Key Takeaways
- An Individual Coverage HRA (ICHRA) allows employers of any size to reimburse employees tax-free for individual health insurance premiums and qualified medical expenses.
- ICHRAs have no contribution limits — employers can set any reimbursement amount and vary it by employee class.
- Employees use ICHRA funds to purchase individual market coverage — including ACA marketplace plans — giving them choice over their own health plan.
- ICHRAs can satisfy the ACA employer mandate for ALEs if the reimbursement amount meets affordability standards.
- ICHRAs are particularly powerful for employers with geographically dispersed workforces, part-time workers, or employees who prefer individual market coverage.
What Is an ICHRA?
An Individual Coverage Health Reimbursement Arrangement (ICHRA) is a type of HRA created by IRS regulations effective January 1, 2020. It allows employers to reimburse employees tax-free for individual health insurance premiums and qualified medical expenses — without offering a traditional group health plan.
Before ICHRAs, employers who wanted to reimburse individual premiums faced significant tax and ACA compliance barriers. The ICHRA regulations resolved those barriers, creating a flexible, employer-funded alternative to group coverage that works for employers of any size.
The ICHRA is not a health insurance plan — it is a reimbursement mechanism. The employer sets a monthly reimbursement amount, the employee purchases individual coverage of their choice, and the employer reimburses the premium (and optionally other medical expenses) up to the defined limit. The employee owns the policy and keeps it if they change jobs.
How ICHRAs Work
The ICHRA mechanics are straightforward:
- 1The employer establishes an ICHRA plan document defining the reimbursement amount, eligible employee classes, and eligible expenses.
- 2The employer notifies employees at least 90 days before the plan year begins.
- 3Employees purchase individual health insurance — from the ACA marketplace, off-exchange, or through a spouse's employer plan.
- 4Employees submit proof of coverage and expense documentation to the ICHRA administrator.
- 5The employer reimburses eligible expenses up to the defined monthly limit, tax-free.
- 6Unused ICHRA funds do not roll over to the next year (unlike HSAs) — they are forfeited.
Employee Classes
One of the most powerful features of the ICHRA is the ability to vary reimbursement amounts by employee class. Employers can set different ICHRA amounts for different groups of employees — as long as the classes are defined by IRS-approved criteria.
- Full-time employees
- Part-time employees
- Seasonal employees
- Employees covered by a collective bargaining agreement
- Employees in a waiting period
- Employees under age 25
- Non-resident aliens with no US-source income
- Salaried employees
- Hourly employees
- Employees in different geographic locations (by rating area)
Geographic class is one of the most useful ICHRA class distinctions. Employers with employees in multiple states can set ICHRA amounts that reflect local individual market premium levels — giving employees in high-cost markets a larger reimbursement than employees in lower-cost markets.
ICHRA and the ACA Employer Mandate
For ALEs (50+ FTE employees), an ICHRA can satisfy the ACA employer mandate if it meets affordability standards. An ICHRA is considered affordable if the employee's net premium for the lowest-cost silver plan on the ACA marketplace does not exceed the affordability threshold (9.96% of household income in 2026) after the ICHRA reimbursement.
- Because household income is unknown, the IRS provides a safe harbor: the ICHRA is affordable if the employee's net premium for the lowest-cost silver plan in their rating area does not exceed the affordability percentage of their W-2 wages.
- Affordability must be calculated for each employee class separately.
- If the ICHRA is affordable, employees in that class are not eligible for ACA premium tax credits — they cannot use marketplace subsidies.
- If the ICHRA is not affordable, employees can opt out and receive marketplace subsidies — but the employer may face ACA "B" penalties.
ICHRA affordability calculations are complex and vary by employee location and income. Employers using ICHRAs to satisfy the ACA mandate should work with a benefits consultant or ERISA attorney to verify affordability for each employee class before the plan year begins.
ICHRA vs. Traditional Group Coverage: When to Use Each
ICHRAs are not a universal replacement for group coverage — they are a powerful tool for specific situations. The decision depends on workforce demographics, geographic distribution, and employer objectives.
| Situation | ICHRA Advantage | Group Plan Advantage |
|---|---|---|
| Geographically dispersed workforce | Reimbursement varies by local market | Single plan design for all locations |
| Part-time or variable-hour workers | Flexible class-based design | Uniform coverage for all employees |
| Employees who prefer plan choice | Employee selects their own plan | Employer negotiates group rates |
| Small employer (< 50 FTEs) | No ACA mandate; full flexibility | May have better group rates |
| High-cost group market | Individual market may be cheaper | Group rates may be more stable |
| Employer wants cost predictability | Fixed monthly reimbursement cap | Premiums vary with claims experience |
Your Action Steps
- 1Identify employee populations where an ICHRA might be more cost-effective than group coverage — part-time workers, remote employees in high-cost markets, or employees who prefer individual plan choice.
- 2Compare the cost of your current group plan premium for those populations against the ICHRA reimbursement amount needed to make individual coverage affordable.
- 3If you are an ALE, calculate the ICHRA reimbursement amount needed to meet ACA affordability standards for each employee class you are considering.
- 4Review the individual market options available in your employees' rating areas — confirm that affordable, quality individual plans are available before committing to an ICHRA.
- 5Evaluate ICHRA administration platforms — vendors like Take Command Health, PeopleKeep, and Sana Benefits offer ICHRA administration with employee shopping tools.
- 6Consult ERISA counsel to draft the ICHRA plan document and confirm compliance with the 90-day advance notice requirement.
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