Can You Combine an ICHRA With a Section 125 Premium Only Plan?

An ICHRA and a Section 125 premium only plan can work together, but only for off-exchange individual coverage and only for the part of the premium the ICHRA allowance does not cover.

Quick Answer (as of 2026): Yes, but only in one specific case. A Section 125 premium only plan can cover the part of an employee's individual health insurance premium that an ICHRA allowance does not, but only when the employee bought that plan off-exchange, directly from a carrier or a private exchange. The IRS blocks pre-tax treatment for any premium paid through the public ACA Marketplace under an ICHRA.

An individual coverage health reimbursement arrangement (ICHRA) hands each employee a monthly allowance to buy their own health plan. Most employees who take that allowance and shop for a plan find the premium runs higher than what the employer contributed. That leftover balance is the question this guide answers: can the employee pay it the same way they would have paid a group premium, pre-tax through payroll?

The short version is that it depends entirely on where the employee bought the plan. Get that part wrong and an employer risks giving employees a tax problem instead of a tax break.

What Is an ICHRA and How Does It Interact With Section 125?

An ICHRA is an employer-funded account that reimburses employees, tax-free, for individual health insurance premiums instead of enrolling them in a single group plan. A Section 125 cafeteria plan is a separate, IRS-qualified arrangement under Internal Revenue Code Section 125 that lets employees pay for certain benefits with pre-tax payroll deductions. The two are not competitors. An ICHRA replaces the group health plan. A Section 125 premium only plan (POP) is the payroll mechanism that can, in specific circumstances, pick up whatever the ICHRA allowance leaves unpaid.

The interaction only matters when the ICHRA allowance is smaller than the premium the employee actually owes, which is the normal case for most ICHRA designs. Employers set the allowance based on budget, not on matching every employee's exact premium.

Can You Run the Employee's Share of an ICHRA Premium Through Section 125?

Yes, for off-exchange coverage. No, for coverage bought on the public ACA Marketplace. This is the single rule that governs the entire combination, and it comes down to where the plan was purchased, not how much it costs or who the employee is.

Off-exchange individual plans: When an employee buys a qualifying individual health plan directly from an insurance carrier or a private exchange, rather than through HealthCare.gov or a state marketplace, the portion of the premium above the ICHRA allowance can run through a Section 125 premium only plan pre-tax. This works the same way a group premium contribution works today. Nothing about the ICHRA changes that mechanic.

On-exchange (public Marketplace) plans: When an employee buys coverage through the public ACA Marketplace, the IRS does not allow any part of that premium to run through a Section 125 plan, even the part the ICHRA does not cover. The reason is that marketplace plans carry a separate federal tax benefit, the premium tax credit, and the IRS treats a pre-tax salary reduction on top of marketplace coverage as a form of double-dipping against that credit. Employees who take an ICHRA also generally lose eligibility for premium tax credits on marketplace coverage in the first place, so this restriction closes the door completely on that path, not just the pre-tax piece of it.

Summit Health Benefits reviews ICHRA designs before the payroll mistake happens. A quick plan document review tells you exactly which employees can use pre-tax treatment and which cannot. Schedule a review.

A Worked Example: What the Gap Actually Costs

Take a disclosed hypothetical: an employer sets a $450 monthly ICHRA allowance. An employee shops off-exchange and finds a plan for $600 a month. That leaves a $150 monthly gap the employee has to pay out of pocket.

Without a Section 125 plan layered on top, that $150 comes out of the employee's paycheck after both income tax and FICA have already been withheld. With a premium only plan in place, the $150 comes out before either tax applies.

  • Employer FICA savings on that $150: 7.65% x $150 = $11.48 per month, per participating employee
  • Employee combined savings (22% federal bracket plus 7.65% FICA, before any state tax): roughly $44.48 per month, or about $534 a year

Across a workforce of 20 employees who all have a similar gap, the employer-side FICA savings alone come to roughly $2,755 a year. Whether that clears Summit's $35 per employee per month administration fee depends on how many employees actually have a gap large enough to elect, since the fee is paid from the FICA savings the whole plan generates, not from any single line item. A narrow ICHRA gap on its own may not clear the fee for every employer, which is exactly why this is worth checking before rolling it out company-wide rather than assuming the math works the same for every group.

2026 ICHRA Affordability Numbers to Get Right First

Before the pre-tax question even comes up, the ICHRA allowance itself has to clear an affordability test, the same one that applies to the employer mandate. For plan years beginning in 2026, employer-sponsored coverage, including an ICHRA allowance, counts as affordable if the employee's required contribution for the lowest-cost silver plan does not exceed 9.96% of household income, under IRS Revenue Procedure 2025-25. Under the federal poverty line safe harbor, the most commonly used of the three IRS safe harbors, that works out to an employee paying no more than $129.90 a month toward that benchmark plan for 2026.

The math: take the employee's monthly household income, multiply by 9.96%, and compare that number to the lowest-cost silver plan premium minus the ICHRA allowance. If the allowance leaves the employee paying more than that threshold, the ICHRA offer is unaffordable and can trigger an employer mandate penalty for applicable large employers, separate from anything to do with Section 125. This percentage is scheduled to rise to 10.22% for plan years beginning in 2027, so an allowance that clears the bar for 2026 needs a second look before an employer locks in 2027 numbers.

Who Handles This Setup?

An ICHRA itself is typically set up and administered through an ICHRA administration platform or a broker who manages allowance classes and reimbursement claims. Summit Health Benefits handles the other half of this arrangement: the Section 125 premium only plan document, the payroll integration for the pre-tax deduction, and confirming the plan language correctly limits pre-tax treatment to off-exchange premiums only. That distinction matters because a cafeteria plan document that does not draw this line correctly can put every employee's pre-tax election at risk, not just the ICHRA participants.

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Employers who want the FICA savings from the full picture, not just the ICHRA gap, typically run the rest of their pre-tax benefits, dental, vision, and FSA elections, through the same plan document rather than standing up a second one just for this piece.

See If an ICHRA Plus Section 125 Setup Works for Your Company

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Frequently Asked Questions

Can an employee use a Section 125 plan to pay their ICHRA premium?
An employee can use a Section 125 premium only plan to pay only the part of an off-exchange individual health premium that exceeds the ICHRA allowance. An employee cannot use a Section 125 plan for any part of a premium paid through the public ACA Marketplace, even the part the ICHRA does not cover.
Why can't Section 125 cover marketplace premiums under an ICHRA?
The IRS blocks this because marketplace plans carry premium tax credits, a separate federal subsidy. Layering a pre-tax salary reduction on top of a subsidized marketplace premium would create a double tax benefit on the same dollar, which the IRS does not allow.
Does the employee still need to be ICHRA-eligible to use the premium only plan?
Yes. The Section 125 pre-tax treatment only applies to the employee's own out-of-pocket premium gap under an active ICHRA offer. An employee who declines the ICHRA and buys marketplace coverage on their own is not eligible for either the ICHRA reimbursement or Section 125 treatment on that premium.
What is the 2026 ICHRA affordability percentage?
For plan years beginning in 2026, an ICHRA allowance is affordable if the employee's required contribution for the lowest-cost silver plan does not exceed 9.96% of household income, per IRS Revenue Procedure 2025-25. Under the federal poverty line safe harbor, that works out to no more than $129.90 a month for 2026.
Does combining ICHRA with Section 125 save the employer money on FICA?
Yes, on the portion of the premium run through the Section 125 plan. The employer avoids the 7.65% FICA match on every pre-tax dollar, the same savings mechanism as a standard premium only plan. The size of the savings depends entirely on how large the employee's out-of-pocket gap is after the ICHRA allowance.
Can a small employer with fewer than 50 employees combine ICHRA and Section 125?
Yes. ICHRA has no employer size minimum, and a Section 125 premium only plan is available to employers of any size. The affordability percentage only creates a penalty exposure for applicable large employers, generally those with 50 or more full-time and full-time-equivalent employees, so a smaller employer can combine the two without that specific compliance risk.
Who writes the plan document for this arrangement?
The ICHRA and the Section 125 premium only plan need separate plan documents, since they are two different legal arrangements. An ICHRA administrator or broker typically handles the ICHRA document and reimbursement rules, while a Section 125 administrator such as Summit Health Benefits handles the premium only plan document and the payroll-side pre-tax election.
Does this work if the employee is on a spouse's ICHRA or group plan instead?
No. An employee covered under a spouse's employer group plan does not have a qualifying individual health plan for ICHRA purposes, so there is no premium gap to run through Section 125 in the first place. The combination only applies when the employee is using their own individual coverage under their own employer's ICHRA offer.

Sources: IRS and Department of Labor final rule on individual coverage HRAs (June 2019, effective January 1, 2020); IRS Revenue Procedure 2025-25 (2026 ACA affordability percentage, 9.96%); IRS Revenue Procedure 2026-26 (2027 ACA affordability percentage, 10.22%); Internal Revenue Code Section 125 and Section 106; IRS Publication 15-B (2026).