ICHRA Myths Busted: Separating Facts from Misconceptions

What is an ICHRA?

An Individual Coverage Health Reimbursement Arrangement (ICHRA) is a type of employer-funded benefit. Instead of picking a group health plan, employers set a monthly allowance. Employees use that money to buy their own individual health insurance and get reimbursed tax-free.

ICHRAs were introduced in 2019 to give employers a more flexible way to offer health benefits, especially for distributed teams or companies looking for cost control.

Top 10 ICHRA Myths (and the Facts Behind Them)

Myth 1: ICHRAs replace health insurance.

Fact: ICHRAs are not insurance; they’re a way to reimburse employees for it. An employee with an ICHRA must enroll in an individual ACA-compliant health plan, which they choose for themselves. The ICHRA simply covers costs.

Myth 2: ICHRAs are only for small businesses.

Fact: Employers of any size can offer an ICHRA. Unlike QSEHRAs (Qualified Small Employer Health Reimbursement Arrangement) which are limited to small employers, ICHRAs work for startups, midsize businesses, and even large enterprises. They can also meet the ACA employer mandate if designed correctly.

Myth 3: ICHRAs are too complex to administer.

Fact: With the right platform or partner, ICHRA setup is manageable—even easier than managing a group plan.

Employers define classes, set allowances, and issue required notices. From there, administration can be automated through purpose-built tools. Learn more in our dedicated section below.

Myth 4: Employees lose coverage if they leave the company.

Fact: Employees keep their plan—it’s their insurance. When someone leaves, the employer contributions stop, but the employee can keep the same plan by paying the full premium themselves.

Myth 5: Employees can use ICHRA funds however they want.

Fact: Reimbursements must follow IRS rules. ICHRA funds can only be used for qualified medical expenses (like premiums, copays, prescriptions) and only if the employee has eligible individual coverage.

Myth 6: ICHRA rules are too rigid to be useful.

Fact: ICHRA rules offer real flexibility—for both employers and employees. Employers can offer different allowances by class (full-time, part-time, remote, etc.), and employees can pick any qualifying plan that fits their needs and budget.

Myth 7: ICHRAs disqualify employees from good coverage.

Fact: Employees can shop the full individual market, including off-exchange plans with strong networks.

ICHRA gives employees access to a broad range of plans, and in many states, reinsurance programs make individual plans price-competitive with group coverage. All qualifying individual plans cover essential health benefits. 

Myth 8: Accepting an ICHRA means employees lose ACA subsidies—even if it’s unaffordable.

Fact: Employees can opt out and still get premium tax credits—if the ICHRA is considered unaffordable under IRS guidelines.

If it’s affordable, they can’t take subsidies. If it’s not, they can decline and use the marketplace like anyone else.

Myth 9: ICHRA funds can’t cover dependents.

Fact: Employers can choose to allow ICHRA funds to cover spouse and dependent premiums. This must be spelled out in the plan design, but it’s a common and fully legal option.

Myth 10: If an employee’s coverage lapses, they can still use ICHRA.

Fact: Employees must have active, qualifying coverage to be eligible. If coverage lapses, they can’t receive reimbursements until they re-enroll. This is a key compliance safeguard.

ICHRA Myths vs. Facts (Quick Table)

ICHRA Implementation & Administration Myths

Many employers assume ICHRA means more work. Here’s what’s actually involved.

Myth: Setting up an ICHRA is time-consuming.

Fact: Most ICHRAs can be launched in a few business days. Define your employee classes, set monthly allowances, and issue the required notices. Platforms like Thatch automate the rest.

Myth: HR teams will have to manage every detail.

Fact: ICHRA platforms handle enrollment verification, reimbursement tracking, and employee support—freeing up HR.

Myth: Compliance is too onerous.

Fact: With built-in processes for managing documentation requirements, nondiscrimination rules, and IRS guidance, ICHRA platforms help ensure compliance from day one.

Tax Treatment of ICHRA Contributions and Reimbursements

ICHRAs are designed to be tax-advantaged for both employers and employees.

For Employers:

• ICHRA reimbursements are tax-deductible business expenses

• No payroll taxes apply to reimbursements

For Employees:

• Reimbursements are excluded from income and payroll tax

• Funds can be used for qualified medical expenses, including premiums, copays, and prescriptions

• To remain tax-free, employees must submit proof of eligible coverage and expenses

Important: An ICHRA can only reimburse medical care expenses allowed under Section 213(d) of the Internal Revenue Code. Employers must document reimbursements and follow substantiation rules to preserve tax-free treatment.

What About ACA Subsidies?

One of the most common misconceptions about ICHRA is how it interacts with ACA tax credits.

• If the ICHRA is affordable, employees cannot claim ACA premium tax credits—even if they decline the ICHRA.

• If the ICHRA is unaffordable, employees can opt out and apply for subsidies through the ACA marketplace.

• Affordability is based on IRS rules and varies by location and household income.

Employers offering ICHRAs should assess affordability annually—especially if they have 50+ full-time employees and are subject to the ACA employer mandate.

Don’t Let ICHRA Myths Hold You Back

Most concerns about ICHRA come from confusion, not reality.

With the right setup and support:

• Employers get predictable costs and tax advantages

• Employees gain more choice and control over their health plans

• Compliance becomes easier—not harder

Want to explore whether ICHRA is right for your team? Start here: How to Set Up an ICHRA Or review: ICHRA Eligible Expenses