What Is an ICHRA? How Individual Coverage HRAs Work for Employers and Employees

Your employer just offered you something called an ICHRA. Or you're a small business owner trying to figure out if there's a better way to handle health benefits than a traditional group plan. Either way, the term is unfamiliar and the rules are not obvious.

Here's what an ICHRA is, how it works for both employers and employees, and what the key tradeoffs are.

What ICHRA stands for

ICHRA stands for Individual Coverage Health Reimbursement Arrangement. It's a type of employer-funded benefit that reimburses employees for the cost of their own individual health insurance premiums — and, depending on how the employer sets it up, for other qualifying medical expenses too.

Unlike traditional group health insurance, where the employer buys one plan and everyone uses it, an ICHRA lets each employee buy their own insurance plan and get reimbursed by their employer.

Where it came from

Health Reimbursement Arrangements have existed for decades, but ICHRAs specifically were created by a 2019 federal rulemaking that expanded on the groundwork laid by the 21st Century Cures Act. The rule took effect January 1, 2020. It was designed to give employers of any size — including those too small to offer affordable group coverage — a tax-advantaged way to contribute to employees' health costs without managing a group plan.

How the basic mechanic works

The ICHRA process follows four steps:

1. Employer sets a monthly or annual allowance — there is no minimum or maximum set by law. The employer decides how much to contribute.
2. Employee shops for and buys an individual health plan — through the ACA Marketplace, directly from an insurer, or through a broker. The employee chooses their own plan.
3. Employee pays premiums (and potentially other medical expenses) out of pocket.
4. Employee submits receipts or proof of coverage and gets reimbursed by the employer — tax-free.

The reimbursement is tax-free income for the employee and a tax-deductible business expense for the employer.

Who can offer an ICHRA

Any employer with at least one W-2 employee can offer an ICHRA. There is no minimum or maximum company size requirement. This is one of the ways ICHRAs differ from their predecessor, the Qualified Small Employer HRA (QSEHRA), which was limited to employers with fewer than 50 employees.

One requirement: an employer cannot offer both an ICHRA and a traditional group health plan to the same group of employees. The two benefit types cannot be mixed for the same employee class.

What expenses can be reimbursed

An ICHRA can be structured to reimburse:

• Premiums only — the monthly cost of the employee's individual health insurance plan
• Medical expenses only — costs like deductibles, copays, and coinsurance as defined in IRS Publication 502
• Both premiums and medical expenses — the employer chooses at setup

Employees can only be reimbursed for what the employer has authorized. For a plain-language breakdown of the out-of-pocket costs an ICHRA might cover, see our guide on how deductibles, copays, and coinsurance work together.

Employee classes: different amounts for different groups

Employers can offer different ICHRA allowance amounts to different groups of employees, called "classes." Federal regulations define 11 permitted employee classes, including:

• Full-time employees
• Part-time employees
• Salaried employees
• Hourly employees
• Seasonal employees
• Employees in different geographic locations
• Employees covered under collective bargaining agreements

Within each class, employers can also vary contributions by age (up to a 3:1 ratio — older employees can receive up to three times the allowance of the youngest employees) and by family status.

This flexibility is useful for employers with a mixed workforce. A company might offer full-time employees a $500/month ICHRA allowance and part-time employees a $200/month allowance, treating each as a separate class.

The tax benefit — for both sides

ICHRAs carry a meaningful tax advantage for both parties:

• For employers: Reimbursements are a deductible business expense, the same as any other employee compensation.
• For employees: Reimbursements are not included in gross income and are not subject to payroll taxes. The money comes back to you tax-free.

ICHRAs and ACA premium tax credits: the key rule to understand

This is the part that trips people up most often.

If you're offered an ICHRA by your employer, your eligibility for ACA premium tax credits — the subsidies that reduce the cost of Marketplace plans — depends on whether the ICHRA is considered affordable.

How affordability is calculated: An ICHRA is affordable if, after the employer's reimbursement, the employee's remaining monthly cost for the lowest-cost Silver plan available in their area is less than 9.02% of their household income (the 2025 threshold — this percentage is adjusted annually by the IRS).

Here's how the two scenarios play out:

• If the ICHRA is affordable: You are not eligible for a Marketplace premium tax credit. The ICHRA covers enough of your cost that the subsidy isn't needed. This doesn't mean you're worse off — the employer's contribution is doing what the credit would have done.
• If the ICHRA is not affordable: You have the option to opt out of the ICHRA and instead purchase a Marketplace plan on your own. If you opt out and your household income qualifies, you can claim the premium tax credit.

You cannot use both an ICHRA and a premium tax credit for the same coverage. If the ICHRA is affordable, the credit isn't available. If it isn't, you choose which benefit to use. Employers are required to notify employees of the ICHRA offer — and how it affects subsidy eligibility — before the coverage start date.

ICHRA vs. traditional group health insurance: the tradeoffs

Neither option is universally better. Here's how they compare honestly.

Advantages of an ICHRA

• Fixed, predictable costs for employers — the employer sets the allowance and knows exactly what they'll spend. Group plan premiums can increase significantly year over year with little employer control.
• Employee flexibility — employees pick their own plan, their own insurer, and their own network. They can choose a plan that fits their specific doctors and health needs. Understanding plan types matters here — our guide on HMOs, PPOs, and EPOs explains the tradeoffs.
• Portability — employees own their individual plan. If they leave the job, they keep the plan and continue paying premiums themselves. There's no coverage gap during job transitions.
• Available to any employer size — small businesses that can't afford group coverage can still contribute meaningfully to employee health costs.

Tradeoffs to understand

• Individual market plans can cost more — individual and family plans purchased outside employer group arrangements often run 10–20% more than equivalent group plan premiums, because group plans benefit from risk pooling across a larger population. The ICHRA allowance may not fully offset this difference.
• Narrower networks are common — individual market plans, especially lower-cost Silver and Bronze plans on the Marketplace, frequently have narrower provider networks than group plans. Employees should verify that their doctors are in-network before selecting a plan.
• Compliance complexity for employers — the affordability rules, employee class requirements, and notification obligations are genuinely complex to administer correctly. Employers with 50 or more full-time employees (Applicable Large Employers under the ACA) have additional obligations. A benefits advisor can help get the setup right.
• Employees carry more responsibility — in a group plan, the employer often handles enrollment logistics. With an ICHRA, employees must research, compare, and enroll in their own plan independently.

Special Enrollment Period: what happens when you're offered an ICHRA

Being newly offered an ICHRA — or having your ICHRA terms change — qualifies you for a 60-day Special Enrollment Period to purchase an individual health plan outside of the standard Open Enrollment window. This applies even if the offer happens mid-year.

If you've been offered an ICHRA and need coverage, you can shop on the ACA Marketplace at healthcare.gov or directly through insurers in your area.

What to do if you've been offered an ICHRA

If your employer is offering you an ICHRA, work through these questions before deciding:

1. What's the monthly allowance? Ask your employer for the exact dollar amount and what it covers — premiums, medical expenses, or both.
2. Is it affordable? To estimate: take your household income, multiply by 9.02%, divide by 12. If the remaining monthly cost of the lowest Silver plan in your area (after reimbursement) is below that number, the ICHRA is affordable and you won't qualify for a Marketplace subsidy.
3. What plans are available in your area? Shop the Marketplace and compare plan premiums, networks, and out-of-pocket costs against what a group plan might offer.
4. Do you want to opt out? If the ICHRA is not affordable, you can opt out and claim a Marketplace subsidy instead — if your income qualifies.

The ICHRA model gives employees more choice and portability, but it also requires more active decision-making. The right answer depends on your health needs, your income, and what plans are available in your market.

Sources: HHS/IRS/DOL Final Rule on ICHRAs — Federal Register (2019), Healthcare.gov — Health Reimbursement Arrangements, IRS Publication 502 — Medical and Dental Expenses