What Is an ICHRA and How Does It Work?
An ICHRA is a way to give your employees a monthly allowance toward a health plan they choose themselves. Here is how an ICHRA works, when it makes sense, and what to know before you decide.
The Short Version
An ICHRA, short for Individual Coverage Health Reimbursement Arrangement, is a way to help your employees pay for health insurance without running a group plan. You choose a monthly amount. Each employee picks the individual health plan that suits their life, and you reimburse them up to that amount. When the arrangement is set up correctly, those reimbursements are generally tax-free for the employee.
If the term is new to you, you are in good company. ICHRAs have only been available since 2020, and many owners are hearing about them for the first time. The rest of this guide walks through how one works, how it differs from a traditional group plan, and what to think about before you decide.
In one sentence
You set the amount, your employees choose their plan, and you reimburse them.
What a Year With an ICHRA Looks Like
An ICHRA runs on a simple rhythm: you set the amount, your team shops, and you reimburse. Here is what each part involves.
Step 1
Choose your monthly amount
You decide how much to put toward each employee's coverage. The amount can be the same for everyone, or different for groups you define, such as full-time and part-time staff. The rules ask that everyone within a group be treated the same way, with limited exceptions such as age.
Step 2
Let your team know
At least 90 days before the plan year starts, eligible employees receive a written notice that explains the benefit and their options. New hires receive theirs when they become eligible. An advisor or benefits administrator can prepare the notice, so you are not writing it from scratch.
Step 3
Employees pick their own plan
Each employee shops for an individual health plan that fits their family, their doctors, and their budget, either on their state's marketplace or directly from an insurer. Your team chooses the plan, and you do not have to.
Step 4
You reimburse, month by month
Employees send proof that they have a plan and have paid their premium. You then reimburse them, up to the amount you set, usually through payroll or with help from an administration service.
At the start of each plan year, you can review the amount and adjust it as your team and budget change.
What Your Employees Experience
Once you set the amount, the shopping happens on your employees' side. Where they go depends on where each person lives, not where your business is based, so a team spread across state lines can each shop close to home.
Pennsylvania
Employees who live in Pennsylvania can shop through Pennie, the state's official health insurance marketplace, or buy directly from an insurer.
New Jersey
Employees who live in New Jersey can shop through GetCoveredNJ, the state's official marketplace, or buy directly from an insurer.
Delaware
Employees who live in Delaware can shop through the state's official health insurance marketplace, or buy directly from an insurer.
Employees who shop for coverage on their own for the first time often have questions, so it helps to plan for some support. Your offer can also affect whether an employee qualifies for marketplace subsidies, which is worth talking through with an advisor before you set the amount.
When an ICHRA Makes Sense, and When It Might Not
An ICHRA is a good match for some teams and a poor match for others. Here are the signs that point each way.
Often a good fit when
- Your team lives in different places, so one plan and one network rarely work for everyone.
- You want to know your monthly benefit cost before the year begins.
- Your employees have different needs, such as different ages, family sizes, or doctors.
- You would rather skip the yearly renewal process with an insurance carrier.
- You expect your team to grow and want a benefit that grows with you.
Worth a closer look when
- Your current group plan is working well on cost and your team is happy with it.
- Your team would strongly prefer one shared plan over shopping for their own.
- The amount you can offer is modest, which may leave employees with fewer plans within reach.
- Your employees are new to buying insurance, and no one is available to help them through it.
Neither path is right for everyone. The clearest answer usually comes from comparing your real numbers side by side, and an advisor can walk through that with you. If you would rather keep a group plan and help your team with out-of-pocket costs, our guide to what a MERP is covers that option.
Common Questions About How an ICHRA Works
Is there a minimum or maximum company size for an ICHRA?
No. Federal rules set no minimum or maximum company size, so employers of many sizes can offer one.
Can an ICHRA start in the middle of the year?
In many cases, yes. The start date is usually yours to choose, and an ICHRA offer gives employees a special enrollment period to buy a plan. Eligible employees need a written notice at least 90 days before the plan year starts, so it helps to plan the timing with an advisor.
What if an employee does not want to join?
Employees can decline the offer. To be reimbursed, an employee has to be enrolled in an individual health plan, so an employee without a plan would not receive a reimbursement.
What happens when an employee leaves the company?
The individual health plan belongs to the employee, so there is no group coverage to end. Your plan document sets when reimbursements stop.
Do I have to help my employees pick a plan?
No. Your employees choose their own plan. Many employers still offer some guidance, because buying individual coverage can be new to people.
How is an ICHRA different from giving employees a raise?
A raise is taxable pay that employees can spend on anything. An ICHRA reimbursement is tied to health coverage costs, and when it is set up correctly it is generally tax-free for the employee.
This content is provided for informational purposes only and does not constitute legal or tax advice. Please consult your legal or tax advisor to determine how regulations apply to your situation.
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Compliance & References
ICHRA Guidance & Regulations
All ICHRA plans must comply with federal regulations outlined in:
- IRS Notice 2018-88
- Final Rule issued by the U.S. Departments of the Treasury, Labor, and HHS (June 2019)
Additional requirements include:
- Employers must provide a 90-day written notice to employees prior to the start of an ICHRA plan year.
- Minimum essential coverage (MEC) is required for employee reimbursement eligibility.
Trusted Sources
This content is provided for informational purposes only and does not constitute legal or tax advice. Please consult your legal or tax advisor to determine how regulations apply to your situation.
Disclosures
We are compensated by the insurance carriers for policies you choose through us. There is no direct cost to you. Compensation may vary by carrier and product. Information on this page is for educational purposes and does not constitute legal, tax, or accounting advice. Please consult your professional advisors about your specific situation. Tax treatment of ICHRA reimbursements can vary by employer and employee. We are licensed to advise clients in Pennsylvania, New Jersey, and Delaware. Contact us to confirm availability in other states.
