What Is ICHRA and Is It Right for Your Business?

The 30-Second Summary

Employers offering health coverage to their employees are tasked with selecting a group health plan to offer to all eligible employees.  An ICHRA, however, allows the employer to simply allot a monthly tax-free dollar amount or premium percentage to each employee with which to shop for their own individual coverage. Think of it as switching from a company pension to a 401(k), but for health insurance.

Large-employer adoption of ICHRAs grew 34% between 2024 and 2025, and it’s easy to see why: predictable costs, no participation minimums, and coverage that works for a remote or spread-out team.

What Exactly Is an ICHRA?

An Individual Coverage Health Reimbursement Arrangement (ICHRA) is a formal IRS-approved benefit which allows employers to reimburse employees tax-free for individual health insurance premiums and qualified medical expenses. Created by federal regulations in 2019, ICHRAs are available to businesses of any size.

The basic mechanics of an ICHRA:

• The employer sets a monthly dollar allowance or percentage for each employee class (e.g., full-time workers receive $400/month, part-time workers receive $200/month)

• Employees enroll in their own individual health plan through the ACA marketplace, directly from a carrier, or through Medicare

• Employees submit proof of coverage and premium payments to a Third-Party Administrator (TPA)

• The TPA verifies all data submitted and either reimburses the employee or pays the carrier directly

• The allowance is not counted as wages. Neither you nor your employees pay Social Security or Medicare taxes on the allowance, so ICHRAs provide the same tax advantage as do traditional group health plans

ICHRA vs. Traditional Group Plan

Which businesses are ICHRAs best suited for?

ICHRA works best for businesses that find traditional group insurance too limiting, expensive, or administratively burdensome. You’re likely a strong fit if your company looks like any of the following:

• Remote or multi-state workforce

Group health plans often have narrow provider networks. An employee in Iowa on a New York-based group plan may have little to no access to in-network providers. An ICHRA allows each employee to purchase a local plan. which more closely suits their individual needs.

• High-turnover industries (retail, hospitality, construction)
  • When employees leave the company, they simply keep their individual plan and lose the employer contribution. No COBRA headaches, no coverage gaps.

• Small businesses and startups that can’t hit participation thresholds

Most group carriers require 50%+ of eligible employees to enroll. ICHRAs have zero participation minimums, making it them a great first benefit for growing companies.

• Businesses with mixed workforces. If you employ a mix of salaried, hourly, and seasonal workers, an ICHRA allows you to offer different allowance amounts to different groups. Keep a generous plan for your core team and use ICHRA for part-time or seasonal staff.

Bottom line: If you’ve struggled to find a group plan that works for everyone or you’re watching premiums climb every year ICHRA is worth a serious look.

When ICHRA Isn’t the Optimal Choice?

ICHRA isn’t the right fit for every business. Some situations where a traditional group health plan may be of better service:

• Low-wage workers in subsidy-eligible income ranges

Employees earning between 100% and 400% of the federal poverty level can qualify for significant tax credits on the ACA marketplace. An “affordable” ICHRA disqualifies these employees from those subsidies. If your ICHRA allowance is $200/month but the ACA subsidy would have been $400/month, your employees will be worse off.

• S-Corp owners

If you own more than 2% of an S-Corp, you generally can’t participate in an ICHRA tax-free. The reimbursements become taxable income. If you want to be on the same plan as your team, ICHRA usually isn’t the answer.

• Businesses in states with thin insurance markets

In states such as Vermont, Wyoming, or West Virginia, individual market premiums are extremely high (think $1,000+/month for a benchmark silver plan). In those markets, group coverage often offers better value and broader networks.

• Families with high coverage needs

Due to an IRS rule known as the “family glitch,” if an ICHRA is considered affordable for the employee alone, the whole family loses eligibility for marketplace subsidies even if adding the family to individual coverage is very expensive.

Quick check: If most of your employees are lower-wage workers who might qualify for marketplace subsidies, run the numbers carefully before moving to ICHRA.

The Benefits of ICHRA

Predictable Costs –  No More Claims Anxiety
In a traditional group plan, one bad year (e.g., an employee diagnosed with cancer, or an inpatient surgery) can spike everyone’s premiums by 20% or 30% at renewal. With an ICHRA, your cost remains at exactly the allowance you set. Your employees’ individual premiums may fluctuate based on the state’s overall insurance market, but your business’s contribution stays the same as long as it meets the ACA’s affordability standards.

Budget Flexibility
You decide how much to offer, and you can offer different amounts to different employee classes. There is no minimum required contribution.
A startup might begin by offering small allowances and increase them as the business grows.

Employees Can Choose Health Plans That Fit Them
Under a group health plan, eligible employees are usually all offered the same two or three choices. With an ICHRA, a 25-year-old can pick a high-deductible Bronze plan to pair with an HSA, while a 55-year-old managing a chronic condition can choose a Gold plan with specialist copays. Survey data shows 94% of employees report being equally satisfied or more satisfied after switching to ICHRA.

Medicare Compatible
If you have employees on Medicare, you can use an ICHRA to reimburse them tax free for their Medicare premiums and other eligible medical expenses. An ICHRA can reimburse premiums paid for Medicare Part A, Part B, Part C (Medicare Advantage), and Part D (prescription drug coverage) premiums. In some cases, even Medigap qualifies for premium reimbursement.

It Works Better for Remote Teams
If you have employees spread across multiple states, ICHRA is often the only health benefit strategy that works well for everyone. Each employee buys a plan in their own market, with a network that includes their own local doctors and hospitals.

It Can Free Up Budget for Wages
Some employers have redirected the savings from high-premium group plans into higher base wages. One company reduced healthcare costs by 40% after switching to ICHRA and put those savings directly into employee compensation.

The Tradeoffs to Know

More Responsibility Falls on Employees
Shopping for individual health insurance can be confusing, especially for employees who’ve always had a plan handed to them. You’ll need a good TPA partner who can educate your team, help them compare plans, and verify that their doctors are in-network before they enroll.

ACA Affordability Rules Apply (For Larger Employers)
If you have 50 or more full-time equivalent employees, your ICHRA must be “affordable” under ACA rules to avoid penalties. For 2026, that means the employee’s share of the lowest-cost silver plan in their area can’t exceed $129.89/month (under the Federal Poverty Level safe harbor). This is more flexible than in prior years. The affordability threshold has increased nearly a full percentage point for 2026, giving employers more breathing room.

Geography Matters
ICHRA works best in states where individual market premiums are reasonable. In states like New Hampshire ($401/month benchmark silver plan) or Maryland ($414/month), employers can offer a modest allowance and still meet ACA affordability standards. In Vermont ($1,299/month) or Wyoming ($1,090/month), employers would need to contribute around $1,000/month just to remain compliant, at which point a traditional group plan may be less expensive.

Compliance Requires Attention
An ICHRA is classified as a group health plan under ERISA. This creates the need for a formal written plan document, annual non-discrimination testing, COBRA compliance, and possibly Form 5500 filings if you have more than 100 participants. A qualified TPA handles most of this, but employers need to be aware.

Next Steps

If ICHRA sounds like it could be a fit for your team, here’s where to start:

• Check individual market premiums in your employees’ states of residence as your ICHRA viability depends heavily on local rates

• Review your workforce composition and identify which employee classes might benefit most from a defined-contribution approach

• Speak with a TPA or benefits advisor who specializes in ICHRA, as they can model the costs, handle compliance, and support your employees through plan selection

ICHRA is not a one-size-fits-all solution but for the right business, it’s one of the most flexible, cost-effective health benefit strategies available today.