What is an ICHRA? Individual Coverage HRA Explained

ICHRA stands for Individual Coverage Health Reimbursement Arrangement. It’s an alternative to traditional group health plans that offers cost control and more flexibility for employers, and more choice for employees to choose their own health plan and take ownership of their health needs. Instead of the employer choosing one or two group plan options for everyone, employees purchase the individual plan that works for them and the employer reimburses them for some or all of this cost. It can also be used to reimburse out-of-pocket medical expenses too. We’ll dive into more on that in the sections below.

Interested in ICHRA for your company? Learn more about ICHRA with Benafica.

How ICHRA Works

The process behind ICHRA is relatively straightforward:

1. Employers choose reimbursement limits, qualified expenses, and define employee eligibility.
2. Employees enroll in an individual health insurance plan that is suitable for their health care needs.
3. Employees submit reimbursement claims to their administrator, similar to an expense report.
4. Reimbursement is issued directly to employees for valid claims from the HRA administrator.

With ICHRA, steps 2-4 happen on our platform, BEN360.

Who Can Offer an ICHRA?

An Individual Coverage HRA can be used by employers of any size. Whether you have a team of 5 or 5,000, you can structure an ICHRA to fit your organization’s budget, location, and tailor it to your workforce demographics. It’s a good option for small employers who struggle to meet participation minimums or can’t sustain traditional group coverage, as well as large organizations looking for something that scales well as they grow. You need at least one W-2 employee; it doesn’t work for 1099 contractors or self-employed individuals.

Pros of ICHRA for Employers

There’s a reason why more employers are taking a serious look at ICHRA. Traditional group health plans have become increasingly expensive, and a single high-claims year can blow up your healthcare budget, especially for small and mid-sized businesses. ICHRA essentially allows you to reduce the risk involved in your employee benefits strategy in the following ways:

1. Add cost control and predictability. With a group plan, high claims can often come back as a painful renewal increase tied to your group’s experience. With ICHRA’s defined contribution model, you decide a monthly allowance and that becomes your ceiling, so you have better control over whether those contributions change every year, instead of being forced to absorb every bad claims year or jump in medical trends. Over multiple years, this makes your employee healthcare costs more predictable and easier to plan for.
2. No minimum or maximum employer size limit. ICHRA works well for businesses of any size. There’s no minimum amount of employees to participate, and there’s no maximum (like with QSEHRA).
3. More flexibility in plan design. ICHRA allows you to vary contributions by 11 employee classes (full-time vs. part-time, salaried vs. hourly, or geographic location). It can also be used to replace your group plan entirely, or alongside a group plan. For example, you can offer a group plan to full-time employees, and an ICHRA to part-time employees.
4. Easier to scale across states or distributed teams. Group plans often need multiple different carriers and plan designs just to make sure people in different states have usable coverage. With ICHRA, employees are choosing from individual plans available in their geographic location, making it simpler for employers to manage and scale as they add new locations.
5. Contributions are tax-deductible. Reimbursements are tax‑free to employees (when they have qualifying individual coverage) and generally tax‑deductible to the employer, similar to traditional group health.
6. Reduced administrative burden. When you team up with a solid ICHRA administrator (like Benafica), you can take many group plan administration tasks off your plate. We offer full-service, year-round ICHRA administration for employers, meaning you get help with  open enrollment and plan selection, ongoing administration, onboarding new hires throughout the year, handling terminations and offboarding, and mid-year plan changes tied to qualifying life events.

Pros of ICHRA for Employees

Your employees all have different health needs and family situations, so a single “rich” group plan isn’t always the best fit or most efficient option for everyone. With ICHRA, employees get more say in choosing their health coverage and can prioritize what makes sense for them, depending on your overall employee benefits strategy.

1. More plan choices, greater employee satisfaction. With ICHRA, employees can choose from dozens of ACA-compliant plans in their own local individual market—choosing the network, deductible, and premium level that matches their needs. Younger, healthier employees can choose lower-premium bronze plans and save money, while older employees or those managing chronic or serious conditions can select richer silver or gold-level options, and employers can know their allowance still helps support the coverage that makes sense for each individual.
2. Tax-free advantages. ICHRA reimbursements for qualified premiums (and sometimes qualified medical expenses, if the employer allows) are tax-free to employees. Any amount over-and-above the employer’s contribution amount can be deducted pre-tax from the employee’s paycheck.
3. ICHRA is portable. With ICHRA, since employees are purchasing individual plans, they own the plan and and can keep the same plan if they switch jobs, move, or have life changes. Only the reimbursement might change. This makes employees less vulnerable to one employer’s benefit decisions, and doctor and medication disruptions.
4. Can cover more employees. Part-time, seasonal or variable-hour employees who might not qualify for traditional group coverage can be covered with different amounts and eligibility rules under ICHRA classes. This is a major benefit of ICHRA, which allows employers to give more people access to some level of employer-funded benefit than an all-or-nothing group plan.

How to Choose ICHRA Allowance Amounts

Choosing an ICHRA allowance starts with real numbers, not guesses. We help you model contribution strategies by pulling the actual  premiums of plans available to each employee in your company, looking at bronze, silver, and gold plans in their local rating area. That gives you a clear view of what coverage really costs by age, location, and metal tier.

From there, we help you test different strategies like flat-dollar amounts, age-banded contributions, or class-based strategies, so you can decide what percentage of those premiums you want to target. For example, with a flat-dollar strategy, you can offer $500/mo to full-time employees and $250/mo to part-time employees. With an age-banded strategy, you can offer to cover 100% of a silver premium or 75% of a gold premium, and everyone will get slightly different amounts based on their local individual market. For Applicable Large Employers (ALEs), we also run affordability testing against IRS rules to help you avoid penalties, making sure your strategy is compliant.

Related Article: A Deeper Dive into ICHRA Contribution Strategies

Frequently Asked Questions About ICHRA

Additional Resources

ICHRA vs. Group Plans: The Major Differences (CHART)
ICHRA vs. QSEHRA: Which Is Better For Your Business?
2026 ACA “Affordability Rate” for Employer-Sponsored Healthcare
How to Start an ICHRA in the Middle of the Year
9 Frequently Asked Questions About Switching to ICHRA