Health insurance is one of the most important benefits you offer: and one of the most difficult expenses to predict.
Traditional group health plans can provide valuable coverage, but premiums, renewals, participation requirements, network limitations, and multistate administration can create challenges for employers. Employees may also have different doctors, prescriptions, family situations, and coverage priorities.
An Individual Coverage Health Reimbursement Arrangement (ICHRA) gives employers another way to approach health benefits. Instead of selecting one group plan for everyone, an employer provides a defined contribution that eligible employees can use to purchase individual health insurance or, when properly structured, pay eligible Medicare premiums.
An ICHRA can be a powerful strategy. However, it is not automatically cheaper or simpler. The right decision depends on plan design, employee demographics, geographic locations, affordability, tax treatment, administration, and compliance.
What Is an ICHRA?
An ICHRA is an employer-funded, account-based health benefit.
The employer establishes a monthly allowance: for example, $400 per month for employee-only coverage or $800 per month for family coverage. Employees then purchase qualifying individual health insurance coverage and submit proof of eligible premiums or expenses for reimbursement.
The employer defines the reimbursement amount in advance. This creates a more predictable benefits budget because the employer is committing to a specified contribution rather than accepting an open-ended share of a group plan’s annual premium increase.
There is no federal annual contribution limit for an ICHRA like there is for certain other HRA arrangements. The employer determines the amount, subject to applicable nondiscrimination, employee-class, affordability, tax, and plan-document requirements.
Reimbursements are generally tax-free to eligible employees when the ICHRA is properly designed and the expenses are substantiated (meaning the employee provides documentation showing that the expense is eligible and was incurred).
ICHRA Versus a Traditional Group Health Plan
Employer budgeting
With a traditional group plan, the employer typically pays all or part of a premium selected from available group offerings. The final cost can change substantially at renewal because of claims experience, carrier pricing, market conditions, and changes in the workforce.
An ICHRA allows the employer to define its contribution. For example, a company might budget $500 per eligible employee per month and establish separate amounts for employee-only and family coverage.
That predictability can help with long-term planning. It does not guarantee lower total spending, however. If the contribution is high enough to make coverage affordable across different locations and household situations, the ICHRA may cost as much as: or more than: a traditional plan.
Employee choice
A group plan usually provides one or several plan options selected by the employer. Employees receive coverage through those options, even when the network does not include their preferred doctors or facilities.
An ICHRA shifts more choice to the employee. Each employee can shop for an individual plan available in their rating area (the geographic region used to price individual coverage), subject to the plan’s terms and the individual market options available where they live.
That flexibility can be valuable for employees with different physicians, prescription needs, family structures, or coverage preferences. It also means employees need clear education and enrollment support.
Remote and multistate workforces
A single group plan may not provide equally convenient access to doctors and hospitals in every state where your employees work.
An ICHRA can be attractive for remote or multistate employers because employees select individual coverage based on their own location. The employer does not have to find one group network that works equally well in Philadelphia, Phoenix, Atlanta, and Seattle.
Network access still requires careful review. Individual plans may use narrower networks, different provider directories, and different rules for out-of-network care. Employee choice is helpful only when employees understand the networks they are selecting.
Administration
An ICHRA requires a written plan, eligibility rules, employee notices, individual coverage verification, reimbursement substantiation, privacy procedures, and ongoing administration.
A third-party administrator can help manage documentation and reimbursement requests. But outsourcing administration does not eliminate the employer’s responsibility to select a compliant design, communicate the benefit accurately, and monitor the arrangement.
Employee Classes and Plan Design Rules
An employer may establish permitted employee classes and provide different ICHRA terms to different classes.
Common classifications include:
- Full-time and part-time employees
- Seasonal employees
- Salaried and hourly employees
- Employees in different geographic rating areas
- Employees covered by a collective bargaining agreement
- Employees subject to different waiting periods
- Employees in separate employment categories permitted by the regulations
Employees within the same class generally must receive the same ICHRA terms. Contributions may also vary based on permitted factors such as age and family status.
Employers must be especially careful when offering an ICHRA to one class while offering a traditional group health plan to another. Federal rules include minimum class-size requirements designed to prevent employers from separating employees in a way that undermines the individual or group market.
The commonly cited minimums are:
- Fewer than 100 employees: at least 10 employees in the ICHRA class
- 100–200 employees: at least 10% of employees in the ICHRA class
- More than 200 employees: at least 20 employees in the ICHRA class
An employer generally cannot offer both a traditional group health plan and an ICHRA to the same employee class.
This is one reason a benefits review should happen before an employer announces a new arrangement. A seemingly simple class structure can create compliance problems if it is not tested against the applicable rules.
Affordability and the Marketplace Premium Tax Credit
Affordability is one of the most important ICHRA issues for employers and employees.
For 2026 planning, the ACA affordability percentage is generally identified as 9.96% of household income. The affordability test for an ICHRA generally compares:
- The lowest-cost self-only Silver plan available in the employee’s rating area;
- Minus the monthly ICHRA contribution; and
- Against the applicable percentage of household income.
For example, assume the lowest-cost self-only Silver plan in an employee’s area costs $650 per month. If the employer provides a $500 monthly ICHRA allowance, the employee’s remaining cost is $150 per month.
That amount must then be compared with the affordability threshold based on household income. The calculation can vary by employee and location, which makes affordability testing more involved than simply choosing one contribution amount for the entire workforce.
If an ICHRA is affordable, the employee generally cannot claim a Marketplace premium tax credit for that month.
If the ICHRA is unaffordable, an eligible employee may be able to opt out of the ICHRA and seek a premium tax credit through the Marketplace, provided all other tax-credit requirements are met. An employee cannot receive both an ICHRA reimbursement and a premium tax credit for the same coverage and month.
Employers should not assume that a contribution is affordable merely because it appears generous. Rating areas, household income, age, and family status can affect the analysis.
Required Notices and Coverage Verification
Employers generally must provide an ICHRA notice at least 90 days before the beginning of the plan year. New employees must receive the notice by the applicable eligibility date or within the timing required by the federal rules.
The notice should explain:
- The amount of the ICHRA allowance
- The plan year and effective date
- Which employees and dependents are eligible
- The requirement to maintain qualifying individual coverage
- How the ICHRA affects Marketplace premium-tax-credit eligibility
- How employees submit documentation and request reimbursement
- Whom employees should contact with questions
The Centers for Medicare & Medicaid Services provides an Individual Coverage HRA Model Notice that employers can review with their benefits professionals.
Employees must maintain qualifying individual coverage to receive tax-free ICHRA reimbursements. Employers or administrators must also verify coverage and substantiate reimbursement requests without collecting more information than necessary.
Privacy and documentation procedures matter. Asking employees to submit incomplete records can delay reimbursements; asking for excessive medical information can create unnecessary privacy concerns.
Can an ICHRA Reimburse Medicare Premiums?
An ICHRA can be integrated with Medicare when the plan is properly designed and the employee meets the qualifying coverage requirement.
Under the applicable federal HRA rules, an ICHRA integrated with Medicare may reimburse eligible premiums for:
- Medicare Part A
- Medicare Part B
- Medicare Part C, also known as Medicare Advantage
- Medicare Part D prescription drug coverage
- Medigap, or Medicare Supplement, policies
The important caveat is that the participant must be enrolled in qualifying Medicare coverage: generally Medicare Part A and Part B or Medicare Part C: for the applicable month, consistent with the plan’s terms and federal requirements.
Not every ICHRA automatically reimburses every Medicare premium. The employer’s plan document must identify eligible expenses, and the administrator must apply the rules consistently.
Medicare enrollees generally are not eligible for Marketplace premium tax credits for months in which they are enrolled in Medicare. Medicare coordination should still be reviewed carefully, particularly when an employer has active employees, spouses, retirees, or employees approaching Medicare eligibility.
The IRS final HRA regulations and IRS HRA guidance provide important background.
Common ICHRA Implementation Mistakes
Employers most often encounter problems when they treat the ICHRA as a simple reimbursement account rather than a regulated health plan.
Common mistakes include:
- Setting contributions without testing affordability
- Using employee classes that do not meet federal requirements
- Offering group coverage and an ICHRA to the same class
- Missing the 90-day notice deadline
- Failing to verify individual coverage
- Reimbursing expenses without proper substantiation
- Assuming every individual plan has the same provider network
- Failing to explain the premium-tax-credit consequences
- Overlooking Medicare enrollment and coordination rules
- Selecting an administrative platform without reviewing its procedures
- Promising that an ICHRA will automatically reduce costs
The employee experience also matters. A benefit that looks efficient to an employer can become frustrating if employees do not understand how to compare plans, confirm networks, document premiums, or manage changes after marriage, divorce, relocation, or loss of coverage.
An Employer Evaluation Checklist
Before adopting an ICHRA, ask:
- What is our current group-plan cost, renewal history, and participation level?
- What monthly contribution can we sustain for employee-only and family coverage?
- Where do our employees live, and how different are their rating areas?
- Which employee classes would be eligible?
- Will we continue offering a traditional group plan to any class?
- Have we completed an affordability analysis for applicable employees?
- How will employees compare plans and confirm provider networks?
- Who will administer coverage verification and reimbursements?
- What expenses will the plan reimburse?
- How will the arrangement coordinate with Medicare?
- What notices and employee education will be provided?
- Have tax, ERISA, ACA, and compliance professionals reviewed the design?
An ICHRA should be compared with the full range of available strategies: not considered in isolation. Depending on your workforce, alternatives may include a traditional group health plan, a level-funded group plan, a defined-contribution approach, a QSEHRA for eligible small employers, or a combination of benefit strategies.
How Total Benefit Solutions Can Help
At Total Benefit Solutions, we act as an independent broker and benefits advocacy partner.
We compare ICHRAs with traditional group plans, level-funded coverage, and other options based on your workforce, budget, locations, employee needs, and compliance obligations. We help you look beyond the headline premium and evaluate networks, contribution levels, administration, employee communication, affordability, and long-term sustainability.
An ICHRA may be the right solution for your organization. It may not be. The important decision is to evaluate it carefully before you commit.
Visit https://www.totalbenefits.net or call (215) 355-2121 to discuss your options. We can help you compare the strategies, identify potential problems, and build a benefits approach that works for your business and your employees.
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