ICHRA

Intro to ICHRA

An Individual Coverage Health Reimbursement Arrangement (ICHRA) is a modern employee benefit that allows employers to reimburse employees for individual health insurance premiums and qualified medical expenses. Introduced in 2020, this flexible alternative to traditional group health plans gives employees greater choice while helping employers control healthcare costs.

Definition of ICHRA

ICHRA stands for Individual Coverage Health Reimbursement Arrangement, a type of health reimbursement arrangement that enables employers of any size to provide tax-advantaged reimbursements for individual health insurance coverage and medical expenses. Unlike traditional group health insurance, ICHRA allows employers to set a defined contribution amount that employees can use to purchase their own individual health insurance policies on the marketplace or through private insurers. Employers determine the reimbursement allowance, which can vary by employee class (such as full-time, part-time, or geographic location), and employees submit proof of coverage and expenses for reimbursement. The reimbursements are tax-free for employees and tax-deductible for employers when properly administered. It is important to note that regulations and tax implications may vary by jurisdiction, and employers should consult with benefits advisors or legal counsel to ensure compliance.

Importance of ICHRA in HR

ICHRA represents a significant shift in how companies approach employee healthcare benefits. It provides flexibility that traditional group plans cannot match, particularly for organizations with distributed workforces or diverse employee needs. For employers, ICHRA offers predictable budgeting since contributions are fixed rather than subject to annual premium increases from insurance carriers. This arrangement also reduces administrative burden by eliminating the need to negotiate group rates or manage plan selections. Employees benefit from personalized choice, selecting plans that best fit their individual or family healthcare needs rather than accepting a one-size-fits-all group policy. This is particularly valuable for companies utilizing EOR services to manage global teams, as ICHRA can accommodate varied healthcare markets. Additionally, ICHRA supports compliance with healthcare regulations while giving smaller employers a viable path to offer competitive health benefits.

Examples of ICHRA

Example 1: Small Business Implementation
A 15-person software company previously unable to afford group health insurance implements ICHRA. The employer sets a monthly allowance of $500 per employee for health coverage. Employees purchase individual plans suited to their needs—some choose high-deductible plans with HSAs, while others select comprehensive coverage. Each month, employees submit proof of coverage and receive tax-free reimbursement.

Example 2: Multi-State Employer
A retail chain operating across multiple states uses ICHRA to address varying healthcare markets and regulations. The company sets different reimbursement amounts based on geographic location to account for regional cost differences. Employees in high-cost areas receive larger allowances, while those in lower-cost regions receive adjusted amounts, ensuring equitable access to quality coverage.

Example 3: Hybrid Workforce
A consulting firm with both full-time employees and contractors establishes separate ICHRA classes. Full-time employees receive $600 monthly, while part-time workers receive $300. This approach, managed through employer of record solutions, ensures compliant benefit differentiation while offering health coverage options to all worker categories.

How HRMS platforms like Asanify support ICHRA

HRMS platforms simplify ICHRA administration through integrated benefits management modules. These systems automate reimbursement workflows, allowing employees to easily submit proof of insurance coverage and medical expenses through self-service portals. The platform validates submissions against ICHRA regulations and processes approved reimbursements through payroll integration. Document management features securely store insurance verification and expense receipts for compliance auditing. HRMS solutions also provide reporting dashboards that track utilization rates, budget allocation, and employee participation, helping HR teams optimize their ICHRA offerings. For organizations expanding internationally using employer of record services in the USA or other countries, these platforms can manage different benefit structures across jurisdictions while maintaining consistent administration. Automated compliance alerts ensure that ICHRA programs remain aligned with changing regulations, reducing legal risk.

FAQs about ICHRA

Who is eligible to offer ICHRA to employees?

Any employer, regardless of size, can offer ICHRA to their employees. Unlike some health benefit arrangements that have employee count requirements, ICHRA is available to businesses with one employee or thousands. Employers can offer ICHRA to different classes of employees with varying allowance amounts, provided they follow non-discrimination rules.

Can employees use ICHRA funds for any health insurance plan?

Employees must purchase individual health insurance coverage that meets minimum essential coverage requirements to receive ICHRA reimbursements. This typically includes marketplace plans, Medicare, or individual policies purchased directly from insurers. The coverage must be in the employee’s name, and they must provide proof of coverage to receive reimbursement.

How does ICHRA differ from HSA or FSA?

ICHRA is funded entirely by employers and specifically reimburses individual health insurance premiums and medical expenses. HSAs (Health Savings Accounts) are employee-owned accounts that can receive both employer and employee contributions, requiring enrollment in high-deductible health plans. FSAs (Flexible Spending Accounts) are typically employee-funded with optional employer contributions and have use-it-or-lose-it provisions. Unlike HSAs, ICHRA funds cannot be rolled over or owned by employees.

What expenses can be reimbursed through ICHRA?

ICHRA can reimburse individual health insurance premiums and qualified medical expenses as defined by IRS Section 213(d). This includes doctor visits, prescription medications, dental and vision care, and other eligible healthcare costs. Employers can choose to reimburse only premiums, only medical expenses, or both, depending on their plan design.

Are ICHRA reimbursements taxable to employees?

No, ICHRA reimbursements are tax-free to employees when they maintain minimum essential coverage and the arrangement is properly administered. Employers also receive tax deductions for ICHRA contributions as a business expense. However, if an employee fails to maintain qualifying coverage, reimbursements may become taxable income. Employers should consult tax advisors to ensure proper compliance.