Can I Offer an ICHRA Instead of a Traditional Group Health Plan to Reimburse Employees for Their Own Insurance?

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Traditional group health insurance is not the only way employers can provide health benefits to their employees. An Individual Coverage Health Reimbursement Arrangement (ICHRA) allows businesses to reimburse employees for qualifying individual health insurance premiums and medical expenses while controlling benefit costs. For employers evaluating their health insurance options, understanding the eligibility requirements, tax advantages, and compliance obligations can help determine whether this approach makes financial sense.

What Is an ICHRA and How Does It Work?

An ICHRA is an employer health reimbursement arrangement that allows businesses to reimburse employees tax-free for individual health insurance premiums and eligible medical expenses.

Introduced under federal regulations finalized on June 20, 2019, and available beginning January 1, 2020, ICHRAs offer an alternative to traditional employer-sponsored group coverage.

Employers establish a reimbursement allowance, while employees purchase qualifying health insurance through the Health Insurance Marketplace or directly from an insurer.

Unlike traditional group insurance, employers do not select a single insurance policy for participating employees. Instead, employees choose coverage that meets their needs, subject to applicable eligibility requirements.

This approach allows businesses to establish predictable benefit budgets while giving employees greater flexibility in selecting their health insurance coverage.

Which Employers Can Offer an ICHRA and Who Qualifies as an Eligible Employee

Businesses of any size can offer an ICHRA, including employers with fewer than 50 employees and organizations subject to the Affordable Care Act’s employer mandate.

Employers may offer ICHRAs to eligible employee classes, including:

• Full-time and part-time employees
• Salaried and hourly employees
• Seasonal employees
• Employees working in different geographic locations
• Employees covered by certain collective bargaining agreements

Employers cannot offer employees a choice between an ICHRA and traditional group coverage within the same employee class.

When both arrangements are offered to different classes, minimum class-size requirements may apply.

For example, employers with fewer than 100 employees generally must include at least 10 employees in certain ICHRA classes when applying these rules.

Employees must maintain qualifying individual coverage or eligible Medicare coverage to participate.

How ICHRA Reimbursements Work and What They Can Cover

An ICHRA operates as a health reimbursement account funded exclusively by the employer. Businesses establish reimbursement allowances without a federal annual contribution limit.

Depending on the plan’s design, eligible reimbursements may include:

• Individual health insurance premiums
• Medicare premiums for qualifying participants
• Prescription medications
• Medical deductibles and copayments
• Dental and vision expenses

Employees must provide documentation establishing qualifying coverage and substantiating reimbursable expenses.

The IRS requires verification of individual health insurance or eligible Medicare enrollment when employees participate and when reimbursement claims are submitted. Acceptable documentation may include coverage attestations, insurer statements, receipts, and medical bills.

Reimbursements are generally excluded from employees’ taxable income when plan requirements are satisfied.

Employers may also permit unused reimbursement allowances to carry forward into subsequent plan years.

How an ICHRA Affects Employee Premium Tax Credit Eligibility

ICHRA participation can affect employees’ eligibility for premium tax credits available through the Health Insurance Marketplace.

Employees generally cannot receive Marketplace premium tax credits while participating in an ICHRA.

If an ICHRA is considered affordable, employees cannot claim premium tax credits even if they decline the arrangement.

For 2026, the IRS established an affordability threshold of 9.96% of household income. ICHRA affordability generally considers the employee’s cost for the lowest-priced qualifying Silver plan after subtracting the employer’s reimbursement allowance.

If an ICHRA is unaffordable, employees may decline coverage under the arrangement and potentially qualify for premium tax credits.

Employers should communicate these rules clearly because accepting an ICHRA can eliminate subsidies employees might otherwise receive through the Marketplace.

ICHRA vs QSEHRA: How to Decide Which One Fits Your Business

Both ICHRAs and Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) provide alternatives to traditional employer funded health insurance.

However, their eligibility requirements and contribution limits differ significantly.

QSEHRAs are available only to eligible employers with fewer than 50 full-time equivalent employees that do not offer group health insurance.

For 2026, QSEHRA reimbursements are capped at $6,450 annually for individual coverage and $13,100 for family coverage.

ICHRAs have no federal contribution ceiling and accommodate businesses of any size. They also provide greater flexibility in establishing employee classes and reimbursement allowances.

Unlike ICHRAs, unaffordable QSEHRAs may allow employees to receive reduced Marketplace premium tax credits.

Employers should compare workforce size, benefit budgets, administrative requirements, and employee subsidy eligibility before choosing between these arrangements.

Additional Considerations for Employers in 2026

Employers considering an ICHRA should evaluate more than the potential reduction in traditional group insurance costs. Establishing the arrangement requires a written plan, employee notices, qualifying coverage verification, and procedures for processing reimbursements.

Employers generally must distribute ICHRA notices at least 90 days before the plan year begins, subject to exceptions for newly eligible employees and newly established plans.

Businesses should also evaluate how health benefit decisions fit within their broader tax planning strategies. Companies claiming R&D Tax Credits, for example, should maintain accurate compensation and benefit records and distinguish qualified research expenses from other employment costs.

Meanwhile, businesses incorporating Artificial Intelligence into payroll and benefits administration should verify that their systems properly handle employee eligibility, reimbursement documentation, and sensitive healthcare information.

An ICHRA can provide an effective alternative to group health insurance, but its financial advantages depend on careful plan design, regulatory compliance, and employee circumstances.

How BT Can Help

For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Bennett Thrasher’s Employee Benefit Plan Audit Team, or call us at 770.396.2200.

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