An Individual Coverage Health Reimbursement Arrangement (ICHRA) is an employer-funded health benefit that reimburses eligible employees for qualifying individual health insurance premiums and, depending on plan design, other medical expenses. Employers set the reimbursement allowance, while employees choose their own qualifying coverage.
For employers and HR teams, this creates a different way to fund health benefits without selecting one group medical policy for every participating employee. Understanding how ICHRA works, who qualifies, how affordability is measured, and how it compares with group coverage can help businesses evaluate whether the arrangement fits their workforce and benefits strategy.
Key Takeaways
- ICHRA stands for Individual Coverage Health Reimbursement Arrangement and is now also called a CHOICE Arrangement in current federal materials.
- Employers set the ICHRA allowance, while eligible employees select their own qualifying individual health coverage.
- Federal ICHRA rules do not impose a specific minimum or maximum employer contribution, though ACA affordability rules may affect plan design.
- An affordable ICHRA generally prevents an employee from receiving Marketplace premium tax credits for coverage subject to the offer.
- Employers should review workforce locations, individual plan options, contribution strategy, administration, and compliance requirements before adopting ICHRA.
What Is an ICHRA?
ICHRA stands for Individual Coverage Health Reimbursement Arrangement. It is an employer-funded Health Reimbursement Arrangement (HRA) that can reimburse eligible employees for individual health insurance premiums and certain qualified medical expenses on a tax-free basis when federal requirements are met.
An ICHRA is not a health insurance policy. The employee enrolls in qualifying individual health insurance, or eligible Medicare coverage, and the employer provides a set reimbursement allowance under the terms of the arrangement. The employer controls the contribution amount and plan design, while the employee chooses coverage available in the individual market.
What does ICHRA stand for in current federal materials? The Centers for Medicare & Medicaid Services (CMS) now refers to ICHRAs as CHOICE Arrangements. Federal materials began using that name in September 2026. The benefit structure remains an employer-funded arrangement for qualifying individual coverage rather than one employer-selected group policy.
How Does an ICHRA Work?
An ICHRA works through employer-funded reimbursements. The employer first sets eligibility rules, contribution amounts, and the expenses the arrangement will reimburse. Eligible employees then enroll in qualifying individual health coverage and provide proof of that coverage.
When an employee incurs an eligible premium or medical expense, the employee submits the required documentation. The employer or plan administrator reviews the request and reimburses approved expenses up to the available allowance. The allowance is not an automatic cash payment or employee-owned account balance. Federal rules require procedures for verifying qualifying coverage and substantiating reimbursement requests.
A Simple Example of an ICHRA Reimbursement
Suppose an employer offers a $400 monthly ICHRA allowance and an employee chooses qualifying individual coverage with a $600 monthly premium. After the required coverage and expense verification, the employer could reimburse $400, leaving the employee responsible for $200. This is a simple illustration, not an insurance quote or guaranteed reimbursement. Marketplace premium tax credit rules must be evaluated separately.
Who Can Offer an ICHRA, and Who Is Eligible?
Employers of different sizes can generally offer an ICHRA when federal requirements are met. The arrangement is for employees, so self-employed owners and independent contractors cannot participate as employees in an ICHRA.
Employers may offer ICHRA to all eligible employees or use permitted employee classes, such as full-time, part-time, seasonal, salaried, hourly, collectively bargained, temporary staffing, and certain geographic classes. Geographic classes can be especially relevant when employees live in different areas, since individual health plan options and premiums can vary by location. For example, a South Carolina employer working with an insurance agency in Myrtle Beach, SC may also have employees in other states whose local coverage options need to be considered when structuring the benefit.
What Health Insurance Plans Qualify for ICHRA?
Employees must have qualifying individual coverage for each month they participate. Eligible coverage includes Marketplace individual plans, qualifying off-Marketplace individual plans, Medicare Parts A and B together, or Medicare Advantage Part C. Short-term plans, indemnity coverage, faith-based arrangements, supplemental-only coverage, and coverage solely through a spouse’s employer generally do not satisfy the ICHRA individual-coverage requirement.
How Much Can Employers Contribute to an ICHRA, and What Can It Cover?
Federal ICHRA rules do not set a minimum or maximum employer contribution. Employers choose the allowance based on plan design, budget, employee classes, and applicable Affordable Care Act (ACA) requirements.
Contributions may vary between permitted employee classes. Within a class, amounts may also vary by age, subject to a 3:1 limit, and by the number of covered dependents. An employer may design the arrangement to reimburse premiums only or include other qualified medical expenses under Internal Revenue Code Section 213(d). Employees cannot simply take unused allowances as cash. Employers reviewing related benefit structures can also compare Benni Agency’s tax-advantaged account options.
How Does ICHRA Affect Taxes and Marketplace Premium Tax Credits?
ICHRA reimbursements for qualifying medical expenses are generally excluded from an employee’s federal taxable income when the arrangement meets applicable requirements. The tax treatment is one reason employers must verify qualifying coverage and substantiate reimbursement requests rather than treating the allowance as ordinary wages.
An ICHRA offer can also affect eligibility for the Marketplace premium tax credit. Employees cannot receive ICHRA benefits and a premium tax credit for the same month. Whether an employee can decline ICHRA and qualify for a tax credit depends in part on whether the employer’s offer meets the federal affordability test. Employers should keep general benefits education separate from individualized tax advice.
How ICHRA Affordability Affects Marketplace Subsidies
ICHRA affordability compares the employee’s cost for the lowest-cost self-only Silver plan after the employer contribution with household income. The required contribution percentage is 9.96% for 2026 and 10.22% for 2027. If the offer is affordable, the employee cannot receive a premium tax credit. If it is unaffordable, the employee may decline ICHRA and qualify if otherwise eligible.
What Employers Should Know About ACA Compliance
Applicable Large Employers (ALEs), generally employers averaging at least 50 full-time employees including full-time equivalents in the prior year, are subject to Affordable Care Act employer shared responsibility rules. An ICHRA can count as an offer of coverage, but affordability still matters. Employers also need to address employee classes, notices, coverage verification, reimbursement substantiation, and applicable reporting.
How Does ICHRA Compare With Traditional Group Health Insurance and QSEHRA?
ICHRA, traditional group health insurance, and a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) can all support employee healthcare costs, but they operate differently.
| Feature | ICHRA | Traditional Group Health Plan | QSEHRA |
| Who selects coverage? | Employee chooses qualifying individual coverage | Employer selects group plan options | Employee generally uses individual coverage |
| Employer contribution | Employer-set allowance with no federal ICHRA contribution cap | Based on the employer’s group plan contribution strategy | Subject to annual federal limits |
| Employer eligibility | Employers of different sizes may qualify | Depends on plan and carrier requirements | Eligible employers generally have fewer than 50 full-time equivalents and cannot offer a group health plan |
| 2026 federal reimbursement limit | No specific ICHRA cap | Not an HRA reimbursement cap | $6,450 self-only or $13,100 with family reimbursements |
The Internal Revenue Service (IRS) confirms the 2026 QSEHRA limits and eligibility requirements.
What Are the Advantages and Disadvantages of an ICHRA?
ICHRA can offer useful flexibility, but it also changes how employees obtain and manage health coverage.
Potential advantages
- Employers define the reimbursement allowance.
- Employees can choose qualifying individual plans available where they live.
- Permitted employee classes can support different workforce structures.
- Qualified reimbursements can receive favorable federal tax treatment.
Potential drawbacks
- Employees must shop for and maintain qualifying individual coverage.
- Individual-market premiums, provider networks, and plan options vary by location.
- The employer allowance may not cover the full premium.
- Affordability, documentation, notices, and reimbursement administration require ongoing attention.
- Employers should compare these factors with their current group benefits arrangement before making a change.
How Can Employers Set Up and Manage an ICHRA?
Setting up an ICHRA starts with plan design. Employers should define eligible employee classes, contribution amounts, covered expenses, plan-year dates, and the process for verifying coverage and reimbursing claims.
The arrangement also needs formal plan documents and employee communications. Federal rules generally require an ICHRA notice at least 90 days before the plan year begins for employees already eligible, with different timing for employees who become eligible later. Employers also need procedures for confirming qualifying individual coverage and substantiating reimbursement requests. Benni Agency’s guide on how to set up ICHRA covers implementation and administration in more detail.
Is an ICHRA Right for Your Business?
An ICHRA may fit businesses that want a defined employer contribution while allowing eligible employees to choose qualifying individual health coverage. It should be evaluated against the company’s current benefits, workforce locations, employee needs, and administrative capacity. Employers should compare individual-market premiums, provider networks, prescription coverage, and plan availability where employees live. They should also model the employer allowance and employee share of premiums before changing benefit structures.
For employers in South Carolina or with employees across several states, location can materially affect the individual plans available to each employee. Benni Agency’s ICHRA benefits solutions can help businesses compare ICHRA with traditional group coverage before selecting a benefits structure.
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