What Is an ICHRA? A Complete Guide for Employers

The Individual Coverage Health Reimbursement Arrangement (ICHRA) is revolutionizing the way employers offer health benefits. By providing tax-free reimbursements for individual health insurance premiums and qualified medical expenses, ICHRA offers businesses greater flexibility and cost control compared to traditional group health plans. But how does it work, and is it right for your business? Let’s dive in.

How Does an ICHRA Work?

1. Employers Set a Monthly Allowance
   Instead of offering a one-size-fits-all group health plan, employers determine a fixed, tax-free reimbursement amount for employees.
2. Employees Purchase Their Own Health Insurance
   Employees can shop for an individual health plan through the ACA Marketplace, private insurers, or Medicare (if eligible).
3. Employees Submit Expenses for Reimbursement
   Employees pay their premiums and medical expenses upfront, then submit receipts for tax-free reimbursement.

Who Can Offer an ICHRA?

✔️ Any size employer can implement an ICHRA—there are no minimum or maximum employee limits.
✔️ Employers can choose which employees qualify by defining eligibility based on job class (e.g., full-time vs. part-time, salaried vs. hourly, remote vs. in-office).
✔️ Works well for small businesses, startups, and growing companies that want to provide health benefits without the cost burden of traditional group insurance.

Who is Eligible for an ICHRA?

✔️ Employees must be enrolled in an individual health insurance plan (purchased through the Marketplace, private insurers, or Medicare).
✔️ Employees cannot be enrolled in a spouse’s group plan to qualify for ICHRA reimbursements.
✔️ Employers can choose to offer different reimbursement amounts based on employee categories (e.g., full-time vs. part-time, location, seasonal workers, etc.).

📌 Important: Employees receiving ICHRA funds cannot also receive premium tax credits through the ACA Marketplace.

What Can Be Reimbursed with an ICHRA?

Employers can reimburse:
💰 Health insurance premiums (ACA-compliant individual plans, Medicare Part A/B/D, and Medicare Advantage)
💰 Qualified medical expenses (co-pays, prescriptions, doctor visits, dental, vision, and more—similar to an HSA or FSA)

Benefits of an ICHRA

For Employers:

✔️ Cost Control – Employers set fixed reimbursement limits, avoiding unpredictable premium hikes.
✔️ No Administrative Burden – No need to manage a group health plan; employees choose their own coverage.
✔️ Tax Benefits – Employer contributions are 100% tax-deductible and tax-free for employees.
✔️ Flexibility – Employers can customize reimbursement rates based on employee classes.

For Employees:

✔️ Choice & Personalization – Employees pick a plan that fits their needs, not a one-size-fits-all option.
✔️ Portability – Since employees own their plan, they keep their coverage even if they change jobs.
✔️ Tax-Free Benefits – Reimbursements are not considered taxable income.

ICHRA vs. Traditional Group Health Insurance

Key Compliance Rules

📌 ICHRA plans must be offered fairly: Employers must follow employee class rules and cannot discriminate in reimbursement amounts based on health conditions.
📌 Employers must provide an ICHRA notice: Employees must be informed about their ICHRA and how it impacts premium tax credit eligibility.
📌 Employees must have an individual plan: Employees must show proof of ACA-compliant coverage to receive tax-free reimbursements.

Is an ICHRA Right for Your Business?

Ideal for:

✔️ Small businesses that want to offer health benefits without group insurance
✔️ Companies with a remote or diverse workforce
✔️ Employers who want predictable, controlled healthcare costs

Not ideal for:

❌ Employers who want a single group plan for all employees
❌ Businesses with many employees on a spouse’s group plan (since ICHRA requires individual coverage)

How to Set Up an ICHRA

1️⃣ Define your budget – Decide how much to reimburse employees per month.
2️⃣ Choose employee classes – Determine who qualifies (e.g., full-time, part-time, seasonal workers).
3️⃣ Communicate the ICHRA details – Provide employees with required notices and guidance.
4️⃣ Set up an easy reimbursement process – Work with an HRA administrator or software provider to manage claims.
5️⃣ Ensure compliance with ACA rules – Keep records, ensure proper documentation, and avoid tax penalties.

The Bottom Line on ICHRA

An ICHRA is a modern, flexible, cost-effective alternative to traditional group health insurance, giving employers budget control and employees personalized health coverage. If your business wants more flexibility while still offering competitive benefits, an ICHRA may be the perfect solution! Contact us today to find out how you can get an ICHRA implemented for your business.