ICHRA: the Individual Coverage HRA, explained

What an ICHRA is

An Individual Coverage Health Reimbursement Arrangement (ICHRA) is an employer-funded benefit that reimburses employees, tax-free, for individual health insurance premiums and — if you choose to allow it — other qualified medical expenses. It has been available to employers of any size since 2020. Instead of choosing a group plan for everyone, you give employees a set amount of money to buy their own coverage on the individual market.

How it works

You set a monthly allowance, which can differ by employee class — for example, full-time versus part-time, or varied by family size and age within IRS limits. Each employee buys an individual-market plan that fits them, shows proof of coverage, and you reimburse them up to their allowance, with no payroll taxes on the reimbursement. Because the plan belongs to the employee, it’s portable: they keep it if they leave. One present-day wrinkle worth knowing — employees with Marketplace coverage pay their premium first and are reimbursed afterward, since on-exchange premiums can’t yet be paid pre-tax through payroll.

Why employers use it

Three reasons come up again and again. Cost control: you set the budget, so there are no surprise renewal hikes — your benefit cost is whatever you decide it is. Choice: employees pick the plan, network, and doctor that fit their lives, rather than a single company plan that fits no one perfectly. Less administration: there’s no group plan to manage or renew each year, and many employers use an ICHRA administrator to handle reimbursements and compliance. An ICHRA also spreads risk across the entire individual market instead of concentrating it in your small group. Against a backdrop of steep group-plan renewals, that predictability is the main draw.

The premium-tax-credit interaction

One rule matters more than any other: an employee offered an affordable ICHRA generally can’t also take a premium tax credit on the Marketplace. If your allowance makes coverage affordable, they use the ICHRA; if it’s unaffordable by the IRS test, they can opt out and claim a subsidy instead — but never both at once. How generously you set the allowance affects which path your lower-paid employees land on. Our guide to the affordability rule walks through exactly how that works.

What’s changing: the CHOICE Arrangement

Congress has repeatedly proposed codifying the ICHRA into federal statute and renaming it the CHOICE Arrangement — adding a tax credit for small businesses and new flexibility, such as letting small employers offer both an ICHRA and a group plan to the same class of workers, and paying on-exchange premiums pre-tax. As of now, those changes aren’t law: the House has passed them, but the Senate hasn’t taken them up, so the existing ICHRA rules still govern. It’s worth watching — but you can adopt an ICHRA today under the current framework, and a future codification would build on it, not replace it. Our full guide to the CHOICE Arrangement covers what would change and where the bill stands.