An Individual Coverage Health Reimbursement Arrangements (ICHRA) is a type of employer-funded health benefit plan that allows an employer to reimburse employees for qualified medical expenses, including some or all of the premiums for individual-market health insurance coverage (or Medicare, if the person is Medicare-eligible), as well as the cost of out-of-pocket medical expenses.  It is similar to a Health Reimbursement Account (HRA) but has a broader application.

First eligible in 2020, ICHRA’s grew 34% from 2024 to 2025 and 18% for small employers. 

When the ACA was first introduced, a number of private health exchanges popped up to provide a way to control employer cost by setting aside a specific amount of money per employee and allowing them to pick the policies (health, dental, vision, disability, etc.) on the exchanges.   Anything less than the amount set-aside would be paid to the employee as income, and anything more than the amount set-aside would be required to be paid by the employee, with pre-tax dollars. Back in 2013, Walgreens was one of the largest employers to put employees into the private health exchange. 

An Individual Coverage Health Reimbursement Arrangement, or ICHRA, is a type of health reimbursement account that allows employers to provide a defined contribution for employees to purchase their own health coverage. The primary advantage of an ICHRA is flexibility. Employees can select the coverage that best fits their needs, whether that is a private individual policy, a plan through the ACA Marketplace, or Medicare if they are eligible.

With a traditional group health plan, the employer chooses the coverage and typically designs the plan around the highest-need populations, such as employees managing chronic conditions or those with dependents. As a result, employers often purchase richer benefits than some employees require, which can drive up overall plan costs and increase employee contributions. This is often a point of frustration for younger or healthier employees who may feel they are paying for coverage they do not fully use.

Applicable Large Employers (ALE), which are those with at least 50 full-time employees, are subject to the ACA’s employer mandate and must offer an ICHRA benefit that’s considered affordable in order to avoid a potential penalty. An employer that is not an ALE can set a predetermined amount that will be reimbursed, knowing that their costs will not exceed this amount, regardless of annual premium increases or changes in health plan designs. Under ACA regulations, an ICHRA is considered affordable if the employee’s required contribution for the lowest-cost silver plan within their geographic area does not exceed a set percentage of their household income. Employers must calculate affordability for different classes of employees to ensure compliance with ACA requirements.

This is a complicated administrative process.

Employees would likely go to the ACA marketplace to obtain their health plans as an alternative.  However, depending on where the employee lives, there may be limited providers.  Further, they may not be eligible for the marketplace subsidy.  An employer plan may in the long run be a better plan. 

Further, an employer that offers ICHRAs must offer it on the same terms to all employees in a given class, with adjustments allowed (but not required) only based on the age of the worker and the number of dependents the worker has. Examples of employee classes are full-time workers, part-time workers, and salaried workers.

From a tax perspective, unlike the amounts set aside like Walgreens did for the private exchanges, the ICHRA is not taxable to the employee and is deductible for the employer.  Furthermore, as the ICHRA is not tied to the position, but to the person, it would not be subject to COBRA requirements, another cost savings for employers.

Overall, HR needs to plan for 2027.  Health costs are going up, likely another double-digit year. However, employers should consider all scenarios to determine if an ICHRA is something that should be in the toolkit for 2027.  HR needs to discuss this option with their benefit providers and legal counsel before implementing. 

Source:  Healthinsurance.org 6/27/25, IX Solutions 10/30/24