How ICHRA Works
An ICHRA is simpler than a group health plan in concept but requires careful setup. The employer funds a monthly reimbursement account. Employees enroll in their own individual coverage and submit expenses. The employer reimburses tax-free up to the monthly allowance. Here is how the full cycle works — and what can go wrong at each step.
Model your ICHRAThe ICHRA reimbursement cycle
Every ICHRA follows the same six-step cycle. The employer controls steps one and two — plan design and employee notice. Employees control steps three and four — coverage enrollment and expense submission. The administrator handles substantiation. The employer funds reimbursements as they are approved.
Employer establishes the ICHRA
The employer creates a formal ICHRA plan document, sets the monthly reimbursement amount (which can vary by employee class and family status), and selects an HRA administration platform. The plan document must define eligible employees, reimbursement amounts, the plan year, and the opt-out procedure.
Employer notifies employees
At least 90 days before the plan year begins, the employer provides a written notice to eligible employees explaining the ICHRA terms, reimbursement amount, and what employees need to do. For new employees, the notice must be provided within 90 days of hire. This notice is a hard compliance requirement — missing the deadline creates legal exposure.
Employees enroll in individual coverage
Employees shop for and enroll in an ACA-compliant individual or family health insurance plan — on the marketplace, off-exchange, or through Medicare. They must maintain qualifying coverage to receive reimbursements. Employees who do not enroll in individual coverage cannot receive ICHRA reimbursements, regardless of the employer's contribution.
Employees submit expenses for reimbursement
Employees submit premium payments and qualifying medical expenses to the HRA administrator with documentation — premium invoices, Explanations of Benefits (EOBs), or itemized receipts. The administrator reviews and approves reimbursements. This substantiation process is required by IRS rules and cannot be skipped.
Employer reimburses tax-free
The employer reimburses approved expenses up to the monthly allowance. Reimbursements are tax-free to the employee and tax-deductible to the employer. Unused allowances do not carry over unless the plan document explicitly allows it. The employer's total cost is exactly the reimbursement amount times the number of employees who submit claims.
Plan renewal and adjustment
The employer reviews and adjusts the reimbursement amount for the next plan year, provides updated notices to employees (required even if nothing changes), and the cycle repeats. Annual renewal is also an opportunity to evaluate whether the ICHRA design is meeting its cost and coverage goals.
What qualifies for reimbursement
ICHRA can reimburse individual health insurance premiums and, if the plan document allows it, qualifying medical expenses under IRC Section 213(d). The plan document controls which expenses are eligible — employers can limit reimbursements to premiums only for a simpler administration model.
Qualifying expenses
Does not qualify
Substantiation: the compliance backbone of ICHRA
Substantiation is the process of verifying that reimbursed expenses are legitimate qualifying expenses before the employer pays them. The IRS requires substantiation for all HRA reimbursements — it is not optional, and it cannot be handled informally.
For premium reimbursements, employees must provide a premium invoice or payment confirmation from their insurer showing the coverage period and premium amount. For medical expenses, employees must provide an EOB or itemized receipt showing the date of service, provider, and amount. The HRA administrator must also verify that the employee has qualifying individual coverage before approving any reimbursement.
This is why an HRA administration platform is not optional. Managing substantiation manually — collecting documents, verifying coverage, tracking monthly allowances — is not feasible at any meaningful scale. The platform handles the compliance workflow and creates the audit trail the employer needs.
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Model your ICHRA reimbursement amounts
Use the free ICHRA calculator to estimate employer costs and check ACA affordability for your workforce before committing to a plan design.