What is an ICHRA? The Individual Coverage HRA Explained

Offering a competitive employee health benefit no longer requires the cost or administrative burden of a traditional group health plan. With an individual coverage health reimbursement arrangement (ICHRA), employers can provide tax-free reimbursements to employees for eligible medical expenses, including monthly premiums for their individual health insurance coverage.

In this article, we’ll explain what an ICHRA is and how it works.

In this blog post, you'll learn:

• How an ICHRA helps employees cover healthcare costs.
• How the reimbursement process works.
• Where employees can get qualifying individual health plans.

What is an ICHRA? A brief overview

The individual coverage HRA (ICHRA) became available in 2020. It allows employers to reimburse employees for individual health insurance premiums and other eligible out-of-pocket medical expenses. Unlike a group insurance plan, an ICHRA provides employees with the freedom to select coverage that best fits their needs.

Why offer an ICHRA instead of a traditional health insurance plan?

• It provides flexibility for employers. An ICHRA provides cost control and budget predictability. Instead of buying a group health plan that comes with steep annual rate hikes, employers have a say over their budget. They can decide how much of an allowance they want to offer employees and never pay more than that amount.
• It provides flexibility for employees. With traditional employer-sponsored insurance, employees don't have much choice. Everyone receives the same health insurance policy and coverage, regardless of their individual needs or location. With an ICHRA, employees can pick the health plans on the individual market that work best for them.

Only employers contribute to an ICHRA. This means employees don't have to contribute any funds from their paychecks.

How does an ICHRA work?

An ICHRA lets employers offer a more personalized, cost-effective health benefit than a group plan. With an ICHRA, employers give their employees a monthly allowance for medical expenses. Employees use it to buy what they need.

Here's how it works:

• The employer sets a monthly allowance. Employers decide how much tax-free money they want to offer their employees. Allowances can vary based on family status and age. You can even offer different employees different reimbursement amounts or customize eligibility using employee classes. There’s no IRS cap on employer contributions. You can offer as much as you want.
• Employers customize the benefit. Employers can choose whether to offer a premium-only ICHRA that reimburses employees for insurance premiums or an ICHRA that reimburses employees for premiums and out-of-pocket medical expenses. They can also establish waiting periods for new hires and run-out periods.
• Employees get qualifying coverage. To participate in an ICHRA, employees must have a qualifying form of individual health insurance coverage. For example, the health plan must meet minimum essential coverage (MEC) standards. If they don't have the right coverage, they can enroll in the right plan upon the offer of the benefit. That's because the offer of an ICHRA creates a 60-day special enrollment period (SEP)¹.
• Employees make healthcare purchases. With their own money, employees pay for the medical care they need. Eligible out-of-pocket expenses include health insurance premiums, doctor's office visits, prescription drugs, over-the-counter medication, and more. IRS Publication 502 and the CARES Act have complete lists of the items you can reimburse².
• Employees submit proof of their eligible medical expenses. After incurring a medical expense, employees submit proof of the expense to their employer. Accepted forms of proof include a receipt or an explanation of benefits from an insurance company.
• The employer or HRA administrator reviews and reimburses employee medical expenses. Each reimbursement request must include the following: the service or product, the date of the service or sale, and the amount incurred. If the medical expense meets eligibility criteria, the employer can approve it. They then reimburse the employee up to their allowance amount. Reimbursements are free of income and payroll taxes.

Who can offer an ICHRA?

Organizations of all sizes can offer an ICHRA. You only need at least one W-2 employee to start offering this benefit.

Organizations that can offer an ICHRA include:

• Nonprofit organizations
• Private companies
• Churches and religious organizations
• Government and municipal entities

While any organization can offer an ICHRA to its U.S. workforce, there are some considerations. You can't offer an ICHRA if you offer a qualified small employer health reimbursement arrangement (QSEHRA) or excepted benefit health reimbursement arrangement (EBHRA). You can offer a traditional group health plan alongside an ICHRA, but you can't offer both benefits to the same class of employees.

For example, you could offer your full-time employees a group health insurance plan and part-time employees an ICHRA. But you can't give either class a choice between a group plan or the ICHRA.

While an ICHRA works well for small employers, it's also an excellent option for applicable large employers (ALEs)—those with 50 or more full-time equivalent employees (FTEs). With the health benefit, ALEs can meet the Affordable Care Act's employer mandate—provided their allowance is affordable. ALEs must provide affordable coverage with MEC and minimum value to at least 95% of full-time employees and their dependents.

Who can participate in an ICHRA?

To meet ICHRA participation requirements, employees need individual health insurance plans that provide minimum essential coverage (MEC). This includes Marketplace plans and those purchased on private exchanges. Medicare Parts A and B together and Medicare Part C also qualify. Employees must be W-2 employees, not independent contractors.

Employees' spouses and legal dependents can also participate, provided they have the right type of coverage. The employer must also choose to extend eligibility to spouses and dependents.

Employers can determine who's eligible for the benefit with the use of 11 employee classes, like hourly or salaried employees. If you use employee classes, you have to give everyone in that class the same ICHRA benefits. However, the ICHRA Final Rules still permit employers to differ allowances by employee age and family status within each class.

Business owners can also participate in an ICHRA if the IRS considers them a W-2 employee. Our infographic explains business owner eligibility.

How does an ICHRA work with premium tax credits?

The ICHRA doesn't work with premium tax credits. If an employee participates in the ICHRA, they can't collect their premium subsidies³. Employees can collect premium subsidies and decline the ICHRA depending on affordability. If an employee's ICHRA allowance is affordable, they can't claim any premium subsidies. If their allowance is unaffordable, they can decline the ICHRA and claim their healthcare tax credits.

Learn more with our guide to premium tax credits with an ICHRA.

Are there other types of HRAs available?

An ICHRA isn’t the only type of health reimbursement arrangement (HRA) available.

The qualified small employer HRA (QSEHRA) works like an ICHRA. It allows you to reimburse employees for individual health insurance and out-of-pocket expenses. However, only employers with fewer than 50 FTEs can offer a QSEHRA.

There’s also the group coverage HRA (GCHRA). This type of HRA supplements a group health plan. With it, employers can reimburse employees for out-of-pocket expenses the group plan doesn’t cover. Examples of eligible expenses include deductibles and copays. A GCHRA doesn’t reimburse employees for insurance premiums.

Offering an ICHRA through PeopleKeep by Remodel Health

For employers new to ICHRAs, administrating one can feel overwhelming. Where do you start? How do you design your plan? How do you stay compliant?

PeopleKeep by Remodel Health can ease your worries. With our ICHRA administration platform, you can launch and manage your health benefit in just minutes each month.

Our team of experts supports you by:

• Creating compliant plan documents that meet federal requirements
• Helping you design a benefit that aligns with your budget and workforce
• Reviewing and processing employee reimbursement requests on your behalf
• Organizing and securely storing required documentation
• Providing award-winning customer support for you and your employees

Your employees can also shop for individual health insurance right from their PeopleKeep accounts. This reduces questions and confusion since they don't have to navigate the health insurance marketplace on their own or work with insurance carriers directly.

Enterprise employers can also take advantage of Remodel Health’s ICHRA+ administration platform. ICHRA+ is built to support complex organizations, offering advanced plan design, compliance support, and hands-on guidance at scale.

Conclusion

When it comes to health coverage for your team, it's a good idea to look beyond traditional group health plans. An individual coverage health reimbursement arrangement (ICHRA) has more design flexibility than a group health insurance policy. It gives employers a cost-effective way to offer personalized employee benefits. It also empowers employees with the freedom of choice when it comes to healthcare services and coverage options.

References

This blog post was originally published on January 8, 2019. It was last updated on January 27, 2026.

1. Federal Register
2. IRS Publication 502
3. IRS Fact Sheet