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Business owner eligibility under an ICHRA [infographic]

Small Business • July 18, 2024 at 7:05 AM • Written by: Holly Bengfort

Health reimbursement arrangements (HRAs) are popular and cost-effective alternatives to traditional group health insurance plans. Entering its fifth year as a tax-advantaged solution, the individual coverage HRA (ICHRA) is seeing rapid growth. The latest data from the HRA Council1 shows that ICHRA adoption increased by 29% from 2023 to 2024.

The ICHRA allows employers to reimburse employees for individual health insurance premiums and other medical expenses. However, many business owners wonder if they can save on their out-of-pocket costs as their employees do.

In this article, we'll explore what it takes for business owners to qualify for and participate in an ICHRA.

Takeaways from this blog post:

  • Eligibility for an ICHRA depends on the business structure. C corporation owners are eligible, while S corporation owners, partners, and sole proprietors aren't.
  • Sole proprietors and partners can participate in an ICRHA if their spouses are W-2 employees of the business.
  • LLC owners must decide on the Internal Revenue Service (IRS) tax classification they prefer - C corp, S corp, sole proprietorship, or partnership. This classification will determine their ICHRA eligibility.

New to the ICHRA? Get our guide for everything you need to know.

What is an ICHRA?

The individual coverage HRA (ICHRA) is an employer-funded health benefit. It allows organizations of any size to reimburse their eligible employees tax-free for more than 200 qualifying medical expenses. There's no contribution limit with an ICHRA, which means you can offer as much as you'd like for your monthly allowance.

Some examples of ICHRA-eligible expenses include:

  • Monthly premiums for individual health plans
  • Prescription drugs
  • Over-the-counter medication
  • Doctor's visits
  • Preventive care
  • Chiropractic care
  • Mental health counseling

An ICHRA offers employers a completely customizable plan design. You can tailor it in several ways to meet the diverse needs of your organization and your employees. With an ICHRA, you can divide your workforce into employee classes. With classes of employees, you can legally offer different benefits and allowances to different groups of workers, such as hourly employees and salaried employees. You also have other class options like seasonal employees and temporary employees to choose from.

The ICHRA is particularly beneficial for organizations with 50 or more full-time equivalent employees (FTEs)—known as applicable large employers (ALEs). Compared to group health insurance, an ICHRA is an affordable solution for satisfying the Affordable Care Act’s employer mandate.

Employee eligibility requirements for an ICHRA

Employees must have minimum essential coverage (MEC) through an individual health insurance policy to participate in an ICHRA. This includes qualifying on-exchange or off-exchange coverage, Medicare Parts A and B, or Medicare Part C.

Employees covered by a traditional group plan, such as a spouse’s or parent’s plan, can’t participate in an ICHRA. Additional forms of health coverage that aren't accepted include COBRA, healthcare sharing ministries, association health plans, and Tricare.

The ICHRA also impacts premium tax credits, and employees who choose to participate in the benefit will no longer qualify for premium tax credits. But, if the ICHRA allowance amount is deemed unaffordable and doesn't meet minimum value (MV) under the ACA, employees can opt out of the ICHRA and claim their tax credits.

What are the benefits of an ICHRA?

ICHRAs offer several benefits. First, they empower employees. With an ICHRA, your employees choose the health policies that work best for them instead of getting stuck with a traditional group health plan. They can shop around and compare their options on the individual market or go directly to an insurance company to purchase a medical plan. This flexibility allows them to select an individual health insurance plan that aligns with their preferred network, doctors, and monthly health insurance premiums.

Additionally, you don't have to worry about annual rate hikes or participation requirements. Unlike a traditional group health plan, employers can control costs by setting a fixed budget. This makes it easier to predict and manage healthcare expenses. You only reimburse employees for the out-of-pocket expenses they incur. Plus, unused funds stay with the employer if the employee doesn't use them by the end of the year.

Finally, offering an ICHRA has major tax advantages. Reimbursements are exempt from payroll and income taxes, so there's no need to report ICHRA funds as income on employees' W-2s.

Can a small business owner participate in an ICHRA?

ICHRAs are a popular option for small businesses looking to provide health benefits to their employees. But what about business owners themselves? Are they eligible to participate in an ICHRA?

The short answer is yes, business owners are eligible for an ICHRA, but there are some specific rules and regulations that they need to follow.

Here's a breakdown of the eligibility criteria for business owners under an ICHRA:

C corporation owners

The IRS recognizes C corporations as separate legal entities from their owners, making C corp owners employees of the corporation. This means they can participate in an ICHRA. Their spouses and dependents can also participate through the owner’s ICHRA.


S corporation owners

An S corp is a pass-through entity, so the IRS taxes business owners and shareholders directly. The IRS doesn’t consider shareholders in an S corp as W-2 employees. If you own more than 2% of shares in an S corp, you can't participate in an ICHRA. However, you can still provide an ICHRA to your employees.



In a partnership, two or more people share ownership of the business. The federal government directly taxes business owners in a partnership, similar to an S corp. Partners aren't eligible to participate in an ICHRA, but they may be able to do so through their spouse if they're a W-2 employee of the business.


Sole proprietors

Finally, we have sole proprietors. Unfortunately, sole proprietors and partners aren’t eligible for an ICHRA but may be able to join through their spouse who is a W-2 employee of the business.


Limited liability company (LCC)

An LLC is a legal business structure recognized by the state. LLC owners have the flexibility to choose how the IRS will tax their business, whether as a C corp, S corp, sole proprietorship, or partnership. You'll use this federal classification to determine your eligibility for an ICHRA.

Can a small business owner participate in a QSEHRA?

If you have fewer than 50 FTEs, you can also offer a different type of HRA. The qualified small employer HRA (QSEHRA) is designed for small business owners working with tight budgets. Just like with an ICHRA, you can reimburse your employees for their healthcare expenses, including individual plan premiums. Business owner eligibility for a QESHRA is the same as with an ICHRA. But, there are some differences in benefit features.

All full-time W-2 employees with MEC qualify for a QSEHRA. You can also choose to offer it to your part-time employees. While the QSEHRA doesn't offer employee classes, you can vary allowance amounts by employee age, family status, and family size. The QSEHRA also comes with a maximum limit for employer contributions. This reimbursement limit is set by the IRS annually.


Many business owners wonder if they can save on medical expenses with an individual coverage health reimbursement arrangement (ICHRA) as their employees do. As with many IRS rules, the answer depends. Small business owners can also participate in an ICHRA if they meet the criteria outlined above.

If you're an eligible employer thinking about participating in an ICHRA, you should consult with an HRA specialist or a tax professional to ensure compliance with all relevant laws and regulations.

  1. https://hracouncil.org/report

Which is better for you—the ICHRA or the QSEHRA? Get our chart to find out.

Holly Bengfort

Holly is a content marketing specialist for PeopleKeep. Before joining the team in 2023, Holly worked in television news as a broadcast journalist. As an anchor and reporter, she communicated complex stories to the vast communities she served on a daily basis. Her background has given her a greater understanding of people and the issues that affect our lives. When Holly isn’t writing, she enjoys reading, exercising, and spending time at the beach.