What Are ICHRAs?

Healthcare costs are a constant source of stress for employers and employees alike. Traditional group health insurance is expensive, rigid, and often fails to meet the needs of a diverse workforce. That’s where Individual Coverage Health Reimbursement Arrangements (“ICHRAs”) come in.

Introduced in 2020, ICHRAs give employers a new, more flexible way to offer health benefits. They shift the focus from one-size-fits-all group plans to personalized, portable coverage for each employee.

Overview

An ICHRA is an employer-funded benefit that reimburses employees for the cost of individual health insurance and, optionally, other qualified medical expenses. Instead of paying premiums to an insurance company for a group plan, the employer gives employees a set amount of money each month. Employees then use that allowance to buy their own health insurance—typically through the ACA marketplace or directly from insurers.

To get reimbursed, employees provide proof of coverage and expenses. If they meet the criteria, the employer reimburses them, tax-free. This setup gives employers budget control and gives employees more flexibility to choose the coverage that works best for them.

Why Employers Are Turning to ICHRAs

One of the biggest advantages of ICHRAs is cost control. Employers decide how much they want to contribute, and they’re not subject to unpredictable rate hikes like they are with traditional health plans. It’s a budget-friendly way to provide meaningful benefits without being held hostage by group health plan premiums.

Another major advantage is flexibility. Employees get to choose their own health plans, which means they can select coverage that includes their doctors, prescriptions, or preferred hospitals. This level of choice is especially valuable for companies with a diverse or distributed workforce.

ICHRAs also come with tax benefits. Reimbursements are excluded from income and payroll taxes for both employers and employees, which keeps more money in everyone’s pocket.

They’re also scalable. Whether a company has 5 employees or 500, ICHRAs can adapt without the administrative complexity that comes with managing a group plan.

Real-World Use Cases

Replacing Group Health Insurance

Many small and mid-sized businesses are choosing to drop group plans entirely and replace them with ICHRAs. Group plans are expensive and come with limited choices. By offering a fixed monthly allowance, for example $500 per employee, companies let their workers shop for ACA-compliant individual plans that better suit their personal needs.

Supporting Remote and Distributed Teams

In a post-pandemic world, more teams are spread across multiple states. That creates a nightmare for group health insurance, which often doesn’t travel well across state lines. ICHRAs solve this problem by allowing employees to buy plans that work in their local area. Whether someone lives in California, Texas, or Vermont, they can choose a policy that includes nearby providers and regional hospitals.

Offering Benefits to Contractors

While 1099 workers aren’t eligible for traditional group plans, companies can use ICHRAs to reimburse them under a separate employee class. This gives gig workers or independent contractors access to healthcare funds without blurring the lines of employment status. It’s a smart move for businesses that rely on flexible labor but still want to remain competitive in recruiting.

Tailoring Benefits by Employee Class

ICHRA rules allow employers to create different reimbursement amounts for different groups of employees. You can offer one amount for full-time workers, another for part-time staff, and a different one for employees in high-cost-of-living areas. The key is treating everyone within a class equally. This customization gives employers precision in their benefit strategy, without risking compliance issues.

Improving Recruitment and Retention

Job seekers care about benefits, and a flexible, portable health reimbursement setup can be a big draw. ICHRAs offer modern, personalized healthcare support, especially appealing to younger employees or those who prefer managing their own plans. Pairing an ICHRA with support services, like plan comparison tools or advisor access, can make the benefit even more attractive.

What Can ICHRAs Cover?

At their core, ICHRAs are designed to reimburse premiums for individual health insurance plans that meet ACA standards. Employers that want to offer a more generous package can also choose to reimburse other IRS-approved medical expenses, such as dental and vision coverage, copays, and prescriptions. However, employees must be enrolled in a qualified individual health plan to receive any reimbursement.

What About Compliance?

There are guardrails. Employees must verify they’re enrolled in individual coverage to qualify. Employers must offer the same terms to all employees within a given class and cannot mix traditional group insurance with an ICHRA for the same group. Notices must be given to employees in advance, and proper documentation must be maintained.

Most businesses use a third-party administrator (“TPA”) or digital benefits platform to handle setup, compliance, and reimbursements. This helps avoid costly mistakes and streamlines the process for everyone involved.

Is an ICHRA Right for Your Business?

ICHRAs won’t work for every company, but they’re a solid choice for those looking for more flexibility and control. If your business is growing across multiple states, facing unsustainable group plan costs, or trying to support a mix of full-time, part-time, and contract workers, it’s worth exploring.

Unlike traditional insurance models, ICHRAs let employers manage budgets while giving employees real choice. That’s a win on both sides, and a signal that health benefits are finally catching up with the modern workforce.