What is ICHRA?

Key Takeaways:

• ICHRA enables employers to reimburse employees for individual health plans, offering flexibility and tax advantages. 
• Employees benefit from personalized health coverage, tax-free reimbursements, and plan portability. 
• Employers gain predictable costs, ACA compliance, and simplified administration for health benefits. 

An Individual Coverage Health Reimbursement Arrangement (ICHRA) allows employers to reimburse employees for health insurance premiums and medical expenses. Introduced in 2020, ICHRAs provide businesses of all sizes with a flexible and cost-effective alternative to traditional group health plans. Unlike QSEHRA, which is limited to small businesses, ICHRAs have no reimbursement caps and meet ACA employer mandate requirements if contributions make coverage affordable, based on the lowest-cost Silver plan in the employee’s area. 

Employees must choose between an ICHRA and a group health plan—employers cannot offer both options simultaneously. 

Key Features of ICHRA 

ICHRA offers several features that make it an appealing option for employers: 

• Budget Control: Employers set fixed reimbursement amounts, providing predictable and manageable healthcare costs. 
• Tax Advantages: Employer contributions are tax-deductible, and employee reimbursements are tax-free, reducing tax liabilities. 
• Customizable Benefits: Employers can tailor reimbursement levels to meet workforce needs, enhancing employee satisfaction and retention. 
• Simplified Administration: Compared to traditional group health plans, ICHRAs reduce ongoing management tasks. 
• Regulatory Compliance: ICHRAs help employers meet ACA requirements, minimizing the risk of penalties. 

Employee Benefits 

Employees also gain unique benefits from ICHRAs: 

• Plan Flexibility: Employees can choose individual health plans that suit their needs, including plans with preferred doctors. 
• Tax-Free Reimbursements: Reimbursements for premiums and qualified healthcare expenses maximize value for employees. 
• Portability: Employees own their health plans, allowing them to maintain coverage even if they change jobs. 
• Additional Coverage Options: Employees can add benefits like vision and dental insurance and get reimbursed for eligible healthcare expenses. 

ICHRA Pros and Cons 

Here’s how ICHRA compares in terms of benefits and challenges for employers and employees: 

Pros for Employers 

• Cost predictability with fixed reimbursement budgets. 
• Contributions are tax-deductible, and reimbursements are tax-free for employees. 
• Simplified administration reduces the burden of managing group plans. 
• Scalability and customization options suit businesses of any size. 

Pros for Employees 

• Flexibility to choose individual plans tailored to their needs. 
• Tax-free reimbursements increase the overall value of benefits. 
• Portability ensures employees can keep their plans after leaving the company. 
• Compatibility with Medicare and Marketplace plans. 

Cons for Employers 

• Setting up an ICHRA requires planning and adherence to IRS and ACA rules. 
• Employers must ensure compliance with ACA affordability requirements. 
• No control over how employees spend reimbursement 

Cons for Employees 

• Navigating the individual health insurance marketplace can be challenging. 
• Individual plans may cost more than group premiums, depending on the region. 
• Plan availability varies by location, potentially limiting options. 

ICHRA vs Other Health Plan Options 

When deciding between ICHRA and other health plan options, it’s important to compare the key features of each. 

Feature	ICHRA	Traditional Group Health Plans	Qualified Small Employer HRAs (QSEHRAs)	HSA (Health Savings Account)	FSA (Flexible Spending Account)
Tax Benefits	Tax-free reimbursements; de Tax-deductible employer contributions; tax-free reimbursements for employees deductible contributions	Tax-deductible premiums for employers; employee premiums often pre-tax	Tax-free contributions for both employer and employee	Contributions are tax-deductible; withdrawals for qualified expenses are tax-free	Contributions are pre-tax, lowering taxable income; withdrawals are tax-free for qualified expenses
Contribution Limits	No IRS limit; employers set limits for each employee class	Set by the employer, often higher than other options	$5,850 (individual) or $11,800 (family) in 2023	$3,650 (individual) or $7,300 (family) in 2023	$2,850 per individual in 2023; $570 optional carryover or grace period
Expense Reimbursement	Covers qualified medical expenses, including premiums, on a tax-free basis.	Covers broad medical expenses but does not reimburse premiums	Covers premiums and qualified medical expenses	Covers qualified expenses; unused funds roll over year to year	Covers qualified expenses; unused funds may only roll over with a grace period or carryover
Flexibility for Employers	Employers set contribution amounts and customize by employee class	Less flexible; employers must manage plan selection and premium costs	Flexible for small employers; allows tax-free reimbursements for individual plans	Not applicable; funds are managed by individuals	Limited involvement; annual limits set by the employer
Flexibility for Employees	Employees choose individual plans and use reimbursements as needed	Limited; employees must use the employer-selected plan	Employees can select plans that meet their needs	Employees can save and use funds for expenses; must pair with a high-deductible health plan (HDHP)	Funds must follow employer-defined rules; less flexible than HSAs
Portability	Fully portable; employees keep their plans if they leave	Not portable unless COBRA applies	Fully portable; employees retain their health plan when leaving	Fully portable; funds stay with the individual	Not portable; funds are tied to the employer’s plan
Legal/Compliance Requirements	Must comply with ACA affordability and IRS rules	Must meet ACA mandates for large employers and comply with ERISA	Fewer compliance requirements; must follow IRS and ACA guidelines	No legal burden on employers; individuals must follow IRS rules	Subject to IRS limits and employer-defined rules; simpler than ICHRA

Who Can Participate in an ICHRA? 

Participation in an ICHRA is based on specific eligibility requirements for employees and defined classes established by the employer. 

General Requirements for Employees 

To participate in an ICHRA, employees must: 

• Be enrolled in an individual health insurance plan or Medicare. 
• Meet employer-defined eligibility criteria, such as full-time, part-time, or seasonal status. 

Employees must use ICHRA funds exclusively for eligible health expenses, including premiums for compliant plans. 

Defined Employee Classes 

Employers have the flexibility to design ICHRA offerings for specific employee groups, known as “classes.” These classes can be customized based on factors such as: 

• Employment Status: Full-time, part-time, or seasonal workers. 
• Compensation Type: Salaried versus hourly employees. 
• Waiting Periods: Employees who haven’t yet satisfied a designated waiting period. 
• Location: Employees working in specific geographic areas or job sites. 
• Collective Bargaining Agreements: Employees covered by union agreements can be included or excluded. 
• Nonresident Aliens: Employees without U.S.-based income. 

Employers can also combine two or more criteria to further refine employee classes, ensuring flexibility while maintaining compliance. 

Class Size Requirements 

In some cases, minimum class sizes apply based on the number of employees. For example: 

Size of employer	Class size minimum
Fewer than 100 employees	10 employees
100–200 employees	10% of the total number of employees
200+ employees	20 employees

How to Determine if an ICHRA is Right for Your Business 

Deciding whether ICHRA fits your organization involves evaluating key aspects of your workforce and goals. Consider the following factors: 

• Evaluate Business Size and Structure: ICHRAs are customizable by employee class, making them suitable for all business sizes. 
• Understand Employee Needs: Flexibility in choosing individual plans can appeal to employees who value personalization over the uniformity of group plans. 
• Weigh Costs and Tax Benefits: Employers benefit from predictable costs, while both employers and employees enjoy significant tax advantages. 
• Compare Alternatives: Traditional group plans, QSEHRA, HSAs, and FSAs may offer different advantages based on your budget and workforce preferences. 

If your employees value flexibility and your business prioritizes cost control, ICHRA could be a strong fit. 

Bringing It All Together 

ICHRA provides a modern approach to health benefits by combining flexibility, tax advantages, and cost control. Employers benefit from streamlined administration and ACA compliance, while employees gain access to personalized coverage and tax-free reimbursements. Although setup and compliance require thoughtful planning, ICHRA’s adaptability makes it an excellent option for businesses looking to optimize their health benefit offerings. 

Additional Resources for Understanding and Implementing ICHRA 

For the most up-to-date and comprehensive information on government guidelines and regulations related to ICHRA, HSA, and FSA, it’s advisable to refer to official government resources such as: 

• Internal Revenue Service (IRS): The IRS provides detailed guidance on tax-advantaged accounts like HSAs and FSAs, including contribution limits, eligible expenses, and tax treatment.  
• Department of Labor (DOL): The DOL oversees employee benefit plans, including ICHRA. They provide guidance on compliance with regulations related to health reimbursement arrangements.  
• Healthcare.gov: Healthcare.gov, managed by the Centers for Medicare & Medicaid Services (CMS), offers information on health insurance and benefit options, including ICHRA.  

ICHRA FAQ’s 

Can Business Owners Participate in ICHRA? 

Yes, business owners can participate if they are employees of the company, like C-corporation owners. Sole proprietors and S-corp owners over 2% typically cannot due to tax rules. 
 

What’s considered an “affordable” individual coverage HRA offers? 

An individual coverage HRA is considered affordable if the employee’s monthly premium for the self-only, lowest-cost Silver plan (after employer reimbursement) is less than 9.12% of 1/12 of their annual household income. 

If affordable, the employees and dependents are ineligible for premium tax credits. If not affordable, employees can decline the HRA to claim premium tax credits for Marketplace coverage, but they cannot combine both. Affordability calculations are not influenced by savings provided by the American Rescue Plan Act of 2021. 

What Happens if Employees Already Have a Plan?  

Employees can use ICHRA funds for qualifying plans. If their plan isn’t eligible, they’ll need to switch to a compliant individual health plan. 

This article provides general information and is not intended to provide tax, legal, or accounting advice. Consult with your own tax, legal, or accounting advisors for advice on your specific situation.