What Is an ICHRA? How It Works, Pros & Cons

ICHRAs have become one of the most discussed alternatives to traditional group health insurance since their federal authorization in 2020. But understanding what an ICHRA actually is, how the reimbursement process works and whether it’s genuinely good for employees requires more than a surface-level overview. This article will cover all of that.

An ICHRA (Individual Coverage Health Reimbursement Arrangement) is an employer-funded benefit that reimburses employees tax-free for individual health insurance premiums and eligible out-of-pocket medical expenses rather than providing a traditional group health plan. This allows employees to choose their own qualified health plan on the individual market. That means they pay their premiums directly and submit proof of payment to receive tax-free reimbursement up to the allowance amount.

ICHRAs were established under a 2019 federal rule and became available to employers of all sizes beginning January 1, 2020.

The employer establishes a set monthly, tax-free allowance for employees to purchase their own individual, ACA compliant health insurance. Employees then select their plan on the individual market. Employees pay for their premiums and other medical costs up front then submit proof of expense to the employer for tax-free reimbursement up to the allowance.

This may sound great, but have you thought about COBRA? Administration? ACA premium tax credits? These are some of the items employers should consider before diving headfirst into an ICHRA and later deciding it’s not worth the hassle.

There are no minimum contribution requirements with an ICHRA, meaning employers are not required to cover a set percentage of premiums like they would with traditional group health plans. This gives employers significant flexibility in how much they choose to contribute, but it can also lead to wide variation in affordability for employees. In some cases, employer contributions may be modest, leaving employees responsible for a larger share of their coverage costs. Without a baseline standard, the level of financial support can differ greatly from one employer to another, making it harder for employees to predict or compare the value of the benefit.

Flexibility by employee status allows employers to vary ICHRA allowances across different employee populations based on defined classes such as full-time, part-time, seasonal, or geographic location. This approach enables employers to tailor contributions in a way that reflects the needs and characteristics of their workforce, rather than applying a one-size-fits-all model. By aligning contributions with factors like employment status or regional cost differences, employers can design a more strategic and responsive health benefit offering.

Tax efficiency is a key advantage of an ICHRA, as employer contributions and employee reimbursements are both tax-free at the federal level. This means employers can provide meaningful financial support for health coverage without increasing taxable income and employees receive those funds without owing federal income or payroll taxes. The result is a more efficient use of healthcare dollars, allowing both parties to maximize the value of the benefit.

Plan choice is a major benefit for employees, as they can select any individual health plan that best fits their needs. Instead of being limited to a single group plan chosen by the employer, employees have the freedom to consider factors like preferred doctors, specific coverage needs, prescription drug formularies and budget. This level of choice allows individuals and families to find a plan that aligns more closely with their personal healthcare priorities.

Benefits are portable, since employees own their individual health plan rather than being tied to an employer-sponsored group policy. If employment ends, they can keep the same plan without needing to switch coverage or deal with gaps in care. While the employer’s contributions stop at separation, the ability to maintain continuous coverage provides stability and control over their healthcare choices.

In our experience, we have found the below to be areas of concern that employers have had regarding an ICHRA.

Although an ICHRA may simplify some aspects of administering health benefits, it also comes with its complications. Employers will often have to hire a third-party administrator (TPA) to manage day-to-day administration. If an employer decides to administer themselves, ICHRAs require tracking of reimbursements, paying reimbursements, verifying employee coverage, handling denied reimbursement requests and appeals, recordkeeping and storing documenting and complying with other legal requirements. As a result, many employers decide to use a TPA, adding an extra cost.

If an ICHRA is considered “affordable,” employees don’t have the option to receive ICHRA reimbursements or opt out and take advantage of the tax credits. This means that if the employee is offered an affordable ICHRA they will not be eligible to receive ACA tax credits.

If an ICHRA is not considered “affordable,” employees can waive their ICHRA benefit and collect their premium tax credit. However, if you are considered an Applicable Large Employer, you are required under the ACA to offer an affordable allowance to satisfy the employer mandate.

If you are an employer with 20 or more employees, you are required under COBRA to offer continuation coverage to employees and their dependents when they lose coverage as a result of a qualifying event. This requirement includes ICHRAs.

In addition to COBRA, ICHRAs are subject to strict legal requirements. This includes ERISA and ACA guidelines. This can create additional compliance challenges.

In our experience, some employers may end up spending more than they thought they would save. In addition, there may be frustration with how invoices from TPAs are paid. Some employers don’t like paying upon the invoice instead of paying for the whole year up front and being done. Some other employers may also not like only showing the invoice without proof that the employee paid first.

Employees must pay first and wait for reimbursement. This can cause a cash flow challenge for hourly or lower-wage workers.

When an ICHRA is considered affordable under ACA rules, it prevents an employee from receiving premium tax credits on the Marketplace, even if they choose not to enroll in the ICHRA. Affordability is based on whether the employee’s share of the premium, after applying the employer’s contribution, falls below a set percentage of their household income. If it does, the coverage is treated as affordable and the employee becomes ineligible for subsidies. This can have a meaningful financial impact, since employees who might have qualified for significant tax credits lose access to that support simply because the employer offered an affordable ICHRA.

Annual re-shopping can be a real burden for employees, as they must review their options and re-enroll in an individual plan each year. Unlike traditional group coverage that often renews automatically, the individual market requires active decision-making during open enrollment. Employees need to compare premiums, provider networks, drug formularies and out-of-pocket costs, all of which can change from year to year. This process can be time-consuming and confusing, especially for those who are not familiar with how to evaluate plan details and it increases the risk of choosing a plan that does not fully meet their needs.

It is now the burden of the employee to manage their plan each year, which means that renewal season will likely result in a loss of productivity and morale.

The above issues should be taken into consideration before you make the big commitment to switch from traditional group health insurance to an ICHRA.

Benecon has decades of experience with ICHRA. For more details, contact our team.