Benefits Most From an ICHRA
Small and mid-size employers that struggle with the cost or complexity of group plans are the most common adopters. Companies with employees spread across multiple states also benefit, since each worker can buy a plan from their local market rather than being forced onto a single carrier that may have a weak network in some areas.
For employees, ICHRAs work well when the allowance is generous enough to cover a meaningful share of premiums and the local individual market has competitive options. They work less well when the allowance is small and the employee would have qualified for significant premium tax credits without the ICHRA offer. If your employer introduces an ICHRA, compare the allowance amount against the full cost of plans in your area and check whether declining the ICHRA and claiming subsidies instead would leave you better off financially.