ICHRA explained: individual coverage HRAs for employers

An individual coverage HRA (ICHRA) is a health reimbursement arrangement in which the employer sets a monthly allowance and employees use it to buy their own individual-market health insurance, which the employer reimburses tax-free. There is no federal dollar cap on the allowance, and employers of any size can offer one. The employer picks the money; the employee picks the plan.

How an ICHRA works

The rules sit in the tri-agency final rule effective in 2020 and codified at 26 CFR 54.9802-4 (Treasury), with parallel DOL and HHS regulations. The core mechanics:

1. The employer adopts a written plan and chooses the allowance for each class of employees.
2. The employee enrolls in individual health insurance, on or off the Marketplace, or in Medicare in some cases, and proves coverage to the plan each plan year.
3. The employer reimburses the premium (and, if the plan allows, other qualified medical expenses) up to the monthly allowance.
4. Reimbursements are excluded from the employee's taxable income and, because the arrangement is an employer plan, from payroll tax. The employer deducts the amounts as a business expense.

An employee covered under an ICHRA must have individual coverage that is not short-term, limited-duration insurance or an excepted benefit. The employer can require substantiation of coverage monthly or annually, and may use a third-party administrator platform to do so. ICHRA administration is more manual than a group plan, so an administrator is common, which is an added fee.

Classes of employees

The employer may vary the allowance only by permitted class, and it must apply the same terms to everyone in a class. The permitted classes are full-time; part-time; salaried; non-salaried (hourly); employees in the same rating area (a reasonable geographic area); seasonal; union employees covered by a collective bargaining agreement; employees in a waiting period; non-resident aliens with no U.S. source income; and temporary workers placed by a staffing firm, plus combinations (26 CFR 54.9802-4(d)(2)). Classes must be set before the plan year.

Within a class, the employer may vary the allowance by only two factors: the employee's age (up to a 3-to-1 ratio, mirroring the ACA age rating curve) and the number of dependents covered. Offering a larger ICHRA to older employees is legal and common because older employees' premiums are higher.

The employer cannot offer the same class both a traditional group plan and an ICHRA. It can, however, offer the group plan to one class and an ICHRA to another, subject to a minimum class size rule when the full-time, part-time, salaried, non-salaried or sub-state geographic classes are used: 10 employees for an employer with fewer than 100 employees, 10% of employees (rounded down) for 100 to 200, and 20 for more than 200.

Affordability and the ACA employer mandate

An applicable large employer can meet its offer obligation with an ICHRA, but the arrangement has to be affordable, which differs from group plan affordability. Under 26 CFR 1.36B-2(c)(5), the ICHRA is affordable for an employee if the monthly premium of the lowest-cost silver plan for self-only coverage in the employee's rating area, minus the monthly self-only allowance, does not exceed one-twelfth of household income times the required contribution percentage. For plan years beginning in 2026 that percentage is 9.96%, according to IRS Rev. Proc. 2025-25. The IRS safe harbors let employers use W-2 wages, rate of pay or the federal poverty line in place of household income, and a look-back to a prior-year January premium so the figure can be fixed in advance. For the penalties at stake ($3,340 and $5,010 per employee for 2026), see The ACA employer mandate: who must offer coverage and the 2026 penalties.

The test works on the lowest-cost silver plan in each rating area, not on the plan the employee picks, so a company with remote employees across many states needs the premium data for each location. Software tools do the calculation. If the ICHRA is unaffordable, the employee may decline it and claim a premium tax credit on the Marketplace, but doing so waives the ICHRA reimbursements for that year. The employer still faces potential (b) exposure. For employees offered an affordable ICHRA, the premium tax credit is not available if they enroll in the Marketplace plan with the ICHRA; if the employee opts out of an affordable ICHRA, no premium tax credit is available either.

You can model your own allowance in the QSEHRA and ICHRA allowance calculator and test the mandate in the ACA employer mandate (ALE) calculator.

Notices, deadlines and paperwork

• Written notice to eligible employees at least 90 days before the start of each plan year (or by the first day they are eligible, for new hires), describing the allowance, the substantiation requirement and the effect on the premium tax credit.
• Plan document and summary plan description. An ICHRA is a group health plan subject to ERISA, and the plan sponsor must maintain a written plan document. COBRA applies where the employer is subject to it, and small employers may fall under state mini-COBRA rules.
• Reporting. Large employers report offers on Form 1095-C using the ICHRA offer codes; small employers don't file, but Form 5500 may apply for plans with 100 or more participants. See ACA reporting: Forms 1094-C and 1095-C for large employers.
• Medicare. Employees who are on Medicare can generally use an ICHRA toward Medicare premiums if the plan permits, subject to the rule that Medicare Part A and B (or C) be in place.

An important rule on timing: individual coverage is purchased in open enrollment, which for the federal Marketplace generally ends in the winter (the exact dates vary by year and state exchange). The employer's plan year should line up so that employees have time to shop, and the 90-day notice should precede the open enrollment. A mid-year hire gets a special enrollment period to buy a plan; employer notice of an offer of an ICHRA triggers it.

HSA interplay

An employee can generally contribute to an health savings account while covered by an ICHRA, if the individual plan is an HDHP and the ICHRA only reimburses premiums and is otherwise HSA-compatible. Under IRS Notice 2026-5, bronze and catastrophic plans bought on an Exchange (and off-Exchange if available on an Exchange) are treated as HDHPs for months after December 31, 2025, even if their deductibles are not within the HDHP limits, and buying such a plan with an ICHRA does not disqualify it. For 2026 the HSA limits are $4,400 self-only and $8,750 family (IRS Rev. Proc. 2025-19). Employees should confirm HSA eligibility with a tax adviser.

ICHRA, QSEHRA and a group plan compared

See QSEHRA explained: the small employer HRA, 2026 limits and rules for the small-employer version.

Risks and where ICHRA goes wrong

• Fewer plan options in some areas. Individual-market choice, networks and premium tax credit rules vary by state and county. Check that employees can find plans.
• Employee confusion. Shopping for a plan is a burden for people used to a single employer choice. Plan enrollment help and a broker or platform are standard.
• Adverse selection. If your group plan was keeping older or sicker employees cheaply insured, an ICHRA with a flat allowance may leave them short.
• Compliance. Misclassifying employees, missing the 90-day notice or failing to substantiate coverage can disqualify the arrangement, putting reimbursements at risk of being treated as taxable wages. This is a case for an advisor and legal review.
• Group-plan access. Moving off a group plan can be harder to reverse for some small groups because of participation and enrollment rules (group health insurance for small businesses: how it works and what it costs).

Key takeaways

• An ICHRA reimburses employees tax-free for individual-market coverage, with no federal cap and no employer size limit.
• Allowances can vary only by permitted class, age (3-to-1) and dependents, and classes must be fixed before the plan year.
• For plan years beginning in 2026, the affordability test uses 9.96% against the lowest-cost silver premium minus the allowance.
• Give the written notice at least 90 days before each plan year and keep a record of coverage substantiation.
• Sources: 26 CFR 54.9802-4, IRS Rev. Proc. 2025-25 and IRS Notice 2026-5.