What Is an ICHRA?
ICHRA lets employers reimburse employees tax-free for individual health insurance and medical expenses. This FAQ answers the most common questions about how ICHRA works, who can participate, and why more employers are switching.
ICHRA lets employers reimburse employees tax-free for individual health insurance and medical expenses. This FAQ answers the most common questions about how ICHRA works, who can participate, and why more employers are switching.
What is an ICHRA?
ICHRA (pronounced "ik-rah") stands for Individual Coverage Health Reimbursement Arrangement. It's a health benefit model that allows employers to reimburse employees a fixed monthly amount for individual health insurance premiums and qualified medical expenses—all tax-free. Employees purchase their own health insurance plans on the individual market, and the employer's contribution covers these costs without the tax burden of regular income.
When did ICHRA become available?
ICHRA was introduced in 2020 under federal regulations. Since then, adoption has grown rapidly—ICHRA coverage among large employers increased 34% between 2024 and 2025, with nearly 450,000 employees now covered nationwide.
How is ICHRA different from a traditional group health plan?
With a traditional group plan, the employer selects the insurance carrier and plan options, and all employees share the same coverage. With ICHRA, the employer defines a contribution amount, and employees choose their own individual health insurance plans. This gives employees more choice while giving employers more predictable costs. Group plan premiums are often tied to the group's claims experience, meaning a few high-cost claims can spike rates for everyone. ICHRA avoids this volatility.
How is ICHRA different from giving employees a taxable stipend for health insurance?
When you add money to an employee's paycheck as a taxable stipend, 20-40% of that value is lost to income taxes and payroll taxes. ICHRA reimbursements are tax-free for both the employer and employee, meaning every dollar goes directly toward health coverage. ICHRA also provides a formal structure for reimbursements, reducing compliance risks associated with informal stipend arrangements.
What size employer can offer an ICHRA?
Employers of any size can offer ICHRA—from startups with just a few employees to large corporations with thousands of employees. There's no minimum or maximum employee threshold, making ICHRA accessible to small businesses that might struggle with the costs and administrative complexity of traditional group plans.
Which employees are eligible to participate in an ICHRA?
ICHRA can cover full-time, part-time, seasonal, and remote employees. Employers can create different employee classes (such as by location, job type, or employment status) and offer different contribution amounts to each class, as long as all employees within a class are treated equally.
Can employees opt out of ICHRA?
Yes. Employees must be given the option to opt out of ICHRA. This is important because accepting ICHRA makes employees ineligible for ACA premium tax credits (subsidies) for Marketplace coverage. Some employees—particularly those with lower incomes—may receive more value from subsidies than from the employer's ICHRA contribution.
Can ICHRA cover employee dependents?
Yes. Employers can design their ICHRA to cover employees only, or to include spouses and dependents. The contribution amount can be structured to provide additional reimbursement for employees with families.
How are employees reimbursed under an ICHRA?
Employees purchase individual health insurance coverage, then submit proof of their premium payments and any qualified expenses to request reimbursement. Alternatively, some employers set up direct premium payments to insurers and deduct any employee portion through payroll, similar to how traditional group plans work.
What health insurance plans qualify for ICHRA reimbursement?
ICHRA can reimburse premiums for individual health insurance plans that provide minimum essential coverage under the ACA. This includes plans purchased on the Health Insurance Marketplace (HealthCare.gov or state exchanges) and off-Marketplace individual plans. Medicare Parts A, B, C, D, and Medicare Supplement (Medigap) plans also qualify, unless the employer specifically excludes them. Group health plans, standalone dental plans, and standalone vision plans do not qualify.
Can ICHRA reimburse out-of-pocket medical expenses beyond premiums?
Yes. Beyond premiums, ICHRA can reimburse qualified medical, dental, and vision expenses as defined under IRS Code Section 213(d). This includes copays, deductibles, coinsurance, prescription costs, and many other healthcare expenses. Employers have flexibility in how they structure this—they can limit reimbursements to premiums only, allow reimbursement of out-of-pocket expenses after premiums are covered, or provide additional funds specifically for medical expenses.
How do employees choose their health insurance plan?
Employees shop for individual health insurance during Open Enrollment (November 1 through January 15 for most states) or during a Special Enrollment Period triggered by a qualifying life event. In most states, employees can choose from dozens of plan options, including HSA-eligible high-deductible plans, traditional copay plans, HMOs, and PPOs. Individual plan rates are community-rated based on age and location—not health status—so insurers must sell coverage at the published rate.
Are ICHRA reimbursements tax-free?
Yes. ICHRA reimbursements are tax-free for employees—they don't count as taxable income. For employers, ICHRA contributions are deductible as a business expense, just like traditional group health plan premiums.
Can employees use ICHRA with an HSA (Health Savings Account)?
Yes, with some considerations. If the ICHRA only reimburses premiums (not out-of-pocket medical expenses), employees can still contribute to an HSA if they're enrolled in an HSA-eligible high-deductible health plan. If the ICHRA reimburses both premiums and medical expenses, the employee generally cannot also contribute to an HSA unless the ICHRA is designed as an "excepted benefit" ICHRA with specific limitations.
Can employees use ICHRA with an FSA (Flexible Spending Account)?
Yes. Employers can offer both ICHRA and a general-purpose FSA. Employees can use both accounts for qualified medical expenses, providing additional tax-advantaged savings options.
How does ICHRA affect ACA premium tax credits (subsidies)?
Employees who accept ICHRA coverage are not eligible for ACA premium tax credits for the same coverage period. This is why employers must provide employees with an opt-out option and clear notice about how ICHRA affects subsidy eligibility. Employees with lower incomes should compare the value of the employer's ICHRA contribution against the subsidies they might receive to determine which option provides better value.
What documents do employers need to establish an ICHRA?
Employers must create a formal plan document that outlines the terms of the ICHRA, including contribution amounts, eligible expenses, employee classes, and plan year dates. This document must be made available to all eligible employees.
What notices must employers provide to employees?
Employers must provide written notice to employees before the ICHRA takes effect and at least 90 days before the start of each subsequent plan year. The notice must explain how ICHRA works, the contribution amount, how it affects ACA subsidy eligibility, and the employee's right to opt out.
Is ICHRA compliant with the Affordable Care Act (ACA)?
Yes. ICHRA was specifically designed to comply with ACA requirements. Because employees purchase individual plans that meet minimum essential coverage standards, ICHRA satisfies the ACA's coverage requirements. For applicable large employers (those with 50+ full-time equivalent employees), ICHRA contributions can be structured to meet affordability standards under the employer mandate.
Does COBRA apply to ICHRA?
Yes, for employers with 20 or more employees. When an employee experiences a qualifying event (such as termination or reduction in hours), they must be offered the opportunity to continue ICHRA coverage under COBRA. However, state continuation laws generally do not apply to ICHRA.
Do employers need a Section 125 plan for ICHRA?
If employers want to allow employees to pay their share of premiums (the amount exceeding the ICHRA contribution) on a pre-tax basis through payroll deductions, a Section 125 cafeteria plan is required. This provides additional tax savings for employees.
How do employers decide how much to contribute?
Employers have flexibility in setting contribution amounts based on their budget and benefit goals. Many employers analyze their current health benefit costs and set ICHRA contributions to maintain or improve employee value while reducing overall expenses. Contributions can vary by employee class (such as full-time vs. part-time, or by geographic location) as long as all employees within each class receive the same amount.
Should contributions vary by employee age?
Because individual health insurance premiums are age-rated (older employees pay higher premiums), some employers choose to provide age-adjusted contributions so that employees of different ages pay roughly the same percentage of their premium out-of-pocket. This promotes fairness across the workforce. Other employers offer flat contributions and let employees choose plans that fit their budget.
What happens if the ICHRA contribution doesn't cover the full premium?
If the employer's contribution doesn't fully cover the premium, employees pay the difference. With a Section 125 plan in place, this additional amount can be deducted from payroll on a pre-tax basis, providing additional tax savings.
How much can employers save with ICHRA?
Many employers report 20-50% reductions in health benefit expenses after transitioning to ICHRA. Savings come from avoiding the unpredictable premium increases common with group plans, eliminating the administrative burden of managing group coverage, and allowing employees to choose plans that better match their needs and budgets.
Does ICHRA provide more budget predictability than group plans?
Yes. With a group plan, employers often face annual premium increases that can vary widely based on claims experience. One or two high-cost claims can spike rates for the entire group. With ICHRA, employers set a fixed contribution amount, providing complete predictability in health benefit costs regardless of how employees use their coverage.
Is an ICHRA easier to administer than a group health plan?
In many ways, yes. Employers don't need to negotiate with insurance carriers, manage enrollment across multiple plan options, or handle mid-year coverage changes. Administrative work primarily involves processing reimbursement requests and maintaining compliance documents. Many employers work with ICHRA administration partners who handle most of these tasks.
What are the advantages of ICHRA for employees?
ICHRA gives employees more choice and control over their health coverage. Instead of being limited to the plans their employer selected, employees can shop the entire individual market and choose coverage that fits their specific needs—whether that's a high-deductible plan paired with an HSA, a comprehensive PPO, or something in between. Employees also keep their coverage if they change jobs, since the individual plan belongs to them.
Can employees keep their doctors with ICHRA?
Employees have the freedom to choose plans based on provider networks. If keeping a specific doctor is important, they can select a plan that includes that provider in-network. With a traditional group plan, employees are limited to whatever network the employer selected.
What happens to coverage if an employee leaves the company?
Because employees own their individual health insurance policy, they can keep their coverage even after leaving the employer. They simply take over paying the full premium themselves. This provides continuity that isn't available with employer group plans, which end when employment ends.
When can an employer switch to ICHRA?
Employers can implement ICHRA at any time, though many align the transition with January 1 to coincide with both the calendar year and the ACA Open Enrollment period. Planning should begin several months in advance to allow time for plan document preparation, employee communication, and enrollment support.
What makes an ICHRA transition successful?
The keys to a successful transition include clear employee education about how ICHRA works and its benefits, tools or support to help employees shop for and select individual plans, streamlined processes for premium payments and reimbursements, and timely communication about deadlines and required actions.
Should employers work with an ICHRA administration partner?
While not required, many employers find that working with an ICHRA administration partner simplifies implementation and ongoing management. These partners can handle plan document preparation, required notices, reimbursement processing, compliance monitoring, and employee support—allowing employers to focus on their core business.
Why is ICHRA growing in popularity?
Several factors are driving ICHRA adoption. Group health plan premiums increased by an average of 9% in 2025, pushing per-employee costs beyond $16,000 annually. Employers are seeking alternatives that provide cost predictability and control. Overall HRA adoption (including ICHRA) jumped nearly 30% in 2024, with large employers seeing an 83% increase. Small employers have seen a 52% uptick in ICHRA adoption because it provides a way to offer competitive benefits without the complexity of traditional group plans.
Is now a good time to switch from a taxable stipend to ICHRA?
If your organization currently provides taxable stipends for health insurance, switching to ICHRA can significantly increase the value employees receive. The same dollar amount goes further when taxes do not reduce it. ICHRA also provides a more transparent structure and greater compliance protection than informal stipend arrangements.
ICHRA offers a flexible, tax-advantaged alternative to traditional group health plans and taxable stipends. It gives employers predictable costs and reduced administrative burden while giving employees more choice and control over their health coverage.