ICHRA: fund individual health coverage with a set employer contribution
An Individual Coverage Health Reimbursement Arrangement — ICHRA — is a way for a company to contribute a set amount toward each eligible employee's medical costs, including premiums for individual health insurance. The employee selects an individual policy. The employer reimburses qualifying expenses, tax-free, up to the amount the company has offered.
HealthCare.gov also uses the name CHOICE Arrangement for this same design. The rules below are the ICHRA rules. The name on a government page may say CHOICE; the structure is the same.
Employers of any size may offer an ICHRA, including companies with 2 to 50 employees. Size is not the barrier. Design is: classes, notices, substantiation, and how the contribution interacts with premium tax credits.
What this arrangement does
You decide how much to contribute for a plan year. There is no federal annual minimum or maximum. Employees use the account for qualifying medical expenses, including monthly premiums and out-of-pocket costs, once they are enrolled in individual health insurance or in Medicare Part A and Part B, or Part C.
Individual health insurance here means a Marketplace plan or a plan bought from an issuer outside the Marketplace. Short-term plans and limited benefits such as dental-only or vision-only coverage do not satisfy the individual-coverage requirement for reimbursements.
Reimbursements that follow the rules are not included in the employee's taxable wages.
Who can offer one
Employers of any size can offer an ICHRA if they have at least one employee who is not a self-employed owner or the spouse of a self-employed owner. The arrangement is for employees, not for self-employed individuals.
You can offer it to all eligible employees, or only to certain classes the federal rules allow. You cannot invent your own classes. Permitted classes include combinations of:
- Full-time, part-time, or seasonal status
- Employees covered by a collective bargaining agreement
- Salaried or hourly employees
- Employees who have not finished a waiting period
- Non-resident aliens with no U.S.-source earned income
- Employees grouped by work location
Inside a class, you must offer the ICHRA on the same terms. You may vary the amount by age, with no more than a 3-to-1 ratio, and by the number of dependents. You may also set a waiting period for new hires; a special rule applies to new employees who become eligible mid-year.
Offering an ICHRA beside a group plan
You may offer a traditional group health plan to one class of employees and an ICHRA to a different class. You may not offer the same class a choice between a traditional group plan and an ICHRA, and you may not combine an ICHRA with a traditional group plan or with SHOP coverage for the same class.
If some classes get a group plan and other classes get an ICHRA, federal minimum class-size rules can apply to the HRA classes:
- Fewer than 100 employees: 10 employees
- 100-200 employees: 10% of the total number of employees
- More than 200 employees: 20 employees
Those size minimums do not apply if you do not offer a traditional group health plan to any employees. For most companies in our 2-to-50-employee practice, a 10-employee minimum is the figure that matters if you intend to run both a group plan and an ICHRA.
Affordability, in practical terms
The amount you contribute can affect whether an employee may take a premium tax credit for Marketplace coverage.
For plan years beginning in 2026, an ICHRA offer is treated as affordable if the employee's monthly cost for the self-only lowest-cost Silver plan in their area, after your ICHRA reimbursement, is less than 9.96% of one-twelfth of the employee's annual household income. For plan years beginning in 2027, that required contribution percentage is 10.22%. The percentage is indexed and can change in later years.
- If the offer is affordable, the employee and the household members the offer covers are not eligible for a premium tax credit, even if they do not use the ICHRA.
- If the offer is not affordable, the employee can take the ICHRA or, if otherwise eligible, a premium tax credit — not both. To take the credit, the employee must decline the ICHRA.
HealthCare.gov publishes lowest-cost Silver plan premium tables and an affordability tool you (or the employee) can use to estimate this. Companies that later become applicable large employers and want to use an ICHRA to meet employer shared-responsibility rules should have a tax advisor walk through affordability and minimum-value testing before the plan year starts. See Do employers under 50 have to offer health insurance?.
Timing, notices, and how employees enroll
You can start an ICHRA at any time of year. A January 1 plan year lines up with individual-market Open Enrollment, which HealthCare.gov currently lists as November 1 through January 15. A mid-year launch can open a special enrollment period when you are ending a traditional group plan, offering the arrangement to a new class, or making newly hired employees eligible.
Give current employees a written notice at least 90 days before the plan year starts. Newly eligible employees should receive the notice no later than the first day their ICHRA coverage can start. The notice tells them the amount, the plan-year dates, whether household members are included, and that they can decline the offer. Employees need information from that letter when they apply for Marketplace coverage.
Employees must have a chance to decline the ICHRA each year before the plan year begins, or when they are first offered it mid-year.
You also need a reasonable process to confirm that each person receiving reimbursements is enrolled in qualifying individual coverage or Medicare for the period they are covered by the ICHRA.
Paying the rest of the premium
Employees can use pre-tax payroll deductions for the portion of the premium the ICHRA does not cover, but only if they buy the individual policy outside the Marketplace, not through HealthCare.gov. Marketplace premiums are handled under different cafeteria-plan rules. See Section 125.
How we help you stand one up
We will review your census, recommend classes the rules actually allow, set contribution amounts you can live with, draft the employee notice against the federal content requirements, and help employees enroll in individual coverage when the arrangement begins. If a group plan or a QSEHRA is the cleaner fit, we will say so. Compare the two reimbursement designs on ICHRA vs QSEHRA.
Frequently asked questions
Can a company with 12 employees use an ICHRA?
Yes, if you have at least one employee who is not a self-employed owner or that owner's spouse. Size is not the barrier. The work is in the classes, the notice, substantiation, and how the contribution interacts with premium tax credits.
Do employees have to buy a Marketplace plan?
No. A Marketplace plan, an individual policy bought from an issuer outside the Marketplace, or Medicare Part A and B (or Part C) can satisfy the coverage requirement. Short-term plans cannot.
Can we offer an ICHRA to part-time staff and a group plan to full-time staff?
Yes. Full-time and part-time status are permitted classes. If you also offer a traditional group plan to another class, check the minimum class-size rule that applies to your headcount. For a company with fewer than 100 employees, that minimum is 10 employees in the HRA class.
Is there a cap on how much we can contribute?
No federal annual cap applies to an ICHRA. You still want an amount that matches your budget and, if you later become an applicable large employer, an amount that has been tested for affordability.
Will this help us claim the Small Business Health Care Tax Credit?
Generally no. HealthCare.gov states that enrolling in SHOP coverage is generally the way to qualify for that credit. An ICHRA is a different structure. See SHOP and the tax credit.