What Is an ICHRA? Flexible Benefits Replacing Traditional Group Health Plans

An ICHRA — Individual Coverage Health Reimbursement Arrangement — is an employer-funded benefit that reimburses employees tax-free for individual health insurance premiums and qualifying medical expenses. Unlike a traditional group health plan, an ICHRA does not require the employer to pick and manage a single plan for everyone. Instead, each employee selects their own individual or family plan, and the employer reimburses them up to a set monthly amount. No shared plan. No network restrictions. No minimum participation requirements.

How Does an ICHRA Work?

The employer sets a monthly reimbursement allowance — any amount they choose, with no minimum or maximum. Employees purchase their own qualifying health insurance (individual plans from any source, including off-marketplace) and submit proof of premium payments and eligible expenses. The employer reimburses them up to the allowance amount, tax-free for both the employer and employee. Employees keep whatever plan suits them; the employer controls the budget.

ICHRAs became available January 1, 2020, following a federal rule change. They work best in situations where a traditional group plan is not viable, too expensive, or too administratively complex.

What Are the Advantages of an ICHRA for Small Businesses?

ICHRA Advantages

•   No minimum group size — works for businesses of any size, including 1 employee

•   No minimum contribution requirement — employer sets any amount

•   No participation minimums — employees do not have to accept

•   Tax-free reimbursements for both employer and employee

•   No administrative burden of managing a group plan

ICHRA Limitations

•   Employees must purchase their own individual insurance

•   Employees who receive an ICHRA offer may not qualify for ACA premium tax credits

•   Requires employees to understand individual health insurance shopping

•   Reimbursements are limited to the employer's set allowance

•    Administration requires a formal ICHRA plan document and compliance

Who Qualifies to Participate in an ICHRA?

To receive tax-free ICHRA reimbursements, employees must be enrolled in a qualifying individual health insurance plan — this includes any plan purchased on or off the ACA marketplace (as long as it is minimum essential coverage). Employees cannot be on another employer's group plan and also receive ICHRA reimbursements for that coverage. Employers can differentiate reimbursement levels by employee class (full-time, part-time, seasonal, geographic location, etc.) but must treat all employees in the same class equally.

How Is an ICHRA Different from a QSEHRA?

The QSEHRA (Qualified Small Employer Health Reimbursement Arrangement) is similar in concept but limited to employers with fewer than 50 FTEs who do not offer group health insurance. The QSEHRA has annual contribution limits ($6,350 for self-only coverage and $12,800 for families in 2026). The ICHRA has no contribution limits and is available to employers of any size. If you want maximum flexibility, the ICHRA is generally the more powerful tool.

What Does an ICHRA Cost to Set Up?

There is no statutory fee to establish an ICHRA — you are essentially creating a formal employer policy with a reimbursement program. Third-party ICHRA administrators charge monthly per-employee fees that typically range from $5 to $20 per employee per month for administration, compliance documentation, and reimbursement processing. Many independent benefits brokers can help you set up an ICHRA and connect you with administration platforms at competitive rates.

Frequently Asked Questions

Q: Can a sole proprietor use an ICHRA?

Sole proprietors without employees generally cannot use an ICHRA to reimburse their own premiums. ICHRAs are designed for employers reimbursing W-2 employees. Self-employed individuals have separate deduction options.

Q: Is an ICHRA considered a group health plan?

Yes. An ICHRA is an employer-sponsored group health plan under federal law. If the ICHRA offer is considered affordable under IRS rules, the employee is not eligible for ACA marketplace premium tax credits. If the offer is unaffordable, the employee may opt out of the ICHRA and claim premium tax credits instead; however, they cannot do both. Affordability is based on whether the employee's remaining cost for the lowest-cost silver plan in their area, after the employer's reimbursement, falls below an IRS-set percentage of household income.

Q: Can employees use an ICHRA to reimburse dental and vision premiums?

Yes. Employers can design an ICHRA to reimburse dental, vision, and other ancillary premiums in addition to medical premiums.

Q: What happens to unused ICHRA funds?

Unlike an HSA, employees do not own unused ICHRA funds. If an employee leaves the company or the employer's contribution exceeds what the employee uses in a month, the employer retains those funds.

 Key Takeaways

•   An ICHRA reimburses employees tax-free for individual health insurance premiums — no shared group plan required.

•  No minimum group size, no contribution minimums, and no participation requirements.

•  Employees select their own individual plans; the employer controls only the monthly reimbursement budget.

•   An affordable ICHRA offer may disqualify employees from ACA marketplace premium tax credits.

•   Best for businesses of any size that want to offer benefits without managing a traditional group plan.

 Sources & References

• IRS. Individual Coverage HRAs. irs.gov

• Department of Labor. FAQs on ICHRAs. dol.gov

• CMS. HRA Flexibilities and Tribal Exemptions. cms.gov