What is ICHRA? Explained by people who run them

What is ICHRA?

An ICHRA, or individual coverage health reimbursement arrangement, is an employer health benefit that reimburses employees tax-free for individual health insurance premiums and, at the employer's option, other medical expenses, instead of enrolling them in a company group plan. The employer sets a monthly allowance; the employee buys their own plan on the individual market and is reimbursed up to that amount. Employers of any size can offer one, and there is no cap on the allowance.

ICHRA was created by federal rule in June 2019 and became available for plan years beginning on or after January 1, 2020. The idea behind it is defined contribution, the same shift that moved retirement benefits from pensions to 401(k)s, applied to health coverage.

What it is not: it isn't a taxable stipend, it isn't cash, and it isn't a group plan the employer picks on everyone's behalf.

How does an ICHRA work?

Six steps, in the order they actually happen.

1. The employer sets an allowance. A monthly dollar amount, which may vary by permitted class and by employee age and family size.
2. Employees get 90 days' notice before the plan year begins.
3. Employees enroll in individual coverage. The ICHRA offer triggers a 60-day special enrollment period, so they aren't limited to open enrollment.
4. Coverage is substantiated. Employees confirm they're enrolled in qualifying individual coverage or Medicare.
5. Reimbursement flows. Tax-free to the employee, deductible to the employer, not subject to payroll tax.
6. Affordability is tested each plan year, per employee, per rating area.

What does an ICHRA cost?

"Cost" means two different things depending on who's asking.

For the employer

The allowance you set, plus a platform or administration fee, typically charged per employee per month. Admin fees vary widely across the category, and platforms advertising no fee are usually earning commission somewhere else in the transaction.

For the employee

The plan premium minus the allowance, plus whatever the plan's deductible and copays run. One nuance most guides get wrong: an employee can only pay that difference pre-tax through a Section 125 cafeteria plan if the plan was purchased off-exchange. Federal law prohibits pre-tax treatment for marketplace plans.

Why the arithmetic often works

A group premium is priced against your claims history. An individual premium is priced against the whole state's risk pool. The gap varies enormously by state and county. But the mechanism is structural, and it's why ICHRA tends to help most exactly where group health hurts most.

See real premium data for your state →

ICHRA vs. traditional group health insurance

	Group plan	ICHRA
Who picks the plan	The employer, for everyone	Each employee, for themselves
How cost is set	Priced against your claims history	You set the allowance
At renewal	A number you receive	A number you choose
Portability	Coverage ends with employment	Policy is in the employee's name
Participation minimums	Usually required	None
Network flexibility	One network for everyone	Whatever's available in each market

ICHRA vs. QSEHRA, HRA, HSA and health stipends

Vehicle	Who can offer	2026 limit	Coverage requirement	Taxable
ICHRA	Any size employer	No cap	Individual coverage or Medicare	No
QSEHRA	Under 50 FTE and offering no group plan	$6,450 / $13,100	Reimbursements taxable without MEC	No, with MEC
Integrated HRA	Employers offering a group plan	Employer-set	Must be on the group plan	No
HSA	Employee-owned; needs an HDHP	$4,400 / $8,750 (+$1,000 at 55+)	n/a	No
Health stipend	Anyone	None	None	Yes, it's wages

A stipend is a raise with a suggestion attached. An ICHRA is a benefit.

The difference is roughly the payroll tax on both sides, plus the fact that nobody helps your employee choose.

ICHRA pros and cons: who it works for, and who it doesn't

The short answer is that ICHRA rewards employers whose problem is cost volatility or workforce diversity, and punishes employers who treat it as a purely financial move and skip the communication. Here's the longer version as a decision path.

Is your workforce spread across more than one rating area?

• Yes → Strong fit. A group plan cannot price several markets well at once, and this is the single clearest signal.
• No → Keep going. Concentration isn't disqualifying, but it removes the strongest argument.

Has your renewal outrun what you can absorb?

• Yes → Strong fit. Defined contribution converts a number you receive into a number you set.
• No → Weaker case. If your claims experience is good and the renewal is flat, group health is genuinely working for you.

How deep is the individual market in the counties your people live in?

• Deep → Multiple carriers and real network choice means employees end up better off, not just differently off.
• Thin → This is the most common reason ICHRA disappoints. It's a county question, not a state one. Check before you commit.

Will someone actually communicate the change well?

• Yes → Either internally or because the vendor does it. This matters more than the economics.
• No → Don't do it yet. Every failed ICHRA we've seen failed here, not in the math.

The four scenarios that decide it

A pros-and-cons list won't tell you whether this will work at your company. Four scenarios will.

1. The migration. Move a 200-life group off its plan. Who educates the employees? What happens to the person who never picks anything?
2. The failed payment. A premium draft fails and the carrier moves to terminate. Who notices, and who calls?
3. The denied claim, asked twice. Once for a national carrier, once for a small regional plan. The second answer is the revealing one.
4. The mid-month life event. A baby arrives on the 12th and the family's billing splits.

These work as a test because the answers depend on structure, not effort. A platform whose insurance work runs through an outside middleman will answer scenario two by describing a ticketing process. A platform that holds the carrier relationship will describe a phone call. Both are being honest. Only one ends with your employee covered by Friday.

We've expanded these into twelve questions to ask any ICHRA administrator →

ICHRA classes: how employers segment employees

The eleven permitted classes are exhaustive. You cannot invent one.

Full-time · Part-time · Salaried · Non-salaried · Employees in the same insurance rating area · Seasonal · Employees covered by a collective bargaining agreement · Employees in a waiting period · Non-resident aliens with no US-source income · Temporary employees placed by a staffing firm · Combinations of the above

You cannot offer a group plan and an ICHRA to the same class. When you offer a group plan to one class and an ICHRA to another, minimum class sizes apply:

Employer size	Minimum class size
Fewer than 100 employees	10
100 to 200 employees	10%
More than 200 employees	20

The ICHRA affordability rule, and how it's calculated

An ICHRA is "affordable" if the employee's cost for the lowest-cost silver plan in their rating area, after the allowance, is no more than an IRS-set percentage of their household income. For plan years beginning in 2026 that percentage is 9.96%, up from 9.02% in 2025.

A worked example

One employee, calendar-year 2026 plan
Lowest-cost silver plan in their rating area	$620 / mo
Less the ICHRA allowance	− $500 / mo
Employee's required contribution	$120 / mo
Household income	$52,000 / yr
9.96% of household income, monthly	$431.60
$120 is below $431.60 → affordable	PASS

Because it's affordable, this employee cannot claim a premium tax credit. Had it failed, they could opt out for the plan year and take the credit instead, once per plan year.

The safe harbors

W-2, rate of pay, and federal poverty level are the employer safe harbors. There are also ICHRA-specific safe harbors covering location, look-back month, and calendar year. Safe harbors govern the employer's penalty exposure. They do not determine the employee's actual premium tax credit eligibility, which uses real household income. Most guides conflate the two.

For calendar-year 2026 plans, the FPL safe harbor works out to a monthly employee cost of $129.89 or less in the mainland US, based on the 2025 federal poverty level of $15,650. Alaska and Hawaii differ.

Sources: IRS Rev. Proc. 2025-25 · HHS poverty guidelines · 26 CFR 54.9802-4

What can an ICHRA reimburse?

An ICHRA can reimburse individual health insurance premiums, and, if the employer chooses, other qualified medical expenses under IRC §213(d). The employer decides which at plan design, and the choice applies uniformly within a class.

Qualifies

• ACA-compliant individual plan premiums
• Medicare Parts A, B, C, D and Medigap premiums
• §213(d) medical expenses, if the employer elects

Doesn't qualify on its own

• Short-term limited-duration plans
• Health sharing ministries
• Standalone dental or vision policies
• A spouse's group plan

Who can offer an ICHRA, and who can participate

Any employer, of any size, can offer an ICHRA. Participation is where it gets specific: more-than-2% S-corporation shareholders, partners, and sole proprietors are not employees for this purpose and generally cannot participate. C-corporation owner-employees generally can. Spouses and dependents can be covered through the employee's plan.

On-exchange vs. off-exchange: the question nobody asks

Off-exchange plans are ACA-compliant individual policies sold directly by carriers rather than through the government marketplace. They carry different tax treatment for the employee's share, and in many markets they offer richer plan options than what's listed on the exchange.

Some ICHRA platforms are on-exchange only. It's a yes-or-no question, it's easy to verify in a demo, and it meaningfully changes what your employees can choose from.

ICHRA and employees over 65

Medicare counts as qualifying coverage for ICHRA purposes, so a Medicare-eligible employee can participate and be reimbursed for Medicare premiums. There are real constraints: Medicare Secondary Payer rules restrict employers with 20 or more employees from incentivizing Medicare-eligible employees off the group plan, and Medicare status is not itself a permitted ICHRA class.

What employees actually experience

Honestly: about two weeks of confusion at the switch, and then, if it's run well, less friction than they had before. Two things reliably go wrong. Someone doesn't pick a plan, and someone's specialist turns out not to be in the plan they chose. Both are preventable, and preventing them is most of what a good administrator does.

The underrated upside is portability. The policy is in the employee's name, so it doesn't evaporate when they change jobs.

How to set up an ICHRA: the timeline

1. Feasibility and county-level market check. Carrier participation and plan depth where your people actually live.
2. Class design and allowance modeling.
3. Affordability testing against the classes and allowances you're considering.
4. Plan documents and legal setup.
5. The 90-day employee notice. Exceptions exist for new hires and newly established employers.
6. Communication and education runway.
7. Enrollment window.
8. Funding and payroll integration.
9. Post-enrollment verification, confirm every employee actually landed somewhere.
10. In-year support.

How to choose an ICHRA administrator

Three things genuinely vary between vendors, and the rest is marketing: who holds the carrier relationships, who employs the support staff, and whether they can enroll members off-exchange.

Twelve questions to ask any ICHRA administrator →