What is ICHRA?
ICHRA — the Individual Coverage Health Reimbursement Arrangement — lets an employer of any size give employees a tax-free monthly allowance to buy their own individual health insurance, instead of sponsoring a group plan. Since it took effect in 2020, it's become one of the fastest-growing ways companies fund health benefits.
The short answer
Fund coverage, don't sponsor a plan.
Instead of buying a group health plan and taking on its cost and risk, an employer using ICHRA sets a defined budget and reimburses employees for the individual coverage they choose. It's a shift from defined benefit to defined contribution — the employer funds coverage rather than running a plan.
How it works
The mechanics, in six parts.
A monthly allowance
The employer sets a tax-free monthly amount to reimburse health coverage. Unlike QSEHRA, there's no federal maximum or minimum on the allowance.
Employees buy their own coverage
Each employee chooses an individual health plan, on or off the ACA exchange, and must be enrolled in individual coverage (or Medicare) to be reimbursed.
Tax-free both ways
Reimbursements are excluded from employee income and exempt from payroll tax for the employer — the same tax treatment as a group plan.
Employee classes
Employers can set different allowances for up to 11 permitted classes — full-time, part-time, seasonal, salaried vs. hourly, geographic area, and more — and vary the amount by age and family size.
Any size employer
From a two-person startup to a national enterprise. There's no company-size cap, which is the key difference from the small-employer QSEHRA.
One model per class
A given class of employees can be offered an ICHRA or a traditional group plan — not both — so employers design classes deliberately.
Why it matters now
Why ICHRA is having its moment.
ICHRA has existed since 2020, but several forces have converged to make it one of the most talked-about ideas in employee benefits.
Group premiums keep climbing
Renewals and rate shocks — especially in the small and mid-sized market — push employers to look for a cost they can actually predict and control.
A bigger individual market
A larger, more competitive individual insurance market since the ACA gives employees real plans to buy on their own, which is what makes the model work.
The defined-contribution shift
Just as 401(k)s replaced pensions, ICHRA moves health benefits from a defined benefit (a plan) to a defined contribution (an allowance).
Distributed workforces
Remote and multi-state teams are hard to cover with a single group plan. ICHRA lets each employee buy coverage in their own local market.
Budget certainty
Employers set the allowance and know their benefits spend up front — without taking on claims risk or plan administration.
For companies
What ICHRA means for an employer.
For the right company, ICHRA turns an unpredictable renewal into a line-item budget. But it's a different job than running a plan — here's the trade.
The upside
- Predictable, controllable cost — you set the allowance
- No claims risk and no plan to administer
- Works across states and across full-time, part-time, and seasonal workers
- Employees pick the plans and networks that fit them
- Can satisfy the ACA employer mandate when the allowance makes coverage affordable
What to weigh
- Employees shop the individual market, where network breadth varies by area
- Requires ICHRA administration and compliance — class rules, affordability, substantiation
- Employee education and change management on a new way to get coverage
- The strength of the individual market differs by state and region
- An employee offered an affordable ICHRA can't also take an ACA premium subsidy
For brokers
Why brokers can't ignore ICHRA.
ICHRA changes the broker's job from placing a group plan to designing an allowance strategy and supporting individual enrollment. That's a threat to brokers who don't adapt — and a growth line for those who do.
- A new advisory line. Class design, affordability testing, compliance, and enrollment support are all value a broker can own — and bill for.
- Client retention. ICHRA keeps small and mid-sized clients who'd otherwise drop coverage or leave after a rate shock.
- Differentiation. Offering ICHRA wins business from brokers who only sell group — while ignoring it invites disintermediation by ICHRA administration platforms.
FAQ
Frequently asked questions
What is ICHRA?+
ICHRA — the Individual Coverage Health Reimbursement Arrangement — is a benefit that lets an employer reimburse employees, tax-free, for individual health insurance they buy themselves, instead of sponsoring a traditional group health plan. The employer sets a monthly allowance; employees choose their own plan and get reimbursed up to that amount.
When did ICHRA become available?+
ICHRA took effect on January 1, 2020, created by a 2019 federal rule from the Departments of the Treasury, Labor, and Health and Human Services. It expanded on earlier HRA models by removing the company-size cap and allowing integration with individual-market coverage.
What's the difference between ICHRA and QSEHRA?+
QSEHRA (the Qualified Small Employer HRA) is limited to employers with fewer than 50 employees that offer no group plan, and it caps the annual reimbursement. ICHRA is available to employers of any size, has no federal contribution limit, and lets employers vary allowances across permitted employee classes — making it far more flexible.
Which employers can offer ICHRA?+
Any employer, of any size — from the smallest startup to the largest enterprise. Employers commonly offer ICHRA to their whole workforce or to specific classes (for example, part-time or seasonal employees) while keeping a group plan for others.
Does ICHRA satisfy the ACA employer mandate?+
It can. For applicable large employers (generally 50+ full-time employees), an ICHRA counts as an offer of coverage under the employer mandate as long as it's considered affordable — meaning the employee's cost for a benchmark individual plan, after the allowance, stays within the ACA affordability threshold.
Can an employee take both an ICHRA and an ACA subsidy?+
No. If an employee is offered an ICHRA that's considered affordable, they aren't eligible for a premium tax credit. If the ICHRA is unaffordable, the employee can opt out and claim a subsidy instead — but they can't use both at once.
Why is ICHRA growing now?+
Rising group premiums, a more competitive individual insurance market, the broader shift toward defined-contribution benefits, and increasingly distributed workforces have all made ICHRA more attractive. Adoption has grown quickly since 2020, especially among small and mid-sized employers looking for cost certainty.
Keep reading
Related guides
Self-funded vs. fully insured
How ICHRA compares to the other ways employers fund health benefits, and what each asks of the company.
What is Form 5500?
The annual ERISA filing behind employer benefit plans, in plain English.
Use cases
How brokers, carriers, and benefits vendors use Hillwinds to reach employers.
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