ICHRA

A stipend for individual coverage

An ICHRA, short for individual coverage health reimbursement arrangement, lets employers of any size give workers a set monthly allowance to buy their own health insurance. Instead of choosing one group plan for everyone, the employer sets the budget and each employee picks a plan that fits their needs.

Employees must enroll in individual health coverage, on or off the Marketplace, to use the ICHRA.

How it works

• The employer sets a monthly allowance, which can vary by employee class, such as full-time, part-time, salaried or by location.
• Allowances can also increase with age and family size, within limits.
• Employees buy their own individual plan and submit proof of coverage.
• The employer reimburses premiums and, if it chooses, other qualified medical expenses.
• Being newly offered an ICHRA gives employees a special enrollment period to buy a plan.

The affordability test

If the ICHRA is considered affordable under IRS rules, employees cannot also receive a Marketplace premium tax credit. If it is not affordable, an employee can decline the ICHRA and claim the credit instead. Larger employers also need to meet coverage rules to avoid penalties. Plan the allowance with these rules in mind.

Example

Chris owns a roofing company with 14 employees, spread across two counties. Group plan renewals have been unpredictable, and his crew wants different things: some want low premiums, others want broad networks for their kids.

He sets up an ICHRA with a fixed monthly allowance for full-time staff and a smaller amount for part-time staff. Each worker shops for a 2027 plan. A young crew member chooses a bronze HSA-eligible plan. A foreman with a family picks a gold plan and pays the difference above the allowance. Chris knows exactly what he will spend each month.

Pros

• Predictable costs for the employer.
• Employees choose plans that fit their families.
• Works for any business size, including those with workers in several states.

Cons

• Employees must navigate individual plan options, which is where a broker helps.
• Affordability rules require careful setup.
• Individual market networks in some areas lean toward HMOs and EPOs.

Tax treatment

ICHRA reimbursements are generally excluded from employees' taxable income, and employer contributions are generally a business deduction. Owners of sole proprietorships, partnerships and most S corporations usually cannot reimburse themselves through an ICHRA as employees.

Marketplace vs private plans

Employees can use an ICHRA for Marketplace or off-exchange individual plans that meet ACA requirements. Non-ACA private plans and short-term plans do not qualify.

Our guides on ICHRA employer stipends and small business owner health insurance explain the setup. To explore an ICHRA for your team, request a quote.

General information, not tax advice — confirm with your CPA based on your specific entity structure.