ICHRA Health Insurance: How It Works for Employers and Workers

By Michael Sprague, Licensed Health Insurance Agent · Reviewed by Heather Sprague, Licensed Health Insurance Agent ICHRA health insurance lets an employer give workers tax-free money to buy their own individual plans. Instead of choosing one group plan for everyone, the business sets a monthly allowance. Then each employee picks the plan that fits them. This guide explains how an ICHRA works, who can use one and how it affects marketplace tax credits. For quick answers, see our ICHRA and enrollment FAQs. Questions about your own plan? Call 888-730-6031 for free help.

What Is ICHRA Health Insurance?

ICHRA stands for Individual Coverage Health Reimbursement Arrangement. Federal rules created it in 2020. It's not a health plan by itself. Instead, it's an account the employer funds to pay for health insurance the employee buys. Here's the basic flow. First, the employer sets an allowance for each class of worker. Next, the employee buys an individual plan. Finally, the employer reimburses premiums, and sometimes other medical costs, up to that amount. The money is generally tax-free to the employee.

Who Can Offer and Use an ICHRA?

Any employer can offer an ICHRA, from a two-person shop to a large company. The business can set different allowances for different classes, such as full-time, part-time, seasonal or salaried workers. However, everyone in the same class must get the same offer, with limited changes for age and family size. To use the money, an employee must enroll in individual health coverage. That can be an ACA marketplace plan or an individual plan bought off the marketplace. Short-term plans don't count. In addition, the employer can't offer the same class both a group plan and an ICHRA.

How Does ICHRA Health Insurance Affect Tax Credits?

This is the part that trips people up. If the ICHRA is considered affordable, you can't get a marketplace premium tax credit. If it's not affordable, you can turn down the ICHRA and claim the tax credit instead. Affordability is based on the cost of the lowest-cost silver plan for self-only coverage in your area, minus the monthly ICHRA amount. If what's left is above a set share of your household income, the ICHRA is unaffordable. Because the math depends on your area and income, it's worth checking carefully. Our guide to health insurance subsidies explains how the credit works.

When Can You Enroll With an ICHRA?

Being newly offered an ICHRA is a qualifying life event. So you can enroll in a marketplace plan outside open enrollment. You generally have 60 days to pick a plan. In most cases, the employer must give notice at least 90 days before the plan year starts, which gives you time to shop. Read more about these windows in our guide to the special enrollment period.

Pros and Cons of ICHRA Health Insurance

For employees

• You choose your own plan, network and doctors.
• Your plan can stay with you if you change jobs.
• However, you have to shop and compare plans yourself each year.
• Also, if the allowance is small, your out-of-pocket share may be higher.

For employers

• Costs are predictable because the business sets a fixed allowance.
• There's no group plan to manage or renew.
• On the other hand, the business must follow notice, class and substantiation rules.
• Many employers use an administrator to handle the paperwork.

How to Choose a Plan With Your ICHRA

Start with your allowance. Then compare plans whose premiums fit inside it, or close to it. Next, check networks and drug lists, because the cheapest premium isn't always the best value. Finally, look at deductibles and out-of-pocket limits. If you're self-employed on the side or have other income, our guide to self-employed health insurance covers more options. Want a second set of eyes? Call 888-730-6031 and a licensed agent will compare plans with you at no cost.

ICHRA vs QSEHRA: What's the Difference?

Both arrangements reimburse individual health insurance. However, a QSEHRA is only for small employers with fewer than 50 full-time equivalent employees, and it has a yearly IRS cap. An ICHRA has no size limit and no federal cap, and it allows different classes of workers. A small business can usually pick whichever fits its goals.

Common ICHRA Mistakes to Avoid

Most ICHRA problems come from timing or paperwork. Watch for these:

• Missing the 60-day window. Your special enrollment period starts when the ICHRA is offered. If you wait too long, you may have to wait for open enrollment.
• Taking a tax credit you can't use. If the ICHRA is affordable and you accept it, you can't also claim a premium tax credit. Doing both can mean repaying the credit at tax time.
• Choosing a plan that doesn't qualify. Short-term plans, health sharing programs and dental-only plans don't meet the requirement.
• Skipping proof of coverage. Employers must confirm you have individual coverage each year. Send the attestation and premium receipts on time.
• Forgetting family members. If your allowance covers dependents, each one needs individual coverage too.

What Records Do You Need for Reimbursement?

Every ICHRA requires proof before it pays. In most cases, you'll send a premium invoice or a bank record that shows the payment. Some employers pay the insurer directly instead. Either way, keep a simple folder with:

• Your plan's enrollment confirmation
• Monthly premium statements or receipts
• The ICHRA notice from your employer
• Any annual attestation forms you signed

These records also help at tax time. If you're unsure what your employer needs, ask the plan administrator first. For help picking a plan that fits the allowance, call 888-730-6031. It's free, and there's no obligation.

ICHRA vs Other Small Business Options

An ICHRA is one of several ways to offer benefits. Compare it in our ICHRA vs QSEHRA vs group health insurance guide, or start with our overview of small business health insurance.

ICHRA Health Insurance: FAQ

Can I use an ICHRA with a short-term plan?

No. An ICHRA requires individual health coverage, such as an ACA plan. Short-term plans don't qualify.

Is ICHRA money taxable?

Generally no, as long as you have qualifying individual coverage. However, if you also take a tax credit, the rules change, so check before you enroll.

Can my spouse and kids be covered?

Yes, if the employer's ICHRA includes family members and they're enrolled in individual coverage.

Next Steps for ICHRA Health Insurance

ICHRA health insurance gives you choice, but it also asks you to shop well. Confirm your allowance, check affordability and compare plans in your area. Then pick the plan that fits your care and budget. Need help? Call 888-730-6031, Monday through Friday, 9 a.m. to 6 p.m. Eastern, or request a free quote.

Sources

1. HealthCare.gov: Individual Coverage HRA
2. CMS: Health Reimbursement Arrangements
3. IRS: Health Reimbursement Arrangements

Related Guides

• Self-employed health insurance
• Health insurance without an employer plan
• Small business health insurance in Pompano Beach
• Health insurance subsidies

Vivna Insurance is a licensed independent agency, not a government website. Our help is free; we are paid by the insurance companies we work with. Coverage options, deadlines and costs vary by plan and state.