An ICHRA, or individual coverage health reimbursement arrangement, lets employers of any size reimburse employees tax-free for individual health insurance premiums and medical expenses instead of offering a traditional group plan. Employers set allowances by employee class, and employees must enroll in individual coverage to participate.
Key takeaways
- Available since 2020 to employers of any size, with no cap on the allowance.
- Allowances can differ by class, such as full-time, part-time, hourly, salaried, or location.
- Within a class, amounts can vary only by age and family size.
- For applicable large employers, an affordable ICHRA can satisfy the ACA employer mandate.
How ICHRA works
The employer picks the classes it wants to cover and sets a monthly allowance for each. Employees buy their own plan on the individual market or through a marketplace, then submit proof of coverage and premiums for reimbursement. Allowances can rise with age, up to a 3 to 1 ratio between the oldest and youngest, and with the number of dependents covered.
Employers can't offer the same class both a group plan and an ICHRA, and minimum class sizes apply when an employer offers a group plan to some classes and an ICHRA to others. Notices must go to employees at least 90 days before the plan year, or by the first day of eligibility for new hires.
For applicable large employers, the ICHRA counts as an offer of coverage. It's affordable for ACA purposes if the employee's cost for the lowest-cost silver plan, after the allowance, stays under the affordability percentage, which is 9.96% of household income for 2026 (Liebert Cassidy Whitmore, 2026 ACA affordability percentage).
ICHRA example
A staffing firm with 400 employees offers its 60 corporate staff a group plan and its 340 field employees an ICHRA of $450 a month for employees under 40 and $700 for those 40 and over, with an extra $300 for each covered dependent. A 45-year-old field worker covering one child receives $1,000 a month toward a plan she chooses. The firm's cost is fixed per person, not tied to the claims of a group pool.
Why ICHRA matters for employers
ICHRAs are still a small slice of the market, but interest is rising. KFF's 2025 survey found that 4% of firms offering health benefits and 9% of firms that don't offer them fund individual coverage through an ICHRA or similar arrangement, and another 2% of offering firms with 10 or more workers said they were very likely to add one within two years (KFF 2025 Employer Health Benefits Survey).
The appeal is predictability and fit for dispersed workforces. Instead of one plan that suits headquarters, each employee picks a local plan. The risk is that individual market options vary a lot by county, so test a few locations before committing. Benefits software or a specialist ICHRA administrator handles proof of coverage and reimbursements.
Common ICHRA mistakes to avoid
Mixing a group plan and ICHRA in the same class
Each class gets one or the other, never both.
Missing the 90-day notice
Employees need time to shop for individual coverage before the plan year.
Assuming any allowance meets the ACA mandate
For large employers, affordability is measured against the lowest-cost silver plan where the employee lives.
Skipping proof of coverage
Employees must show they have individual coverage before reimbursements start.
ICHRA: questions people also ask
What does ICHRA stand for?
Is there a maximum ICHRA allowance?
Can small businesses offer an ICHRA?
Does an ICHRA satisfy the ACA employer mandate?
What's the difference between ICHRA and QSEHRA?
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HRTally glossary entries are written by people who have run US payroll, benefits, and HR operations, then checked line by line against primary sources such as the IRS, Department of Labor, EEOC, and Bureau of Labor Statistics. Dollar limits and rates are for 2026 unless stated. We review every entry at least twice a year and whenever a rule changes. This page explains general rules and isn't legal or tax advice; state law can differ. Read our editorial standards.
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<blockquote>An ICHRA, or individual coverage health reimbursement arrangement, lets employers of any size reimburse employees tax-free for individual health insurance premiums and medical expenses instead of offering a traditional group plan. Employers set allowances by employee class, and employees must enroll in individual coverage to participate.</blockquote><p>Source: <a href="https://www.hrtally.com/hr-glossary/ichra/">HRTally HR Glossary, ICHRA</a></p>
Written by the HRTally Research Team
Our guides are written and reviewed by people with hands-on US HR, payroll, and HR technology experience. Legal and tax facts are checked against primary sources, such as the Department of Labor, IRS, EEOC, and USCIS, and linked at the end of each guide. Vendors never review or pay for our editorial content.