Most small businesses assume health benefits mean one thing: a group health plan — pick a carrier, negotiate rates, and manage renewals every year. The Individual Coverage Health Reimbursement Arrangement (ICHRA) is a fundamentally different approach: instead of buying coverage for your employees, you give each one a fixed monthly budget to buy their own.
The IRS, Department of Labor, and HHS finalized ICHRA rules in June 2019, effective January 1, 2020. Several years in, most small business owners still haven't heard of it — which means they're either offering no health benefits at all, or managing a group plan that costs more than it should.
What ICHRA Is
An ICHRA is an employer-funded account employees use to pay individual health insurance premiums. The employer sets a monthly reimbursement amount per employee class — any amount, with no IRS-imposed cap. Employees use those dollars to buy ACA-compliant individual or family coverage from the marketplace or an off-exchange carrier.
How the money moves:
- The employer funds the ICHRA (employer dollars only — employees cannot contribute)
- The employee enrolls in an individual health plan of their choice
- The employee pays their premium, then submits proof of coverage and a receipt
- The employer reimburses up to the set monthly amount
- The reimbursement is excluded from the employee's gross income — no federal income tax, no payroll taxes
For the employer, ICHRA contributions are deductible as a business expense, just like traditional group health premiums.
Who Can Offer ICHRA
ICHRA is available to employers of any size — from a two-person LLC to a company with hundreds of employees. This is the key structural difference from the Qualified Small Employer HRA (QSEHRA), which is limited to businesses with fewer than 50 full-time equivalent employees and carries IRS-set annual contribution caps.
Employee eligibility requirements:
- Employees must be enrolled in ACA-compliant individual health insurance to participate. Short-term limited duration plans and health-sharing arrangements don't qualify.
- An employee cannot simultaneously receive ICHRA benefits and traditional group health coverage from the same employer (within the same class).
- Employers may offer ICHRA to some employee classes and group coverage to others — for example, offering ICHRA to part-time workers and a group plan to full-time salaried employees. The key rule: you cannot offer both arrangements to employees in the same class.
The IRS also allows different reimbursement amounts for different employee classes, so a multi-state employer can offer different monthly amounts to employees in different geographic rating areas.
What about self-employed owners? Sole proprietors without employees cannot use ICHRA for themselves — it's an employer-to-employee benefit. An S-corp owner who is a W-2 employee of their own corporation may potentially participate in the company's ICHRA, but the rules around owner-employee treatment are nuanced. Consult a tax advisor for your specific ownership structure.
The Payroll Tax Advantage
This is where ICHRA beats most business owners' intuition. When an employer pays ICHRA reimbursements, those amounts are not wages — they're excluded from FICA (Social Security and Medicare taxes), FUTA, and state unemployment taxes. The employer also deducts the full reimbursement as a business expense.
Employees pay zero income or payroll tax on what they receive.
Compare this to simply giving employees a health insurance stipend (extra wages): that stipend is fully subject to income and payroll taxes on both sides. A $500/month stipend costs the employer $500 plus employer-side FICA (~$38), and the employee takes home around $350 after taxes — not $500. An ICHRA reimbursement of the same $500 costs the employer $500 (minus the deduction benefit) and the employee receives the full value tax-free.
The Premium Tax Credit Interaction
Employees who receive an "affordable" ICHRA generally cannot also claim the premium tax credit (PTC) for marketplace coverage on their individual tax return.
The IRS tests affordability by comparing the employee's net monthly premium for the lowest-cost self-only silver plan — after applying the ICHRA contribution — to a defined percentage of household income. If the employee's remaining cost falls below that threshold, the ICHRA is "affordable," and the PTC is unavailable.
The practical implication: lower-income employees who qualify for significant marketplace subsidies may net more value by opting out of the ICHRA and claiming the PTC instead. The IRS allows any employee to opt out of an ICHRA — they simply notify the employer and enroll in marketplace coverage with PTC eligibility intact. Factor this into your communication with employees, particularly part-time or entry-level staff whose income puts them in strong PTC territory.
How to Set Up an ICHRA
Choose a plan year start date. Most employers use January 1 to align with marketplace open enrollment (typically November 1 through mid-January for ACA plans).
Set reimbursement amounts by employee class. No IRS minimum or maximum. Common approaches: match the employer share of what a comparable group plan would cost, or set a flat monthly amount based on budget.
Draft the plan document. A formal written plan document specifying eligibility, reimbursement amounts, plan year dates, and substantiation requirements is required by law. HRA administration platforms typically generate a compliant document for a small annual fee.
Give employees 90 days' notice. Before the ICHRA plan year starts, employees must receive written notice of the ICHRA terms — including the monthly reimbursement amount, the plan year, how to submit claims, and how the ICHRA interacts with the premium tax credit. For newly eligible employees, the 90-day clock starts from their first day of eligibility.
Employees enroll in individual coverage. Direct employees to healthcare.gov or their state's marketplace for ACA plans. ICHRA also works with qualifying off-exchange (non-marketplace) individual plans.
Process claims. Employees submit proof of ACA-compliant coverage enrollment — typically a coverage declaration page or premium payment confirmation — along with expense receipts. Most small businesses use a third-party HRA administrator to handle substantiation compliance and maintain documentation.
ICHRA vs. Group Plan: When Does It Make Sense?
ICHRA tends to win when:
- Employees are geographically spread out. Each employee accesses plans in their own local market rather than a single employer-negotiated network.
- You want fixed, predictable monthly costs. Your ICHRA obligation is exactly the reimbursement amount you set — no mid-year carrier rate adjustments.
- Your team has varied health needs. No single group plan fits everyone; ICHRA lets each employee pick the plan that works for them.
- You currently offer no benefits at all. ICHRA provides a structured, tax-advantaged path to offering something without group plan administrative burden.
Group plans may still make more sense when your workforce is concentrated in one area (favorable group rates), when employees strongly prefer managed coverage, or when uniform national network access is a priority.
If you're evaluating whether your business cash flow can support adding ICHRA — or whether a line of credit could help smooth the transition — explore your business funding options before committing to a monthly reimbursement amount you haven't budgeted for.
Related reading: Group Health Insurance for Small Businesses · Self-Employed Health Insurance Deduction · Health Insurance for Self-Employed Owners