ICHRA stands for individual coverage health reimbursement arrangement. It is a type of employer-funded health benefit that lets employees buy their own individual health insurance and get reimbursed tax-free by their employer.
If you have heard the term but are not sure what it actually involves, this post walks through how ICHRA works step by step: what the employer does, what the employee does, what it covers, and what rules apply.
How ICHRA works in three steps
The mechanics are straightforward.
Step 1: The employer sets a monthly allowance. You decide how much to contribute per employee per month. There is no federal minimum or maximum. You can set the allowance based on your budget, your location, your industry, or whatever makes sense for your team. You can also set different amounts for different groups of employees using employee classes (more on that below).
Step 2: Employees buy their own health insurance. Each employee shops for an individual health plan that fits their needs. They can purchase coverage on the ACA marketplace (Healthcare.gov or their state exchange), off-exchange directly from an insurer, or through a broker. The plan must qualify as individual health insurance coverage or Medicare. under the ACA. Medicare also qualifies.
Step 3: The employer reimburses the employee. Once the employee has coverage, they submit proof of their premium or other qualified medical expenses. The employer (or the ICHRA administrator) verifies the expense and reimburses the employee up to their monthly allowance. The reimbursement is tax-free for the employee and not subject to payroll taxes for the employer.
That is the full cycle. The employer funds the benefit. The employee chooses the coverage. The reimbursement flows tax-free.
What can ICHRA funds be used for?
ICHRA funds can reimburse two categories of expenses:
Individual health insurance premiums. This is the primary use. Employees use their allowance to pay for individual health insurance coverage, whether purchased through the marketplace, off-exchange, or through Medicare.
Qualified medical expenses. If the employer allows it, employees can also use ICHRA funds for out-of-pocket medical costs defined under IRS Section 213(d). This includes doctor visits, prescriptions, dental care, vision care, mental health services, and other eligible expenses. Employers can choose to limit reimbursements to premiums only or open it up to include medical expenses. The decision is yours.
One important restriction: employees cannot use ICHRA funds for short-term health plans, health sharing ministries, or coverage through a spouse's or parent's employer plan. The coverage must be individual market insurance or Medicare.
How employee classes work
One of the most useful features of ICHRA is the ability to divide your workforce into classes and offer different allowances to each.
The IRS defines 11 eligible employee classes. The most commonly used are:
Full-time employees
Part-time employees
Salaried employees
Hourly employees
Employees in a specific geographic location
Seasonal employees
You can also combine classes. For example, you could create a class for "full-time salaried employees in California" by combining three of the available categories.
Within each class, every employee must receive the same base offer. But you can adjust allowances within a class based on two factors:
Age (consistent with the ACA’s 3:1 limit on age-rating of individual market premiums, older employees can receive up to three times more than the youngest employees in the same class).
Family size (employees with dependents can receive a higher allowance than single employees).
This flexibility matters for employers with distributed teams. A company with employees in both New York City and rural Ohio can set location-based allowances that reflect actual plan costs in each market, rather than picking a single number that overserves one group and underserves the other.
If ICHRA is your only health benefit (no group plan), there are no minimum class size requirements. If you offer both a group plan and an ICHRA to different classes, minimum class sizes apply depending on your total headcount.
What makes ICHRA different from group health insurance?
With a group plan, the employer selects the insurance. With an ICHRA, the employee selects the insurance. That single difference changes everything about how the benefit works in practice.
Cost predictability. Group insurance premiums are locked in for one plan year, then you get a renewal. Renewals can increase 5%, 10%, 15%, or more, and you have limited control over the number. With ICHRA, you set the contribution. Your cost only changes if you decide to change it.
Employee choice. A group plan offers one or two options. An ICHRA gives employees access to the full individual market: dozens of plans across multiple carriers, with different network structures, deductible levels, and premium ranges. Each employee can pick the plan that fits their doctors, prescriptions, and budget.
Portability. Group coverage ends when employment ends. Individual coverage purchased through an ICHRA belongs to the employee. Because the employee purchases their own individual plan, they can keep that coverage if they leave the company. They simply stop receiving the employer's reimbursement. This reduces the disruption of job transitions for employees.
No participation minimums. Group plans often require 60% to 70% of eligible employees to enroll. If too many employees have coverage elsewhere (through a spouse, for example), you may not meet the threshold to offer a group plan at all. ICHRA has no participation requirements. Even if only a few employees use it, the benefit is valid.
Administration. Group plan administration involves carrier negotiations, renewal management, and plan design decisions. ICHRA administration involves setting allowances, processing reimbursements, and maintaining compliance documentation. Most employers use an ICHRA administrator like Thatch to handle the operational side. Employees are responsible for shopping and enrolling in their own coverage, which can come with a learning curve for those who are new to the individual market. If you have questions about this process, we’re here to help.
How ICHRA works for large employers (50+ employees)
If your company has 50 or more full-time equivalent employees, you are classified as an applicable large employer (ALE) under the ACA. ALEs are required to offer affordable health coverage that meets minimum essential coverage and minimum value standards to at least 95% of their full-time employees. This is commonly called the employer mandate.
An ICHRA can satisfy the employer mandate, but the allowance has to be sufficient. Here is how affordability works for ICHRA in 2026:
The benchmark: The IRS measures ICHRA affordability based on the cost of the lowest-cost silver plan available to the employee on the ACA marketplace, minus the employer's ICHRA contribution. If the employee's remaining share of that premium does not exceed 9.96% of their household income, the ICHRA is considered affordable.
The problem: Most employers do not know their employees' household income. To address this, the IRS offers three safe harbors that let you estimate affordability using data you do have:
W-2 safe harbor: Based on the employee's Box 1 wages.
Rate of pay safe harbor: Based on the employee's hourly rate (multiplied by 130 hours per month) or monthly salary.
Federal poverty level (FPL) safe harbor: Based on the federal poverty level for a household of one. For 2026, coverage is affordable under this safe harbor if the employee's monthly share does not exceed $129.89 for mainland U.S. employees.
The FPL safe harbor is the simplest to apply across a workforce. Many ALEs start there and adjust if needed.
What happens if the ICHRA is not affordable? Employees can decline the ICHRA and purchase marketplace coverage with premium tax credits instead. The employer may face a penalty if a full-time employee receives marketplace subsidies because the ICHRA offer was not affordable. For employers with fewer than 50 FTEs, the employer mandate does not apply, and there are no affordability requirements.
This section covers the basics, but affordability calculations can get nuanced depending on your workforce composition and geography. Many ALEs work with an administrator who handles affordability testing.
Who is eligible for ICHRA?
ICHRA covers W-2 employees and their eligible dependents. A few eligibility rules are worth knowing:
Business owners: C-corporation owners can participate. S-corporation owners who hold more than 2% of the company cannot. Partners in a partnership are also ineligible. However, if a partner's spouse is a bona fide W-2 employee of the business (and not themselves a partner or owner), the partner may access the ICHRA as a covered dependent of the spouse.
Employees with other group coverage: ICHRA funds cannot be used to reimburse premiums for coverage under a spouse's or parent's employer-sponsored group plan. Employees who want to use ICHRA must be enrolled in their own qualifying individual coverage or Medicare.
1099 contractors: ICHRA is only for W-2 employees. Independent contractors are not eligible.
Common questions
Can I offer ICHRA and a group plan at the same time? Yes, but not to the same class of employees. You could offer a group plan to salaried employees and an ICHRA to hourly employees, for example. You cannot give employees within the same class a choice between the two.
Do unused ICHRA funds roll over? That depends on how you set up your plan. Employers can allow unused funds to roll over to the next plan year or set them to expire. Either way, unused funds stay with the employer, not the employee.
Can employees use ICHRA with marketplace subsidies? Not simultaneously. If an employee accepts an affordable ICHRA, they are not eligible for premium tax credits on the marketplace. If the ICHRA offer is not affordable (or the employee works for an employer with fewer than 50 FTEs and opts out), they may be able to access subsidies.
How long does it take to set up an ICHRA? With a platform like Thatch, setup typically takes days, not weeks. The employer connects payroll, sets allowances, and employees receive enrollment support to choose a plan.
The bottom line
ICHRA is a health benefit that puts the employer in control of costs and the employee in control of coverage. The employer decides how much to spend. The employee decides how to use it. Reimbursements are tax-free. There are no contribution caps. And the benefit works for companies of any size.
It is not the right fit for every situation. Employees who prefer not to shop for their own insurance may need more onboarding support. Large employers need to account for ACA affordability rules. The employee experience can vary depending on how the benefit is administered.
But for employers who want predictable costs, flexible plan design, and a benefit their employees actually get to personalize, ICHRA is one of the most flexible options available today.
