An Individual Coverage Health Reimbursement Arrangement (ICHRA) is a tax-free health benefit that lets employers of any size reimburse employees for individual health insurance premiums and qualified medical expenses.

Unlike traditional group plans, ICHRA has no reimbursement caps, allows varying amounts by employee class (age, family size, role), and gives employees freedom to choose their own ACA-compliant plan on or off the marketplace.

Fully tax-deductible for employers and tax-free for employees. Launched in 2020, it’s the flexible, cost-controlled alternative to group health insurance.

How ICHRA Funding Works

Employees pay their individual health insurance premium directly (often via payroll deduction or auto-pay).

They submit proof of coverage + premium payment to the employer (or TPA).

Employer reimburses 100% tax-free through payroll (as a Section 105 HRA benefit) or separate check.

• Employee: reimbursement is tax-free; reduces taxable income.
• Employer: full reimbursement is 100% tax-deductible as a business expense.

No payroll taxes (FICA) for either party on the reimbursed amount.

How to Set Up an Individual Coverage HRA (ICHRA) in 2025

1. Confirm Eligibility
   • Any employer size (no minimum/maximum).
   • Cannot offer traditional group health plan to same class of employees.
2. Design Classes of Employees Legal classes: full-time, part-time, seasonal, union/non-union, salaried/hourly, geographic location, etc. (11 IRS-approved classes).
3. Set Reimbursement Amounts
   • Vary by class and family size (no dollar limit).
4. Draft Legal Documents
   • ICHRA Plan Document
   • Section 105 Notice
   • Employee Notice (90 days before plan year)
5. Provide Required Notices
   • 90-day advance notice to eligible employees
   • Annual notice each year thereafter
6. Integrate with Individual Market
   • Employees must enroll in individual coverage (on- or off-exchange)
   • Coverage must be MEC (minimum essential coverage)
7. Set Up Reimbursement Process
   • Choose: payroll add-on (tax-free) or third-party administrator
   • Require proof of coverage + receipts
8. Handle Affordability & ACA Compliance
   • Offer minimum value for affordability safe harbor (if applicable)
   • Coordinate with premium tax credits