Individual Coverage Health Reimbursement Arrangements (ICHRAs) are employer-funded health plans that allow tax-favored reimbursement of individual health insurance premiums, including Medicare, and other qualifying medical expenses. Unlike traditional group health plans, ICHRAs shift plan selection to employees while allowing employers to maintain cost control and reduce administrative complexity. Employees purchase their own individual health coverage or enroll in Medicare, and employers reimburse eligible expenses up to a defined amount.

When Do ICHRAs Make Sense?

ICHRA adoption has grown as employers look for alternatives to traditional group health plans. It can be especially attractive for employers struggling with participation requirements, high turnover, or geographically dispersed workforces. Employers that have experienced rising premiums due to unfavorable claims experience may also find value in transitioning to individual coverage, where rates are community-based rather than employer-specific.

ICHRAs provide a way to extend benefits to part-time employees or other populations that are not typically eligible for group health coverage. An ICHRA can also serve as a strategy to meet employer mandate requirements under §4980H for applicable large employers.

How Does Funding and Reimbursement Work?

ICHRAs provide employers with significant flexibility in determining contribution amounts and eligible expenses. There are no minimum or maximum funding requirements, allowing employers to align contributions with budget goals or affordability requirements under the employer mandate.

Reimbursements can be structured to cover insurance premiums, other qualifying medical expenses, or both. However, all reimbursements must comply with IRS substantiation rules, requiring appropriate documentation before payment is made. Employers may also choose whether unused amounts carry over from year to year or are forfeited at the end of the plan year.

For ICHRAs providing premium reimbursement, which they typically do, employers can require employees to pay premiums upfront and then request reimbursement, but many employers streamline the process through direct payment arrangements or reimbursement tools.

What Are the Core Design & Compliance Requirements?

To receive reimbursements through an ICHRA, employees and any covered dependents must be enrolled in individual health insurance or Medicare. Enrollment must be substantiated both annually and each time expenses are submitted for reimbursement.

Employers must offer ICHRAs consistently within defined classes of employees, such as full-time, part-time, salaried, hourly, seasonal or employees working in a specific geographic location. It is not possible to offer an ICHRA solely to those who are Medicare-eligible. Employers cannot offer employees a choice between a traditional group health plan and an ICHRA within the same class.

ICHRAs require advance notice to eligible employees, generally at least 90 days before the start of the plan year. This notice is intended to help employees understand how the ICHRA works and how it may impact eligibility for subsidies through the public Marketplace.

Are There ACA Employer Mandate or Reporting Considerations?

For applicable large employers, ICHRAs can be used to satisfy §4980H offer of coverage requirements. An ICHRA qualifies as an offer of minimum essential coverage, and if structured correctly, can also meet affordability and minimum value standards.

Affordability is determined based on the cost of the lowest-cost silver plan available to the employee, reduced by the employer’s ICHRA contribution. If the remaining cost to the employee falls within IRS affordability thresholds, the coverage is considered affordable. Safe harbor methods based on the federal poverty level, rate of pay, or Form W-2 wages may be used to confirm affordability.

Applicable large employers offering ICHRAs must report offer of coverage information on Form 1095-Cs. In addition, since an ICHRA is self-funded minimum essential coverage, any size employer offering an ICHRA must report ICHRA enrollment information on Form 1095-Bs or Form 1095-Cs (Part III).

How do ICHRAs Interact with Premium Tax Credits?

The availability of an ICHRA affects an employee’s eligibility for premium tax credits (PTCs) through the Marketplace. If an ICHRA offering is affordable, the employee (and any eligible dependents) will not qualify for a PTC, even if they decline the ICHRA. If the ICHRA offering is not affordable, the employee may choose between enrolling in the ICHRA or receiving a PTC but cannot receive both.

Are There Any Additional Compliance Considerations?

ERISA: ICHRAs are group health plans subject to ERISA, meaning they must comply with plan documentation and reporting requirements. However, individual policies purchased by employees can remain outside ERISA if the employer does not endorse specific carriers and meets certain safe harbor requirements.

COBRA: COBRA continuation coverage applies to ICHRAs, although it is often not a practical option due to cost. Employers must still offer COBRA continuation for the ICHRA following qualifying events, allowing participants to continue accessing reimbursements if they elect coverage and pay the COBRA premium.

HSA Eligibility: ICHRA design can also impact health savings account (HSA) eligibility. Plans that reimburse only premiums generally preserve HSA eligibility, while broader reimbursement designs may disqualify participants from contributing to an HSA unless the ICHRA is designed to be post-deductible or available solely to reimburse excepted benefits (e.g., dental or vision expenses).

PCORI: ICHRAs are subject to various nondiscrimination rules and other compliance requirements, including PCORI fees, Medicare Secondary Payer rules, and age discrimination considerations. Employers must ensure that plan design does not disproportionately favor highly compensated employees or otherwise create compliance risks.

Summary

ICHRAs offer a flexible alternative to traditional group health plans by allowing employers to define contributions while giving employees greater control over their health coverage choices. When properly designed and communicated, they can provide cost predictability for employers and meaningful choice for employees. However, successful implementation requires careful attention to eligibility rules, affordability standards, and ongoing compliance obligations.