What is ICHRA?
ICHRA (Individual Coverage Health Reimbursement Arrangement) is a benefit that lets employers reimburse employees tax-free for individual health insurance premiums they purchase on their own. Instead of the employer choosing a group plan, employees shop the ACA marketplace and select plans that fit their individual needs—then get reimbursed by their employer.
Think of it as a defined contribution model: the employer decides how much to contribute each month (the "allowance"), and employees use that money to buy the health insurance they want. It's the employer-sponsored health benefits version of switching from a pension (defined benefit) to a 401(k) (defined contribution).
How ICHRA Works
ICHRA is simpler than it sounds. Here's the step-by-step process:
Employer Sets Allowance
The employer decides how much to contribute each month (e.g., $500/month per employee). You can vary the allowance by employee class (full-time vs. part-time, age, family size).
Employees Shop for Plans
Employees go to the ACA marketplace (Healthcare.gov in Texas) during Open Enrollment or a Special Enrollment Period and choose their own individual health insurance plan. They can compare all carriers and plan types.
Employees Pay Premiums
Employees pay for their selected health insurance plan. If the plan costs less than the employer's allowance, they keep the difference. If it costs more, they pay the extra out of pocket.
Employer Reimburses
Employees submit proof of coverage (usually an insurance card or invoice). The employer reimburses them up to the monthly allowance amount. Reimbursements are tax-free to the employee and tax-deductible for the employer.
Advantages of ICHRA
ICHRA offers significant benefits for both employers and employees, especially for small businesses:
For Employers
- ✓ Predictable costs - Set your monthly budget and stick to it
- ✓ No participation requirements - Works even if only 1-2 employees enroll
- ✓ No carrier shopping - Employees handle their own plan selection
- ✓ Less administrative burden - ICHRA administrator handles most paperwork
- ✓ Flexible allowances - Vary by employee class (full-time, part-time, age, family size)
- ✓ Works for remote teams - Employees in different states get local coverage
- ✓ No annual renewals - No need to negotiate rates or change carriers every year
- ✓ Tax deductible - Employer contributions are business expenses
For Employees
- ✓ Personal choice - Choose the plan that fits YOUR needs and doctors
- ✓ Portable coverage - Keep your plan if you leave the employer (lose the allowance, but can keep the plan)
- ✓ Premium tax credits - May qualify for additional federal subsidies based on income
- ✓ ACA protections - Pre-existing conditions covered, essential health benefits included
- ✓ Spouse not forced - Each employee chooses independently; no requirement for spouse to join
- ✓ Local networks - Get coverage for where you actually live (great for remote workers)
- ✓ Tax-free benefit - Reimbursements aren't taxable income
ICHRA vs. Traditional Group Insurance
How does ICHRA compare to traditional fully-insured group plans? Here's a side-by-side comparison:
| Factor | ICHRA | Traditional Group Plan |
|---|---|---|
| Employer Cost | Predictable (set monthly allowance) | Varies (annual rate increases of 10-20%) |
| Participation Req. | None | Typically 70-75% of eligible employees |
| Plan Choice | Employees choose their own plans | Employer chooses one plan for everyone |
| Flexibility | Very high (each employee gets what they need) | Low (one-size-fits-all) |
| Remote Workers | Works perfectly (local coverage) | Difficult (network limitations) |
| Administrative Burden | Lower (ICHRA admin platform handles it) | Higher (enrollment, changes, billing) |
| Employee Education | Required (new concept for many) | Minimal (everyone knows group insurance) |
| Carrier Relationships | Not needed | Must negotiate with carriers annually |
| Minimum Contribution | No minimum required | Usually 50% of employee-only premium |
ICHRA Eligibility & Requirements
To offer ICHRA, employers and employees must meet certain requirements:
- • Can be ANY size (even 1 employee)
- • Cannot offer both ICHRA and traditional group plan to the same class of employees
- • Must offer ICHRA to all employees in the same class (can't cherry-pick)
- • Must work with an ICHRA administration platform to handle compliance
- • Must provide written notice to employees before coverage starts
- • Must have individual health insurance coverage (ACA marketplace plans)
- • Cannot have Medicare or Medicaid as primary insurance (limited exceptions)
- • Must provide proof of coverage to receive reimbursements
- • If they want to claim premium tax credits, the ICHRA must be "unaffordable" (complex calculation)
Employers can offer different allowance amounts to different employee classes:
- • Full-time vs. part-time
- • Salaried vs. hourly
- • Seasonal vs. non-seasonal
- • Employees in different geographic locations
- • Temporary workers
- • Employees covered by collective bargaining agreements
- • Employees based on age or family size (with limitations)
Important: All employees within the same class must be offered the same allowance.
ICHRA Costs
What does ICHRA actually cost employers and employees? Let's break it down:
For Employers
Monthly Allowance
$300-700 per employee typical (you set this amount)
ICHRA Administrator Fee
$5-15 per employee per month (platform to handle reimbursements and compliance)
Setup/Consulting
Often free or minimal (we can help you set this up at no charge)
Total Monthly Cost
(Allowance × # employees) + admin fees
Example: 10 employees × $500 allowance + $10 admin fee = $5,100/month
For Employees
Health Insurance Premium
Varies widely by age, location, plan type ($200-800/month typical for individuals)
Employer Reimbursement
Up to the allowance amount (e.g., $500/month)
Out-of-Pocket Cost
Premium minus reimbursement (if premium exceeds allowance)
Example Scenarios
- • $400 premium, $500 allowance = $0 cost (employee keeps $100)
- • $500 premium, $500 allowance = $0 cost
- • $650 premium, $500 allowance = $150 cost
ICHRA and Premium Tax Credits
One unique aspect of ICHRA: employees might qualify for premium tax credits in addition to the employer's allowance—but only if the ICHRA is "unaffordable" under ACA rules. This is complex:
ICHRA Affordability Test
An ICHRA is considered "affordable" if the amount the employee would pay for the lowest-cost Silver plan (after subtracting the ICHRA allowance) is less than 9.12% of their household income (2023 threshold).
If ICHRA is affordable: Employee must use ICHRA, cannot claim premium tax credits
If ICHRA is unaffordable: Employee can decline ICHRA and claim premium tax credits instead
This is a complex calculation involving employee income, location, age, and ACA plan costs. Most ICHRA administrators provide affordability calculators.
Setting Up ICHRA
Ready to offer ICHRA to your employees? Here's the setup process:
- Decide on allowance amounts - Determine how much you'll contribute per employee per month, by employee class if desired
- Choose an ICHRA administrator - Select a platform to handle reimbursements, compliance, and employee support
- Set your effective date - Choose when the ICHRA will begin (must coordinate with ACA Open Enrollment or Special Enrollment Periods)
- Notify employees - Provide written notice at least 90 days before the plan year (or before hire for new employees)
- Educate employees - Help employees understand how to shop for plans and submit reimbursements
- Employees enroll - Employees shop for and purchase individual plans during Open Enrollment
- Reimburse employees - Verify coverage and reimburse employees monthly through payroll or separately
We Can Help You Set Up ICHRA
I work with ICHRA administrators and can guide you through the entire setup process. I'll help you determine appropriate allowance amounts, recommend administrator platforms, and educate your employees on how to choose plans.
Who Benefits Most from ICHRA?
ICHRA isn't right for every business, but it's ideal for:
- Small businesses that can't meet traditional group plan participation requirements (70-75%)
- Startups that want predictable costs and flexibility as they grow
- Remote/distributed teams where employees live in different states
- Businesses with high turnover where maintaining group enrollment is difficult
- Employers with diverse workforces where one group plan doesn't fit everyone's needs
- Companies transitioning from no benefits who want to start offering health benefits affordably
- Employers who want to avoid annual rate increases and carrier negotiations
ICHRA may NOT be the best choice if:
- Your workforce is older/sicker and would benefit from group rating
- You want maximum simplicity and employees prefer a single group plan
- Most employees would qualify for large premium tax credits (making ICHRA less attractive)
- You're willing to pay significantly more to have a traditional "benefit package"
Get Expert ICHRA Guidance
ICHRA can be an excellent solution for Texas small businesses, but it requires careful planning and employee education. I can help you:
- Determine if ICHRA is right for your business
- Calculate appropriate allowance amounts for your budget
- Understand affordability rules and compliance requirements
- Connect you with reputable ICHRA administrators
- Educate your employees on choosing ACA marketplace plans
- Help employees compare and enroll in individual plans
- Ensure smooth setup and implementation
Explore ICHRA for Your Business
Let's discuss your business size, budget, and goals. I'll help you understand whether ICHRA is a good fit and guide you through the entire setup process. Free consultation, no obligation.