An Individual Coverage HRA lets your business reimburse employees, tax-free, for health plans they pick themselves. Fixed budget, no participation minimums, any company size. Here's how it actually works.
An ICHRA (Individual Coverage Health Reimbursement Arrangement) replaces the traditional group plan with a defined, tax-free monthly allowance per employee. Employees buy the individual plan they want, on their state's marketplace or off-exchange, and the business reimburses them up to the allowance. Reimbursements are deductible to the business and tax-free to the employee.
What makes it different: your budget is fixed by design (no renewal shock), there are no minimum participation or contribution rules, it works at any company size, and employees keep their plan if they leave. The trade-off: employees shop for their own coverage, and the allowance must be designed around the ACA affordability rules to protect everyone's subsidy position.
Decide which employee classes you'll cover (full-time, part-time, by location, and other legally defined classes) and the monthly allowance for each. Allowances can scale by age and family size. This is where the budget gets locked: the business's cost is the allowance, period.
Each employee shops the individual market in their own state, on the state's exchange (Healthcare.gov, or state-run exchanges like Georgia Access or kynect) or off-exchange, and enrolls in the plan that fits their doctors, medications, and budget. A special enrollment period opens when an ICHRA is first offered, so there's no waiting for January.
Employees substantiate their premium and get reimbursed up to their allowance, handled cleanly through an ICHRA administrator. Reimbursements are deductible to the business and never hit the employee's W-2. Unused allowance simply stays with the business.
Distributed teams spread across states (one group plan can't follow them; individual plans can). Budget-first owners who need a fixed, predictable benefits cost. Micro businesses that can't hit group participation minimums. Businesses with heavy premium differences by location, since allowances can vary by rating area.
Teams that expect a curated plan: in competitive professional hiring markets, a well-funded group plan is still the stronger recruiting statement. Owners who mainly want coverage for themselves: entity type can exclude owners from participating (see the FAQ). Areas with thin individual markets, where employee plan options are weak.
The ACA affordability interaction: an affordable ICHRA offer replaces an employee's Marketplace subsidy; an unaffordable one can be declined so the employee keeps the subsidy. Set the allowance without checking each wage band and you can accidentally make employees worse off. This is the calculation we run before recommending any number.
Comparing structures? A traditional group plan maximizes recruiting power, a level-funded plan rewards a healthy census with refund potential, and an ICHRA maximizes budget control and flexibility. We quote all three against your actual roster. State-by-state details live on our state pages.
Individual Coverage Health Reimbursement Arrangement. It became available to employers of every size in 2020. Instead of buying one group plan, the business gives each employee a defined, tax-free monthly allowance that reimburses premiums for the individual health plan the employee picks, plus, if the employer allows, other medical expenses.
Yes, when set up properly. Reimbursements are deductible for the business and tax-free to the employee, the same tax treatment group premiums get. Employees pay their premium, submit proof, and get reimbursed, or the administrator pays the carrier directly.
Within rules, yes. ICHRA classes let you set different allowances for legally defined employee classes, like full-time versus part-time, salaried versus hourly, or by geographic rating area, and allowances may also vary by age and family size inside a class. What you cannot do is hand-pick individuals for better treatment.
If the ICHRA offer is considered affordable under ACA rules, the employee cannot take a Marketplace premium tax credit; they use the ICHRA. If it is unaffordable for that employee, they may decline it and keep their subsidy. This interaction is the single most important design detail, and it's exactly what we model before recommending an allowance amount.
It depends on how the business is taxed. C-corporation owners generally can participate. Sole proprietors, partners, and more-than-2% S-corporation shareholders generally cannot, though they often have other routes to deductible coverage, like the self-employed health insurance deduction. We sort this out case by case.
Send us a simple census, ages, ZIP codes, and wage bands, and we'll model an ICHRA against traditional group and level-funded options, including the affordability math, at zero cost to you.
Quotes are non-binding and based on the information you provide.