An Individual Coverage Health Reimbursement Arrangement (ICHRA) lets employers reimburse employees tax-free for individual health insurance premiums and medical expenses instead of offering a group plan.

How does an employee use ICHRA money?

The employee buys an individual market plan (on or off the marketplace) and is reimbursed up to the employer's allowance. Accepting ICHRA generally disqualifies the employee from premium tax credits.

Can employees choose APTC instead of ICHRA?

Employees can opt out of an ICHRA offer if the offer is considered unaffordable. If they take ICHRA, they cannot also receive APTC for the same coverage.

Defined-contribution health benefits

ICHRA — Individual Coverage HRA

An ICHRA lets employers reimburse employees tax-free for individual market premiums (and medical expenses, if designed that way) instead of sponsoring a group plan. Created by 2019 regulation; in market since Jan 2020.

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What an ICHRA is

An Individual Coverage Health Reimbursement Arrangement is an employer-funded, tax-free account that reimburses employees for individual marketplace or Medicare premiums (and optionally other medical expenses). Employees keep their own plan if they leave.

No minimum or maximum contribution.
Employers can offer different amounts to 11 permitted classes of employees (FT, PT, seasonal, salaried vs hourly, geography, etc.).
Employees must have qualifying individual coverage (not short-term, not a fixed-indemnity plan).
Counts as an ALE offer of coverage for ACA employer mandate purposes if affordable.

Employer mechanics

Design plan: which classes, contribution amount per class, age bands.
Provide 90-day notice (or as soon as eligible) before plan year start.
Employees enroll in individual coverage (via SEP triggered by the ICHRA offer).
Each pay period or month, reimburse via payroll (tax-free) after substantiation.
Annual reporting on Forms 1094/1095-B or C if ALE.

Employee mechanics

You shop on HealthCare.gov / your SBE for any qualifying plan.
You cannot claim a premium tax credit for any month covered by an affordable ICHRA offer.
If the ICHRA is unaffordable, you may waive it and claim APTC instead.
Reimbursements are tax-free to you and do not show up on W-2 Box 1.

Pros & cons

Pros

Predictable budget — fixed defined contribution.
No renewal underwriting; immune to group rate hikes.
Employees pick their own network and metal tier.
Portable — employees keep the plan when they leave.
Class structure supports geographically distributed teams.

Cons

Older employees may pay more (age-banded premiums).
Disqualifies APTC for affordable offers.
Setup complexity — needs an admin platform.
Less robust in markets with thin individual carrier participation.
HSA-pairing requires ICHRA designed as premium-only.

Adoption heat map

Tiers are aggregator estimates of relative employer ICHRA density (Q4 2025 data). States with broader individual carrier participation and lower group rates trend higher.

Map legend

11 high-adoption states

21 mid

19 low

Compliance basics

Written plan document & Summary Plan Description (ERISA).
Employee notice 90 days before plan year (or upon hire mid-year).
Substantiation of individual coverage each reimbursement.
No reimbursement of short-term limited duration insurance or healthcare sharing ministries.
Affordability tested using the lowest-cost Silver in the employee's rating area for self-only coverage.

Most employers use a third-party ICHRA admin to handle notices, substantiation, payroll integration, and 1095-C reporting.

Sources

The information contained on this website is for educational purposes only. We are not responsible for missing or inaccurate information. Please consult a licensed insurance broker in your state and area for insurance advice. Please consult a CPA for tax or legal advice.