Individual Coverage Health Reimbursement Arrangement

ICHRA Explained: Simple Guide to Better Healthcare Benefits

Did you know that the Individual Coverage Health Reimbursement Arrangement (ICHRA) has already attracted 84% of small businesses among the newest adopters?

Available since January 2020, ICHRA represents a fresh approach to employee health benefits that’s rapidly gaining traction across the country. We’ve seen impressive results already, with one small college saving $1.4 million in healthcare costs while their employees reduced their premiums by an average of $1,200 each after switching to this innovative solution. Additionally, the Health and Human Services Department projects that approximately 800,000 employers will offer ICHRAs to more than 11 million employees within the next 5-10 years.

Unlike traditional group health plans, ICHRA allows employers to set fixed monthly allowances for health insurance, consequently eliminating unpredictable premium increases and making healthcare costs more manageable. Furthermore, this approach significantly reduces the administrative burden on businesses, especially when utilizing an HRA administrator to handle compliance and reimbursement processes.

In this guide, we’ll explain what an ICHRA plan is, how it differs from traditional health insurance options, and why it might be the right choice for your organization. Whether you’re considering implementing ICHRA health insurance or simply want to understand its meaning and potential benefits, we’ve got you covered with straightforward, practical information to help you make informed decisions about your healthcare strategy.

What is an ICHRA Plan and How Does It Work?

In essence, an Individual Coverage Health Reimbursement Arrangement (ICHRA) is a tax-advantaged health benefit that enables employers to reimburse employees for their individual health insurance premiums and qualified medical expenses tax-free. Introduced in January 2020, ICHRA emerged following a 2017 Executive Order directing various federal departments to expand businesses’ use of Health Reimbursement Arrangements (HRAs).

ICHRA definition and IRS classification

ICHRA represents a formal health benefit regulated by the Internal Revenue Service. This arrangement allows businesses to provide a monthly allowance of tax-free money that employees can use to purchase individual health insurance tailored to their specific needs. The plan functions as an alternative to traditional group health plans, offering greater flexibility in coverage options and cost management.

Prior to ICHRA’s establishment, the Affordable Care Act (ACA) had limited businesses’ ability to offer HRAs for individual policies through IRS Notice 2013-54. However, the new rules released in June 2019 created ICHRA as a viable option beginning January 1, 2020, effectively restoring employers’ opportunity to reimburse employees for individual insurance policies.

How reimbursements are processed

The ICHRA reimbursement process follows a straightforward four-step workflow:

1. Design and allocation – Employers establish monthly allowances for employees, with the flexibility to set different amounts for various employee classes. There are no minimum or maximum contribution limits, allowing businesses to offer allowances that fit their budget.
2. Purchase and coverage – Employees must first purchase individual health insurance policies through the Health Insurance Marketplace, directly from carriers, or through state-based exchanges. Only after obtaining qualifying coverage can employees participate in the ICHRA program.
3. Expense submission – After incurring qualified expenses, employees submit reimbursement requests along with substantiating documentation such as invoices, receipts, or explanations of benefits (EOBs). This documentation verifies that expenses qualify under the ICHRA plan.
4. Review and reimbursement – The employer or a designated third-party administrator (TPA) reviews the documentation to ensure compliance with IRS regulations and the specific terms of the ICHRA benefit. Upon approval, reimbursements are issued through payroll, check, or direct deposit.

Who can offer and receive ICHRA benefits

Practically any employer with at least one W-2 employee can offer an ICHRA. This includes private businesses of all sizes, nonprofit organizations, government entities, religious organizations, educational institutions, and both startups and established companies.

For employees to participate, they must:

• Be classified as W-2 employees (independent contractors and consultants generally don’t qualify)
• Maintain enrolment in individual health insurance that qualifies as Minimum Essential Coverage (MEC) under the ACA
• Complete any waiting period established by the employer
• Provide monthly verification of individual coverage

Moreover, ICHRA allows employers to define different classes of employees (such as full-time, part-time, or seasonal) and apply offerings consistently within each class. Employees covered under a spouse’s group health plan typically cannot participate, though they may opt out of the ICHRA benefit.

Notably, employers can offer both a traditional group health insurance plan and an ICHRA simultaneously, but not to the same class of employees. For instance, a company could provide a group plan to full-time staff and an ICHRA to part-time workers.

ICHRA vs Traditional Group Health Plans

Comparing ICHRA and traditional group health plans reveals fundamental differences in how employers fund healthcare and manage associated risks. Indeed, almost 70% of small business owners cite rising premiums and deductibles as their primary healthcare concern, making alternative approaches increasingly attractive.

Cost control and budget predictability

The financial advantage of an ICHRA plan stems from its defined contribution structure. Unlike traditional group health insurance where employers absorb unpredictable annual premium increases, an ICHRA allows businesses to set predetermined monthly allowances. This approach creates complete control over healthcare budgets.

Traditional group health plans typically require employers to cover a substantial portion of premiums- according to KFF, employers paid an average of 84% of premiums for single coverage and 75% for family coverage in 2024. Conversely, with an ICHRA, organizations determine exactly how much to contribute, creating fixed, predictable costs.

The financial impact can be substantial. A Pennsylvania-based mechanical contractor saved ₹41,515,181.80 annually after transitioning to an ICHRA. Similarly, a Pittsburgh non-profit reduced expenses by over ₹63,285,338.10.

Plan portability and employee choice

A critical distinction between an ICHRA and traditional group health insurance lies in plan ownership. With traditional group coverage, employees lose their benefits when changing jobs. In contrast, the individual health insurance plans purchased through an ICHRA remain with employees regardless of employment changes.

This portability creates greater autonomy for employees. As noted in the Harvard Business Review, workplaces that grant employees more control over benefits see increased “employee satisfaction, fulfilment, and engagement at work”.

Furthermore, traditional group plans typically follow a one-size-fits-all approach. ICHRA health insurance arrangements allow employees to shop for individual plans through public or private exchanges, selecting coverage that aligns with their specific needs and circumstances. Younger, healthier employees might choose high-deductible plans with lower premiums, whereas those with families or chronic conditions can select more comprehensive coverage.

Participation requirements and risk management

Traditional group health plans generally require approximately 70% employee participation. This constraint often forces employers to offer more generous—and expensive—benefits than they might otherwise provide simply to maintain the plan.

An ICHRA eliminates this pressure entirely, as there are no minimum participation requirements. If employees decline the benefit, employers face no penalties or compliance concerns.

Additionally, an ICHRA fundamentally changes how employers handle healthcare risk. Group health insurance makes employers responsible for managing their employees’ health risks, either through premium increases in fully insured plans or direct claim payments in self-funded arrangements.

Alternatively, ICHRA meaning in practice is that employers can “get out” of managing employee health risks while still providing valuable benefits. Because individual insurance carriers assume the risk of covering employees, businesses face no exposure to unexpected claim costs.

This risk shift represents a significant advantage, particularly for smaller organizations. Self-funded group plans without adequate protection could face financial ruin from expensive claims, whereas an ICHRA removes this vulnerability entirely.

Key Benefits of ICHRA for Employers and Employees

ICHRA stands out in the employee benefits landscape due to its remarkable advantages for both employers and workers alike. First and foremost, this innovative health benefit model offers substantial value beyond traditional group plans through several key mechanisms.

Tax advantages for both parties

The financial benefits of an ICHRA plan extend to both sides of the employment relationship. For employers, all reimbursements qualify as tax-deductible business expenses and aren’t subject to payroll taxes. This creates immediate cost savings compared to simply increasing salaries to help employees purchase health insurance.

Equally important, employees receive these health benefit dollars completely tax-free. Unlike regular income which faces income and payroll taxes, ICHRA reimbursements remain untaxed when used for qualified medical expenses. In fact, if an employer offers this option, employees can pay their entire individual policy premium with pre-tax dollars.

Customizable reimbursement structures

An ICHRA definition includes remarkable flexibility in how benefits are structured. Employers can tailor allowances based on 11 different employee classes including full-time, part-time, salaried, hourly, remote, seasonal, and several others. This allows organizations to prioritize their health benefits budget strategically.

Besides class-based customization, employers determine exactly how much to contribute monthly with no minimum or maximum limits. This enables businesses to offer precisely what fits their budget while still providing meaningful benefits. Some employers choose to reimburse only for premiums, while others include additional out-of-pocket medical expenses.

Improved employee satisfaction and retention

Understanding what an ICHRA plan is reveals why it enhances workplace satisfaction. By offering ICHRA health insurance, employers demonstrate a commitment to employee wellbeing while respecting individual preferences. Workers gain the freedom to select plans that truly fit their personal or family needs rather than accepting a one-size-fits-all solution.

The portability of individual health insurance also represents a significant advantage. Unlike traditional employer plans that terminate with employment, ICHRA coverage stays with employees even when they change jobs or relocate. This continuity creates greater peace of mind and reduces healthcare-related stress.

As a result, businesses offering this benefit often experience improved employee retention. Research indicates that 45% of Americans at small to medium-sized companies plan to stay in their current roles longer specifically because of employer-sponsored wellness programs.

No minimum participation requirements

The ICHRA meaning for employers includes freedom from traditional participation thresholds. Unlike group plans that typically require 70% employee enrollment, an ICHRA has no minimum participation requirements. This eliminates a significant administrative headache and compliance concern.

Also, if employees decline to participate in the benefit for any reason, employers face no penalties or additional costs. This creates a truly optional benefit that respects employee choice while still offering substantial value to those who participate.

In addition, this flexibility makes ICHRA particularly suitable for organizations with diverse workforce compositions, including those with part-time or seasonal employees who traditionally might not receive health benefits.

How to Set Up and Administer an ICHRA Plan

Implementing an ICHRA plan requires careful planning and attention to regulatory details. Once you’ve decided this approach is right for your organization, a methodical setup process ensures smooth administration and compliance.

Step-by-step setup process

Initially, select a start date for your ICHRA benefit. Unlike traditional health plans, an ICHRA can begin anytime during the year, not just during open enrollment periods. Subsequently, evaluate your company’s needs and establish a budget that balances competitive benefits with long-term sustainability. For businesses transitioning from group coverage, schedule your ICHRA to begin one day after your group policy ends to prevent coverage gaps.

Creating employee classes and setting allowances

One distinctive feature of ICHRA meaning in practice is the ability to customize benefits through employee classifications. Employers can utilize up to 11 different classes, including full-time/part-time status, salaried/hourly workers, geographic location, and seasonal employees.

After defining your classes, determine reimbursement amounts for each group. Allowances can vary based on:

• Employee class (e.g., full-time vs. part-time)
• Age (following a maximum 3:1 ratio from youngest to oldest)
• Family size (offering more for employees with dependents)

Remember that all employees within the same class must receive equal treatment to comply with non-discrimination rules.

Legal documentation and ERISA compliance

Under the Employee Retirement Income Security Act (ERISA), employers must create formal written plan documents. These include:

• Master Plan Document outlining eligibility, reimbursement rules, and claims procedures
• Summary Plan Description (SPD) explaining benefits in plain language
• ICHRA Employee Notice (required at least 90 days before plan year)

These documents establish fiduciary responsibilities, outline appeal processes for denied claims, and protect both employers and participants. Failure to maintain proper documentation could result in penalties of approximately ₹8,438.05 per employee per day.

Using third-party administrators for privacy and recordkeeping

Although self-administration is possible, most experts recommend using specialized third-party administrators (TPAs) for ICHRA health insurance administration. TPAs provide critical privacy protection, as directly handling medical expense documentation could violate HIPAA regulations. Additionally, they maintain secure digital records, verify coverage compliance, and stay current on evolving healthcare regulations.

Beyond legal protection, TPAs streamline processes by managing reimbursement verification, claims processing, and regulatory reporting requirements. This outsourcing typically proves more cost-effective than hiring an attorney to draft compliant plan documents, which could exceed ₹168,760.90.

ICHRA Compliance and Affordability Rules Explained

Understanding ICHRA compliance goes beyond basic setup knowledge. For applicable large employers (ALEs) with 50+ full-time equivalent employees, the ACA employer mandate creates specific obligations.

ACA employer mandate and affordability threshold

The affordability threshold represents a key compliance metric for ICHRA plans. In 2025, an ICHRA is considered affordable when employees contribute no more than 9.02% of their household income toward individual coverage. This percentage increases to 9.96% for 2026. Failing this affordability test can trigger IRS penalties for employers subject to ACA mandates.

Safe harbor methods: W-2, Rate of Pay, FPL

Given that employers typically lack access to household income data, the IRS established three “safe harbor” methods:

1. W-2 Safe Harbor – Bases calculations on Box 1 of the employee’s W-2 form. The annual cost cannot exceed 9.02% of these wages for 2025.
2. Rate of Pay Safe Harbor – For hourly employees, multiplies hourly rate by 130 hours (minimum monthly hours for full-time status). For salaried workers, uses monthly salary at the coverage period start.
3. Federal Poverty Level (FPL) Safe Harbor – Often the simplest approach. For 2026, employees must pay no more than ₹10,961.02 monthly under this method.

Minimum class size requirements

Minimum class size rules only apply when offering both a traditional group plan and an ICHRA simultaneously. For employers with fewer than 100 employees, each class must include at least 10 eligible workers. Those with 100-200 employees must maintain 10% minimum class size, while organizations with 200+ employees need at least 20 per class.

Impact on premium tax credit eligibility

Employees cannot collect premium tax credits (PTC) while participating in an ICHRA. Nevertheless, merely being offered an ICHRA doesn’t automatically disqualify them. If the ICHRA allowance is deemed unaffordable, employees can opt out before the plan start date and remain eligible for PTCs. Crucially, employers must provide notice explaining how their ICHRA plan affects premium tax credit eligibility.

Conclusion

ICHRA represents a significant shift in how businesses approach employee health benefits. Throughout this guide, we’ve seen how this tax-advantaged arrangement allows employers to reimburse employees for individual health insurance premiums and qualified medical expenses while maintaining predictable healthcare budgets.

The flexibility of ICHRA stands out as perhaps its most valuable feature. Employers can tailor allowances based on employee classifications, offer different amounts for various worker categories, and decide exactly how much to contribute without minimum or maximum limits. This adaptability makes ICHRA suitable for organizations of all sizes, from small startups to established corporations.

Financially, ICHRA delivers clear advantages for both parties. Employers benefit from tax-deductible reimbursements, freedom from unpredictable premium increases, and elimination of minimum participation requirements. Employees, meanwhile, gain tax-free health benefit dollars, plan portability when changing jobs, and the ability to select coverage that truly fits their specific needs rather than accepting one-size-fits-all solutions.

Setting up an ICHRA does require careful planning and attention to compliance details, especially regarding affordability thresholds for applicable large employers. However, third-party administrators can significantly simplify this process by managing documentation, verification, and regulatory requirements.

The rapid adoption of ICHRA since its 2020 introduction suggests this healthcare solution addresses real pain points for American businesses. As healthcare costs continue rising and workforce arrangements become increasingly diverse, ICHRA offers a sustainable alternative that balances employer budget concerns with employee wellbeing.

Whether you’re a small business owner struggling with traditional group insurance costs or a larger organization seeking more flexible benefits options, ICHRA deserves serious consideration as part of your healthcare strategy. This innovative approach might just deliver the predictability, customization, and tax advantages your organization needs.

Key Takeaways

ICHRA offers a revolutionary approach to employee health benefits that’s gaining rapid adoption, with 84% of small businesses among newest adopters and projected growth to 11 million employees within 5-10 years.

• ICHRA provides predictable healthcare costs – Employers set fixed monthly allowances instead of absorbing unpredictable premium increases, creating complete budget control.

• Employees gain portable, personalized coverage – Individual health plans stay with workers when changing jobs, and they can choose coverage that fits their specific needs.

• Tax advantages benefit both parties – Employers get tax-deductible reimbursements without payroll taxes, while employees receive completely tax-free health benefit dollars.

• No minimum participation requirements – Unlike traditional group plans requiring 70% participation, ICHRA eliminates this constraint and associated compliance concerns.

• Professional administration is recommended – Third-party administrators handle HIPAA compliance, documentation, and regulatory requirements more cost-effectively than self-administration.

ICHRA represents a sustainable solution that balances employer budget predictability with employee choice and satisfaction, making it an attractive alternative to traditional group health insurance for organizations of all sizes.

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