ICHRA (Individual Coverage HRA) Guide for 2026: A Practical, Modern Guide for Employers
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Key takeaways
- Learn why rising healthcare costs and distributed teams are pushing employers to reconsider traditional group plans — and why ICHRA adoption has grown more than 1,000% since 2020.
- Understand how an ICHRA plan works, including allowance design, employee classes, and affordability requirements.
- See how ICHRA supports remote workforces, diverse employee needs, and Medicare-eligible employees.
- Recognize how premium tax credits, plan selection behavior, and local market conditions affect employee experience.
- Identify the key operational and compliance responsibilities involved in managing an ICHRA — and how platforms like Iris.by eHealth can help streamline these processes.
Who can benefit from this guide?
If you’re actively thinking about how health benefits work today — and how they might need to change — this guide is for you:
- Employers looking for alternatives to traditional group health insurance
- HR and finance leaders dealing with renewals, rising costs, and distributed teams
- Brokers and benefits consultants helping clients make sense of a complicated and fast-changing benefits landscape
Introduction: Why ICHRA is having a moment
Employee health insurance has become harder to manage, with rising costs, distributed teams, and group plans that no longer fit every workforce.
As a result, more employers are taking a closer look at ICHRA.
Not as a temporary workaround, but as a different way to approach health benefits — one that gives employers more control over costs and gives employees more say in the coverage they choose.
What is ICHRA, really?
An Individual Coverage Health Reimbursement Arrangement (ICHRA) is a way for employers to help pay for employee health insurance without offering a traditional group plan.
Instead of choosing one plan for everyone, the employer sets a monthly, tax-free allowance. Employees then use that allowance to buy their own individual health insurance and, in some cases, pay for other eligible medical expenses.
The shift is important, and worth understanding.
With ICHRA:
- Employers move from managing a group insurance policy to setting a defined contribution.
- Employees move from enrolling in a single group plan to choosing coverage that fits their needs.
In other words, health benefits move from employer-selected plans to employee-selected coverage.
Who can offer an ICHRA?
Any employer can offer an ICHRA plan, regardless of size.
That includes:
- Small Businesses: Great for those who cannot afford a group plan or struggle with participation minimums. (Learn more about the challenge of health benefits for small businesses).
- Mid-Sized Companies: Excellent for stabilizing costs.
- Large Enterprises: Useful for managing distinct groups of employees or moving away from self-insured risk.
Why employers are re-thinking group health plans
Most employers don’t walk away from group health plans quickly or casually.
It usually happens after years of trying to make the same model work — despite growing frustration with how unpredictable it can be.
Over time, common pressure points start to add up:
- Renewals that are hard to plan for
- Participation requirements that don’t reflect how people enroll
- Limited plan options that don’t fit every employee
- Costs that rise faster than budgets
Traditional group plans also concentrate risk at the employer level. A single year of high claims can drive meaningful increases at the next renewal.
ICHRA changes that structure.
With ICHRA:
- Employers decide what they’ll spend
- Contribution amounts are set in advance
- Pricing is tied to the individual insurance market, rather than the employer’s own claims experience
Why ICHRA appeals to today’s employers
ICHRA tends to resonate with employers because it addresses several long-standing challenges at once:
- Predictable budgets in a volatile market
Instead of reacting to group rate renewal increases, employers set allowances intentionally and review them on their own timeline.
- Built for remote and multi-state teams
Employees can buy health insurance where they live, rather than relying on a group network that may not travel well across state lines.
- Tax-free allowances
Employer contributions through an ICHRA are generally tax-deductible, and qualified reimbursements are tax-free to employees — preserving the core tax advantages of employer-sponsored health benefits.
- No participation requirements*
Unlike many traditional group plans, ICHRA does not require a minimum employee enrollment percentage to remain valid. Employers aren’t dependent on hitting participation thresholds during onboarding or open enrollment.
*If ICHRA is offered alongside a traditional group plan, certain employee classes may be subject to minimum size requirements under federal rules.
- Employee ownership of coverage
Under an ICHRA, employees own their individual health insurance policies. Because the coverage isn’t tied to the employer, it can continue even if the employee changes jobs.
A brief history: Why ICHRA exists
Health reimbursement arrangements (HRAs) have evolved over time as policymakers and employers looked for more flexible ways to offer health benefits. ICHRA represents the most recent step in that evolution:
| Phase | What it was | Why it mattered |
| Traditional HRAs (Pre – 2016) | Employer-funded arrangements used to reimburse medical expenses, typically tied to a traditional group health plan. | Offered tax advantages but were limited in flexibility and difficult to scale beyond group-plan structures. |
| QSEHRA Introduced (2016 – 2017) | The Qualified Small Employer Health Reimbursement Arrangement allowed certain employers with fewer than 50 employees to reimburse individual health insurance premiums under federal law. | First step toward defined-contribution health benefits — but limited by employer size and annual IRS contribution caps. |
| ICHRA Created (2019 – 2020) | The Individual Coverage Health Reimbursement Arrangement expanded the model to employers of any size, removed contribution caps, and introduced employee class flexibility. | Made reimbursement-based health benefits scalable and adaptable for modern, distributed workforces. |
| 2020 – Present | Adoption accelerated as group premiums rose and workforce models evolved. | Employers gained a flexible alternative to traditional group coverage. |
Learn more about the difference between ICHRA and traditional HRAs.
ICHRA vs. Group Plans vs. QSEHRA
While traditional group insurance, QSEHRA, and ICHRA can all be effective in the right context, they differ significantly in who they’re designed for, how costs are managed, and how much flexibility they offer.
The chart below highlights the key distinctions employers and brokers typically consider when evaluating ICHRA vs. group health insurance and ICHRA vs. QSEHRA.
| Traditional Group Health Insurance | QSEHRA | ICHRA | |
| Who it’s for: | Employers offering a single group plan to employees | Small employers with simple benefit needs | Employers of any size seeking flexibility |
| Employer size limits: | No formal size limit, but participation rules often apply | Only available to employers with fewer than 50 employees | No size limits |
| How costs are set: | Premiums set by the insurance carrier | Employer contributions capped by the IRS | Employer decides contribution amounts |
| Contribution limits: | No formal cap, but costs fluctuate with renewals | Annual IRS contribution limits | No IRS-imposed contribution caps |
| Participation requirements: | Typically required (e.g., 70–75% enrollment) | No participation requirements | No participation requirements |
| Employee choice: | Limited to selected group plans | Employees choose individual coverage | Employees choose individual coverage |
| Ability to vary benefits: | Limited | Very limited (same terms for all eligible employees) | Broad flexibility using approved employee classes |
| Support for remote/multi-state teams: | Often challenging due to network limitations | Limited | Well-suited for distributed teams |
| Cost predictability for employers: | Low to moderate | High | High |
| Best fit for: | Employers prioritizing a traditional, centralized plan | Very small employers with uniform needs | Growing, diverse, or distributed workforces |
For employers who expect to grow — or who need more customization across their workforce — ICHRA is often the more adaptable option.
How ICHRA works (the big picture)
At a high level, ICHRA follows a straightforward process.
First, the employer sets a monthly allowance.
This is the amount employees can use toward coverage, and it can vary by employee class or, in some cases, age.
Next, employees choose their own health plans.
Coverage is purchased on the individual market — either through the ACA Marketplace or with the help of a broker.
Finally, the allowance is applied toward premiums and eligible expenses.
Under the regulations, ICHRA is structured as a reimbursement arrangement — meaning employees must be enrolled in qualifying coverage before funds are used.
In practice, however, many modern ICHRA administrators use pre-funded models in which the employer funds a pooled account and premiums are paid directly to carriers on the employee’s behalf. In these setups, employees typically do not have to front premium costs and wait for reimbursement.
The structure itself is simple.
What takes more attention is administration and compliance — which is why many employers choose to work with an administration platform from the start, such as Iris by eHealth, which offers dedicated year-round administrative support.
Employee classes: Where strategy meets compliance
The “Class” system is the engine that makes ICHRA customizable.
ICHRA allows employers to group employees into classes and offer different allowance amounts to each group.
The approved ICHRA employee classes include:
- Full-time employees
- Part-time employees
- Salaried employees
- Hourly / Non-salaried employees
- Seasonal employees
- Temporary employees of staffing firms
- Employees working in the same geographic location (the same insurance area)
- Employees covered by a collective bargaining agreement (union)
- Employees in a waiting period
- Foreign employees who work abroad
- Any group of employees formed by combining two or more of the above classes
Why does this matter?
For example, an employer could…
- Offer $600/month to full-time staff in New York, where insurance premiums tend to be higher, and $400/month to full-time staff in Florida, where coverage is generally less expensive.
- Provide benefits to salaried workers only, excluding part-time or seasonal workers.
- Give different allowances to hourly vs. salaried staff, creating a personalized compensation structure.
This flexibility is powerful — but it also requires planning.
From a broker perspective, class design is often where plans either come together cleanly or create confusion later on.
One important structural rule to know
When designing employee classes, there are guardrails to keep in mind.
If an employer offers both a traditional group health plan and an ICHRA, employees within the same class cannot be given a choice between the two.
For example, an employer cannot tell full-time employees, “Choose between our group plan or $500 through an ICHRA.”
However, employers may:
- Offer a group plan to one class (such as existing full-time employees), and
- Offer an ICHRA to a different class (such as new hires or employees in another location).
This is one of several structural rules that apply to ICHRA design, and it’s particularly important for employers transitioning gradually from a group plan.
Handled thoughtfully, this approach allows for a phased shift rather than an all-at-once change.
ICHRA and Medicare: What employers should know
As workforces age, Medicare-related questions come up more often.
Employees enrolled in Medicare can participate in an ICHRA — but the eligibility rules are specific. To qualify for ICHRA reimbursement:
- An employee must be enrolled in Medicare Parts A and B, or
- Be enrolled in a Medicare Advantage plan (Part C)
Enrollment in Part A alone or Part B alone does not meet the requirement. Similarly, Part D (prescription coverage) does not qualify on its own and must be paired with A and B.
When properly enrolled, ICHRA allowances can generally be used to reimburse:
- Medicare Part B premiums
- Medicare Advantage (Part C) premiums
- Medicare Part D premiums (when paired with qualifying coverage)
- Other eligible medical expenses, depending on plan designEmployers cannot require employees to enroll in Medicare, and clear communication around eligibility and reimbursement rules is essential.
For brokers, ICHRA can offer a structured way to support Medicare-eligible employees without maintaining a separate retiree group plan — provided the coverage coordination rules are understood.
A modern reality check: Employee experience matters
ICHRA doesn’t succeed on structure alone.
In traditional group plans, employers typically select a carrier and offer a small set of plan options—employees are used to choosing within those boundaries.
With ICHRA, employees choose from the broader individual market rather than a limited employer-selected menu. That expanded choice can be empowering, but without guidance, it can also feel unfamiliar or overwhelming.
Employees tend to have a better experience with ICHRA when employers focus on:
- Clear, early communication about how the allowance works and what steps employees need to take
- Decision support during plan selection, especially when comparing premiums, deductibles, and provider networks
- Ongoing education, not just a one-time explanation at enrollment
When employees understand their options and feel supported throughout the process, the experience becomes manageable rather than confusing. That’s where broker involvement and thoughtful platform support can make a meaningful difference.
ICHRA pros & cons: An honest look
Now, let’s look at a round-up of the benefits of an ICHRA plan side-by-side with any potential downsides:
| Advantages: | Tradeoffs to Consider: |
| Predictable costs Employers decide how much they’ll contribute ahead of time, without costs automatically increasing due to claims or carrier pricing. | Upfront planning required Designing classes, allowances, and notices takes more initial thought than setting a fixed benefits amount with group insurance. |
| Tax efficiency Employer reimbursements are generally tax-deductible, and qualified reimbursements are tax-free for employees. | Employee education is essential Employees need guidance to understand how ICHRA works and how to shop for coverage confidently. |
| Flexibility and customization Allowances can vary by employee class, allowing benefits to better reflect workforce differences. | Individual market quality varies by location Plan availability and network depth depend on the local insurance market. |
| Portability for employees Employees keep their coverage if they change jobs, which can be valuable in a mobile workforce. | Subsidy interactions must be managed carefully ICHRA affordability affects employees’ eligibility for premium tax credits. |
| No participation requirements Unlike many group plans, ICHRA doesn’t require a minimum enrollment percentage to remain valid. | Ongoing compliance responsibilities Notices, affordability testing, and recordkeeping must be handled correctly each year. |
How ICHRA works in practice
From an operational standpoint, responsibilities are shared.
Employers typically handle:
- Defining employee classes and allowance amounts
- Establishing plan documents
- Issuing required notices
- Ensuring affordability, when applicable
- Funding the ICHRA through a designated administrator or benefits platform
Employees are responsible for:
- Selecting qualifying individual coverage
- Verifying enrollment in that coverage
- Confirming ongoing eligibility
Once coverage is verified, the ICHRA allowance is applied toward premiums and eligible expenses.
In practice, many administrators use pre-funded models that pay carriers directly, so employees typically don’t have to front premiums.
Allowances remain capped at the defined contribution amount, and unused funds generally stay with the employer.
ICHRA step-by-step implementation
Here is the operational breakdown for the business and staff on setting up and managing an ICHRA.
First, the employer (typically through a designated administrator or benefits platform):
1. Defines the strategy and employee classes
- Action: Creates class list.
- Requirement: Ensures classes are based on legitimate business distinctions, not individual health factors.
2. Sets contribution amounts
Decides the budget, such as a flat rate (e.g., $300 for everyone) or scaled by age (for instance, giving older employees more because their premiums are higher).
- Affordability Check: If the employer has over 50 full-time equivalent employees, they must ensure the contribution is “affordable” under ACA standards to avoid penalties (more on this in the Regulation section).
3. Creates legal plan documents
There must be a formal written plan document that outlines the HRA rules, reimbursement limits, and eligibility — required by the IRS and ERISA.
4. Gives issue notices
Eligible employees must receive a written ICHRA notice at least 90 days before the start of each plan year. This notice is designed to give employees enough time to understand the benefit and shop for individual coverage before their ICHRA begins. For more information, see the official rule on the Federal Register website.
The notice must clearly explain:
- The amount of the employee’s ICHRA allowance
- That the employee must enroll in individual health insurance to participate
- How the ICHRA affects eligibility for Premium Tax Credits (PTCs)
Specifically, employees need to understand that:
- If the ICHRA offer is considered affordable, they are not eligible for individual ACA premium tax credits on the Marketplace.
- If the ICHRA offer is not affordable, the employee may opt out of the ICHRA and instead use premium tax credits to purchase coverage.
For employees who are not eligible at the start of the plan year — such as new hires or employees who become eligible mid-year — the notice must be provided no later than the date they first become eligible to participate in the ICHRA.
Next, the employee:
1. Shops and selects a plan
This is the biggest shift for employees accustomed to having a plan handed to them. They must go to the open market — usually HealthCare.gov or a state exchange — or a private broker.
- Requirement: To receive reimbursements, the employee must have a “qualified health plan.” This generally means a standard major medical plan (Bronze, Silver, Gold).
- Not Allowed: Short-term limited duration plans or health sharing ministries usually do not qualify for ICHRA reimbursement.
2. Submits proof of coverage
Before any funds are released, the employee must prove they have health insurance.
- Documentation: This is usually a copy of the insurance card or a “Confirmation of Enrollment” letter from the carrier.
- Monthly Attestation: Employees typically have to verify each month that they are still insured before reimbursement is issued.
3. Then comes the funding and payment process:
For premiums, once enrollment is verified, the ICHRA allowance is applied toward the employee’s monthly premium.
In many modern ICHRA implementations, administrators use pre-funded models that pay carriers directly from an employer-funded account. In these cases, employees typically do not need to pay premiums upfront.
If the premium exceeds the allowance, the employee pays the difference.
If the ICHRA also allows reimbursement of other eligible medical expenses, those expenses may require submission and substantiation before funds are issued.
Also important is ongoing compliance:
Since running an ICHRA requires keeping specific records, an employer must retain:
- The Plan Document.
- Copies of the 90-day notices sent to employees.
- Records of all reimbursements and the proof of coverage associated with them.
- Annual tax filings (like Form 720 or Form 1094/1095 depending on company size).
Regulation & affordability rules
Next, let’s discuss the important compliance checklist of items that keep an ICHRA legal and effective. While these requirements aren’t unique to ICHRA, they do need to be handled correctly for the benefit to work as intended.
- Employee notice requirements
Providing timely ICHRA notices is a core compliance requirement.
Employers must issue a written ICHRA notice:
- At least 90 days before the start of the plan year, or
- By the eligibility date for employees who become eligible mid-year
Because notice timing and content are set by regulation:
- Missed or late notices can create compliance risk
- Employees may be confused about affordability and premium tax credit eligibility
For these reasons, notice distribution and tracking are among the most common areas where employers and brokers rely on administrative support.
- Understanding affordability (The “ALE” mandate)
If you’re an Applicable Large Employer (ALE) — generally defined as having 50 or more full-time equivalent employees — your ICHRA must meet ACA affordability standards to avoid potential penalties.
ICHRA affordability rule explained
An ICHRA is considered affordable if the employee’s remaining cost for coverage stays below a set percentage of household income. That percentage is updated annually by the IRS.
In practice, affordability is assessed by:
- Identifying the lowest-cost Silver plan available to the employee based on age and location
- Subtracting the employer’s monthly ICHRA allowance
- Comparing the remaining cost to the current year’s affordability threshold
For 2026, the affordability threshold is below 9% of household income and must be evaluated using IRS-approved safe harbors.
Why it matters:
- For the employer: If the offer is “affordable” by this math, they satisfied the ACA mandate and will not be fined.
- For the employee: If the offer is “affordable,” they’re disqualified from receiving premium tax credits (subsidies) on the Marketplace. They must either accept the ICHRA plan from their employer or pay full price for a health insurance plan.
- The “Opt-Out”: If your offer is not affordable, the employee can choose to opt out of the ICHRA plan and claim the tax credits instead.
- Pairing rules (ICHRA vs. Group Coverage)
Employers cannot offer a choice between a traditional group health plan and an ICHRA to employees within the same class.
This rule prevents adverse selection and ensures benefits are offered fairly and consistently.
To comply:
- Employees must be grouped using objective employee classes.
- Each class must be offered either a group plan or an ICHRA — not both.
Many employers manage this by offering ICHRA to specific classes or introducing it gradually over time.
Regulatory Timeline (At a Glance):
- 2019: Federal agencies finalized the rules creating ICHRA.
- 2020: ICHRA became effective for plan years beginning January 1.
- 2023–2026: Affordability thresholds and ACA reporting requirements reviewed and updated annually.
Employers and brokers should review these updates each year as part of their benefits planning process.
Introducing Iris™ by eHealth
Moving to an ICHRA can solve cost and flexibility challenges — but it also introduces new administrative responsibilities. These include creating plan documents, managing required notices, verifying employee coverage, and staying compliant with evolving regulations.
What is Iris?
Iris is an ICHRA administration platform designed to support both employers and the advisors who guide them. It acts as a digital benefits manager, handling the operational and compliance details behind the scenes so employers can focus on their business and brokers can focus on advising clients.
Graphic idea: Screenshot-style mockup of the Iris dashboard.
How Iris helps solve the ICHRA “cons”
As mentioned, the biggest hurdles with ICHRA are typically employee education and ongoing administration. Iris is built to support both:
- Plan setup & design support
Iris helps employers and brokers define employee classes and model contribution amounts, making it easier to align benefit design with budgets and compliance requirements.
- Employee shopping & education
Employees get access to a guided shopping experience where they can compare plans, understand how their allowance applies, and enroll with confidence — reducing confusion and questions for both employers and brokers.
- Compliance management
Iris automates affordability calculations, generates required notices, and tracks acknowledgments, helping reduce compliance risk and administrative burden.
- Reimbursement & coverage verification
The platform verifies employee coverage and centralizes reimbursement reporting, giving employers clear visibility and brokers peace of mind that the process is running smoothly.
See Iris in action
When the hard work of ongoing ICHRA plan administration and compliance is taken care of automatically, then brokers, employers and their employees can enjoy a much more seamless ICHRA experience.
Is ICHRA right for you or your clients?
ICHRA tends to work best in situations where flexibility and cost control matter most.
It’s often a strong fit when:
- Healthcare costs are rising faster than budgets
- The workforce is diverse, remote, or spread across multiple states
- Long-term cost predictability is a priority
In either case, many organizations benefit from working with a technology partner when implementing and managing an ICHRA.
Here’s what to look at when comparing ICHRA plans.
Frequently asked ICHRA questions from employers and advisors
Here are some of the most common questions we’ve come across concerning ICHRA
1. Is an Individual Coverage HRA (ICHRA) replacing group health insurance?
Usually not — at least not all at once.
Most employers treat ICHRA as a transition or complement, not an immediate replacement. Some start by offering ICHRA to specific employee classes (such as remote workers or new hires), while others phase out group coverage over time. For brokers, ICHRA often becomes part of a longer-term benefits strategy rather than a single renewal decision.
2. What’s the biggest mistake employers make with ICHRA?
Underestimating the need for employee education.
ICHRA changes how employees get health insurance, and many are used to having a plan chosen for them. Employers that invest in clear communication, shopping support, and ongoing guidance tend to see smoother adoption and higher satisfaction. Those that don’t often face confusion — even when the benefit itself is generous.
3. Is ICHRA harder to manage than a group plan?
At first, it can feel that way.
Initial setup requires more planning around classes, allowances, and notices. Over time, however, many employers find ICHRA easier to manage than group coverage, with fewer renewal surprises and more predictable costs — especially when supported by an administration platform, such as eHealth’s Iris.
4. Does ICHRA work with subsidies?
Yes — but affordability determines how subsidies apply.
If an employer’s ICHRA offer is considered affordable, employees generally cannot use individual ACA premium tax credits. If the ICHRA is not affordable, employees may opt out of the ICHRA and instead use Marketplace subsidies to purchase health insurance.
This “either/or” structure makes affordability testing especially important, both for compliance and for employee experience.
5. How do brokers get paid when clients move to an ICHRA plan?
Broker compensation varies, but it doesn’t disappear.
Brokers may be paid through:
- Commissions on individual health insurance plans, depending on carrier and state rules
- Consulting or advisory fees for plan design and employee support
- Partnerships with ICHRA administration platforms
In many cases, ICHRA shifts broker work from annual renewals to ongoing advisory and education, which some brokers find more sustainable over time.
Looking ahead
Rising health benefit costs remain a top concern, with 81% of businesses worried about continued increases.
ICHRA offers employers a more flexible alternative — one that prioritizes predictable spending, employee choice, and adaptability as workforces evolve. For organizations that make the switch, average savings of around 17% have been reported — making ICHRA a modern, practical option for those looking beyond traditional group plans for their employee health insurance needs.