How Does ICHRA Work? A Plain-English Guide for Employers

The average employer cost for family health coverage hit $25,572 per year in 2024, according to KFF. That figure has risen every single year for more than a decade. For the millions of employers watching those renewals climb, the individual coverage health reimbursement arrangement (ICHRA) is quickly becoming the alternative worth a serious look. ICHRA adoption among U.S. employers grew 29% from 2023 to 2024, according to the HRA Council, and the acceleration is showing no signs of slowing.

This guide explains exactly how ICHRA works, what it costs compared to group health insurance, how it stacks up against its smaller sibling QSEHRA, and the most common mistakes employers make when setting one up.

TL;DR: 3 Key Takeaways

• ICHRA lets employers set a defined monthly allowance; employees use it to buy their own ACA-compliant individual health plan.
• There are no contribution limits, no participation minimums, and no medical underwriting risk for employers.
• ICHRA satisfies the ACA employer mandate for applicable large employers and works for companies of any size.

What is ICHRA? (individual coverage health reimbursement arrangement)

An individual coverage health reimbursement arrangement (ICHRA) is an employer-funded benefit account that reimburses employees, tax-free, for individual health insurance premiums and, depending on plan design, qualified out-of-pocket medical expenses. Unlike a traditional group health plan, the employer never buys a single plan for everyone. Instead, the employer sets a monthly allowance, employees choose whichever ACA-compliant individual plan fits their situation, and the employer reimburses them up to that cap. Final regulations were published by the IRS and DOL in June 2019; ICHRA became available January 1, 2020.

How does ICHRA work? 3 steps with a real dollar example

1. Employer sets the monthly allowance. The employer decides how much to contribute each month per employee. There is no annual IRS cap on ICHRA contributions. Employers can offer as much or as little as their budget allows. Allowances can vary legally by employee class (full-time, part-time, seasonal, salaried, etc.), by age (up to a 3:1 ratio between oldest and youngest), and by family size.
2. Employees enroll in their own individual health insurance. To participate in ICHRA, employees must have a qualifying individual health plan that provides minimum essential coverage (MEC). They can shop the ACA Marketplace, use a private exchange, or go directly through a licensed carrier. Coverage through a spouse's employer plan does not qualify.
3. Employees submit premiums for tax-free reimbursement. Once enrolled, employees submit proof of their monthly premiums. The employer reimburses up to the set allowance. Reimbursements are tax-free for both the employer and the employee.

Real Dollar Example: An employee selects a silver-tier individual plan with a $425/month premium. Their employer offers a $400/month ICHRA allowance. The employer reimburses $400 tax-free; the employee pays only $25 out of pocket. If the employee finds a $390/month bronze plan instead, the employer still reimburses $390 and keeps the remaining $10 allowance. No money is wasted.

ICHRA benefits for employers

Traditional group health insurance is one of the fastest-rising line items on a company's P&L. According to KFF's 2024 Employer Health Benefits Survey, the average annual premium was $8,951 for single coverage and $25,572 for family coverage, with employers covering roughly 83% of the single premium. ICHRA changes that equation in several important ways.

• Defined cost. Employers set the budget. There are no surprise renewals, no claims-based rate hikes, and no negotiating with carriers each year.
• No participation requirements. Group plans typically require 70–75% of eligible employees to enroll. ICHRA has no such floor.
• No medical underwriting risk. Because employees buy individual ACA plans, the employer is never on the hook for a high-claims year.
• Tax advantages. ICHRA contributions are deductible for the employer and excluded from employees' taxable income. No FICA, no federal income tax on reimbursements.
• ACA employer mandate compliance. A properly designed ICHRA that meets the affordability threshold satisfies the employer shared responsibility requirement for applicable large employers (ALEs) with 50+ FTEs.
• Recruitment and retention. ICHRA lets even small employers offer meaningful, competitive benefits without buying into an expensive group plan.

ICHRA vs. group health insurance: real cost comparison for a 25-person company

The table below uses KFF 2024 average premiums and HRA Council average contribution data. Figures assume a 25-employee company with single coverage and an 83% employer share on the group side.

Sources: KFF 2024 Employer Health Benefits Survey; HRA Council 2024 ICHRA Report.

ICHRA benefits for employees

A 25-year-old healthy employee and a 52-year-old employee managing a chronic condition have very different coverage needs. Offering them the same group plan is a compromise for both. ICHRA removes that constraint.

• Freedom of choice. Employees can select any individual plan on the ACA Marketplace or private exchange, from a low-premium bronze plan to a comprehensive platinum option with their preferred network of doctors.
• Tax-free reimbursement. The employer's contribution is excluded from the employee's taxable income. It won't appear on their W-2 as wages.
• Portability. Individual plans belong to the employee, not the employer. If they leave the job, their coverage isn't automatically interrupted. There's no COBRA gap to manage.
• Potential for premium tax credits. Employees who receive an ICHRA allowance below the ACA affordability threshold may still be eligible for Premium Tax Credits on the Marketplace, depending on their income.

ICHRA benefits for brokers

For health insurance brokers, ICHRA is both a new revenue stream and a competitive differentiator. Clients who have been priced out of the group market, or who keep losing employees because of limited plan options, are strong ICHRA candidates.

• Expanded client base. ICHRA works for employers of all sizes, from a 3-person team to a 3,000-person enterprise. Groups that aren't a good fit for group health are now potential clients.
• New revenue from ICHRA administration. Partnering with an ICHRA administrator opens commissions and referral fees beyond the traditional group market.
• Regulatory expertise as a value-add. ICHRA has real compliance requirements around affordability calculations, employee class rules, and notice timelines. Brokers who understand these rules become trusted advisors.
• Individual plan placement. Since employees each buy their own plan, brokers can assist employees in selecting individual coverage, broadening their service scope significantly.

ICHRA vs. QSEHRA: which HRA is right for your client?

ICHRA is often confused with its predecessor, the Qualified Small Employer HRA (QSEHRA), introduced in 2016. They share the same basic model (employer sets an allowance, employees buy individual coverage), but the differences matter significantly.

The short version: QSEHRA works for small employers who want a simple, uniform benefit with a predictable cap. ICHRA works for virtually any employer that wants more flexibility, higher contribution potential, and ACA mandate satisfaction.

5 common ICHRA mistakes employers make

ICHRA has real compliance teeth. These are the mistakes that create the most exposure.

Mistake 1: Failing the ACA affordability test

For applicable large employers (ALEs), an ICHRA only satisfies the employer mandate if the allowance is "affordable," meaning the employee's net premium for the lowest-cost silver plan in their area doesn't exceed a set percentage of their household income. Getting this calculation wrong exposes ALEs to IRS employer shared responsibility penalties.

Mistake 2: Missing the 90-day employee notice requirement

Employers must provide written notice to all eligible employees at least 90 days before each ICHRA plan year begins. New hires receive it on their first day of eligibility. Missing this window doesn't invalidate the ICHRA, but it can affect employees' ability to coordinate Marketplace premium tax credits.

Mistake 3: Reimbursing before verifying individual coverage

ICHRA reimbursements are only tax-free if the employee has qualifying individual market MEC coverage in place. Reimbursing employees who haven't demonstrated coverage, or whose coverage has lapsed, converts those payments into taxable wages.

Mistake 4: Offering ICHRA and a group plan to the same employee class

An employer cannot offer ICHRA and traditional group health insurance to the same class of employees simultaneously. You can offer group coverage to one class (e.g., full-time salaried) and ICHRA to a different class (e.g., part-time hourly), but not both options to the same group.

Mistake 5: Setting class sizes below the IRS minimum

When an employer offers group health to some employees and ICHRA to others, the IRS requires a minimum class size for the ICHRA class (10, 20, or similar employees, depending on the total workforce size). Structures that fall below the minimum size are non-compliant and can disqualify the ICHRA arrangement.

How Summit Health Benefits makes ICHRA easier

Summit Health Benefits helps employers and brokers design, launch, and administer ICHRA plans without the compliance guesswork. We calculate ACA-affordable allowance amounts for each employee class, handle the required 90-day notice documentation, verify employee coverage before each reimbursement, and process claims accurately, so you're never exposed to a tax compliance gap you didn't see coming.

For employers who also want to maximize pre-tax savings on dental, vision, and FSA contributions alongside their ICHRA, we can pair the arrangement with the right employee benefits strategy for your workforce size and budget.

Frequently Asked Questions

References

1. HRA Council, 2024 ICHRA Report, hracouncil.org/report
2. KFF, 2024 Employer Health Benefits Survey, Section 1: Cost of Health Insurance, kff.org