ICHRA: A Small Business Owner's Guide

An ICHRA (Individual Coverage Health Reimbursement Arrangement) is a federally approved benefit that lets a small business reimburse employees tax-free for individual health insurance instead of buying a group plan. The employer sets a monthly budget, employees choose their own ACA plan, and reimbursements flow back tax-free for both sides.

ICHRAs were created by a 2019 federal rule from the IRS, the Department of Labor, and HHS. They are growing fast because they give small employers predictable costs and give employees real plan choice. This guide explains how an ICHRA works, who it fits, and how to set one up.

Last updated: June 2026.

What Is an ICHRA?

An ICHRA is a written employer benefit that reimburses employees, tax-free, for individual health insurance premiums and (optionally) other qualified medical expenses. Instead of the employer picking one group plan for everyone, each employee buys their own plan on the ACA Marketplace or directly from a carrier, and the employer pays them back up to a set monthly amount.

The rule was finalized by the IRS, DOL, and HHS in 2019 and took effect in January 2020. Official guidance lives at IRS Notice 2019-45 and on healthcare.gov.

How Does an ICHRA Work for the Employer?

1. Decide the budget. Pick a monthly reimbursement amount. You can set one number for everyone or vary it by IRS-approved employee classes (full-time, part-time, salaried, hourly, seasonal, geographic rating area, etc.).
2. Write the plan document. An ICHRA needs a written plan document and a Summary Plan Description, similar to other ERISA benefits. Most employers use an ICHRA administrator to handle this.
3. Notify employees. The IRS requires a written notice at least 90 days before the plan year starts (or before a new hire's effective date for mid-year launches).
4. Reimburse on a schedule. Employees submit proof of coverage and (if applicable) receipts. The employer reimburses up to the monthly cap. Unused dollars stay with the employer.

The employer's cost is capped at the monthly contribution times the number of enrolled employees. There are no renewal rate hikes from a carrier because the employer is not buying a group policy.

How Does an ICHRA Work for the Employee?

1. The employee shops for an individual health plan on the ACA Marketplace or directly from a carrier.
2. The employee picks the plan that fits their family, doctors, and budget.
3. The employee submits proof of coverage to the ICHRA administrator each month (this is usually automated).
4. The employer reimburses the employee tax-free, either by payroll or direct deposit, up to the monthly amount.

If the employee's chosen plan costs more than the ICHRA amount, the employee pays the difference, often through pre-tax payroll deduction. If the plan costs less, the employee uses the remaining ICHRA dollars on qualified medical expenses if the employer allows it.

Who Is an ICHRA a Good Fit For?

• Small businesses tired of group renewal hikes. A fixed contribution removes the annual surprise.
• Employers with remote or multi-state teams. A group plan struggles when employees live in different states. Individual plans solve that automatically.
• Companies with diverse workforces. A young single employee and a family of five rarely want the same plan. ICHRAs let each person pick what fits.
• New businesses that cannot meet group participation rules. Most group carriers require a minimum participation percentage. ICHRAs have no minimum.
• Employers who want to offer a benefit but not manage one. The administrator handles compliance, eligibility, and reimbursements.

An ICHRA is usually not the right fit if the employer wants to keep a single, employer-chosen plan with employer-negotiated network discounts, or if most employees would qualify for large ACA subsidies that they would lose by accepting the ICHRA offer.

ICHRA vs. Traditional Group Plan: The Short Comparison

Does an ICHRA Satisfy the ACA Employer Mandate?

Yes. The IRS treats an ICHRA offer as an offer of coverage for purposes of the Applicable Large Employer (ALE) mandate. If the ICHRA contribution is large enough to make the lowest-cost self-only Silver plan in the employee's area "affordable" under IRS rules, the employer satisfies the mandate. The exact affordability threshold is updated each year by the IRS, so check current-year guidance from the IRS Employer Shared Responsibility FAQ before setting your contribution.

Can Employees Still Get a Subsidy?

If the ICHRA is considered affordable for the employee, accepting it disqualifies them from a premium tax credit on the Marketplace for that plan year. If the ICHRA is not affordable for that employee, they can opt out and claim a subsidy instead. This is one of the reasons an experienced advisor should help you set the contribution level, especially if you have lower-income employees who would qualify for large subsidies.

Steps to Set Up an ICHRA

1. Decide why you want one. Cost predictability, multi-state team, or simply offering a benefit for the first time.
2. Define employee classes and budgets. Same amount for everyone, or vary by class.
3. Choose an ICHRA administrator. They will draft the plan documents, handle the 90-day notice, verify enrollments, and process reimbursements.
4. Notify employees in writing at least 90 days out. Provide the IRS-required model notice.
5. Help employees enroll. A licensed agent (this is what we do) can walk each employee through individual plan options during the special enrollment period that the ICHRA offer creates.
6. Set up payroll integration. Reimburse tax-free on a regular cycle.

QSEHRA vs. ICHRA: Which Should a Small Business Pick?

QSEHRA (Qualified Small Employer HRA) is a similar tax-free reimbursement benefit, but only for employers with fewer than 50 employees, and the IRS caps the annual contribution. ICHRA has no employer-size limit and no contribution cap. Most small employers compare both and choose ICHRA for flexibility, unless the lower QSEHRA contribution cap fits their budget. For current QSEHRA contribution limits, see the IRS Revenue Procedure for the relevant year (the IRS updates these limits annually).

Frequently Asked Questions About ICHRAs

What is an ICHRA in plain English?

It is a formal benefit that lets an employer give employees tax-free money to buy their own individual health insurance instead of providing a group plan.

Does an ICHRA satisfy the ACA employer mandate?

Yes, if the contribution is large enough to make a benchmark individual plan affordable for the employee under IRS rules.

Can a business of any size offer an ICHRA?

Yes. ICHRAs are available to employers of all sizes and have no minimum participation requirement.

Can employees use their ACA subsidy with an ICHRA?

No. If the ICHRA offer is affordable and the employee accepts it, they cannot also claim a premium tax credit for the same coverage.

Are ICHRA reimbursements taxable?

No. Reimbursements for qualifying individual health insurance premiums and eligible medical expenses are tax-free to the employee and tax-deductible for the employer.

Can I give different amounts to different employees?

You can vary the amount by IRS-defined employee classes (such as full-time vs. part-time or by geographic rating area). You cannot single out individuals within the same class.

How much does it cost a small business to run an ICHRA?

Administration platforms typically charge a small monthly per-employee fee. The main cost is the monthly reimbursement budget the employer chooses.

Want help deciding which option fits your business? I'm a licensed independent agent based in Omaha. I can walk you and your team through ICHRAs, QSEHRAs, level-funded, and traditional group plans, then quote the ones that fit. Free consultation, no obligation, no pressure.

Book a free consultation with Nick Depke or call (402) 680-6171.