How to Evaluate and Implement an ICHRA for Employer Clients

An Individual Coverage HRA (ICHRA) is an employer-funded arrangement under IRC §106(d) that reimburses employees tax-free for individual health insurance premiums and qualified medical expenses — replacing or supplementing a traditional group health plan. The IRS and DOL finalized ICHRA rules in June 2019 (84 FR 28888, effective January 1, 2020). Unlike traditional group health, the employer sets a fixed monthly allowance; employees buy their own ACA-compliant individual market coverage and submit premiums for reimbursement. Any size employer can offer an ICHRA, and employers can offer it to some employee classes while maintaining traditional group health for others. For insurance brokers, ICHRA is not simply an alternative product — it is a structurally different approach to employer health benefits that changes the broker's role, the compliance obligations, and the premium tax credit interaction for every employee in the ICHRA class.

Prerequisites

• Confirmation of whether the employer is an applicable large employer (ALE) under IRC §4980H — ALE status determines whether the ICHRA must satisfy ACA affordability standards to avoid employer shared responsibility penalties
• The employer's current employee roster broken out by class: full-time, part-time, seasonal, CBA-covered, salaried, and hourly — ICHRA class design requires this data before allowances can be set
• Geographic data: states and counties where employees live and work — individual market premium variability across rating areas directly affects affordability calculations and allowance adequacy
• The employer's cost target and any existing group health plan termination date — if transitioning from group health, the plan's termination date must align with the ICHRA effective date
• Working knowledge of the individual market in each state where employees reside: ACA marketplace availability, silver plan benchmark premiums, and off-exchange carrier options

Step 1: Determine Whether ICHRA Is the Right Structure

ICHRA works best in specific employer profiles. Evaluate these before recommending it.

Strong ICHRA candidates:

• Employers with geographically dispersed employees across multiple rating areas — individual market premiums vary significantly by county, and ICHRA gives each employee access to plans priced for their actual market rather than a group rate blended across all locations
• Employers with a mix of full-time and part-time workers who want to offer a benefit to both classes without the cost and administrative burden of a group plan for part-timers
• Small employers under 50 FTEs who want a tax-advantaged health benefit without group underwriting complexity — for a full comparison of all coverage options available to sub-50 employers, including SHOP plans, level-funded arrangements, and QSEHRA, see How to Find Affordable Group Health Coverage for Small Business Clients with Under 50 Employees
• Employers transitioning off a group plan in a hard renewal market — ICHRA shifts underwriting risk from the employer to the individual market

Employers who should stay on group health:

• Employers with older or sicker employee populations in high-cost markets — a fixed ICHRA allowance may not stretch far enough for the employees who need it most
• Employers with a workforce where many employees would qualify for substantial marketplace premium tax credits — an affordable ICHRA blocks PTC eligibility, which can be a net negative for lower-income workers
• Employers in markets with limited individual carrier participation — in counties with one or two carriers, individual plan quality and network adequacy may not support a shift away from group coverage

The QSEHRA alternative: Employers with fewer than 50 employees who don't offer group health should also evaluate the Qualified Small Employer HRA (QSEHRA) under IRC §9831(d). QSEHRA has simpler design rules — no class structure required — but annual contribution limits apply: $6,350 individual / $12,800 family for 2025 (IRS Notice 2024-80). ICHRA has no contribution cap. For a side-by-side on both HRA types alongside HSAs and FSAs, see HRA vs HSA vs FSA: How Each Account Works and 2025 Contribution Limits.

Step 2: Design the Employee Class Structure

The ICHRA rules under 26 CFR §54.9802-4 allow employers to offer different ICHRA terms — or no ICHRA at all — to employees in different permitted classes. This is the primary design tool that makes ICHRA flexible for employers with varied workforces.

The 11 permitted employee classes:

1. Full-time employees (30+ hours per week under ACA definitions)
2. Part-time employees
3. Seasonal employees
4. Employees covered by a collective bargaining agreement
5. Employees who have not yet satisfied a coverage waiting period
6. Non-resident aliens with no U.S.-source income
7. Employees whose primary site of employment is in the same geographic area (state, county, or rating area)
8. Salaried employees
9. Hourly employees
10. Former employees
11. Any combination of the above

Critical rule: If the employer offers traditional group health to any class, ICHRA cannot be offered to that same class. An employer may offer group health to full-time employees and ICHRA to part-time employees — that is permitted. An employer cannot offer both to the same class and let employees choose between them.

Minimum class size: For employers with 100 or fewer employees who offer ICHRA to one class and traditional group health to another, the ICHRA class must contain at least 10 employees. For employers with 101–200 employees, the minimum is 10% of total employee count. For employers with more than 200 employees, the minimum is 20. These minimums prevent employers from using ICHRA selectively to offload high-cost employees from the group plan.

Step 3: Set Allowance Amounts by Class and Age Band

The employer determines the ICHRA allowance — there is no IRS minimum or maximum. The allowance can vary by:

• Employee class — different classes can receive different monthly allowances
• Age — the rules permit age-based variation of up to 3:1. The oldest employees can receive up to three times the allowance of the youngest, reflecting how individual market premiums actually scale with age
• Family status — allowances can scale for employees with dependents, in multiples corresponding to the number of covered dependents

Benchmarking the allowance: The allowance is only valuable if it covers a meaningful portion of the individual market premium in each employee's rating area. Use the benchmark silver plan premium for the employee's county as the reference point:

• A 45-year-old in one county may face a $480/month benchmark silver plan premium; in another county, $760/month
• A flat national allowance of $400/month may be adequate in one market and meaningless in another
• Age-banded allowances that track the 3:1 ratio allow the allowance to follow the actual premium curve across the age distribution

Most ICHRA implementations work best when the allowance covers 70–90% of the benchmark silver plan premium for the average employee in each class, age-adjusted. This leaves a manageable employee contribution while driving meaningful enrollment.

Step 4: Confirm Employees Can Access Qualifying Individual Coverage

Employees can only use ICHRA funds to reimburse premiums for coverage that qualifies under 26 CFR §54.9802-4(c)(3): ACA-compliant individual health insurance or Medicare.

What qualifies:

• Individual ACA marketplace plans (on- and off-exchange)
• Medicare Parts A+B, Part C (Medicare Advantage), and Part D for Medicare-eligible employees
• Individual market major medical plans that meet ACA guaranteed issue and essential health benefit requirements

What does not qualify:

• Short-term limited duration insurance
• Health care sharing ministry memberships
• The employee's spouse's employer-sponsored group health plan
• Standalone dental and vision plans — these are excepted benefits under 45 CFR §147.150(b), not individual health insurance

Before finalizing the ICHRA structure, confirm that qualifying individual coverage is actually available in every state and county where employees live. In markets with limited carrier participation, individual plan quality and network adequacy may undermine the recommendation regardless of allowance size.

Step 5: Calculate ACA Affordability for Employer Mandate Compliance

For ALEs — employers with 50 or more FTEs in the prior calendar year under IRC §4980H — the ICHRA must be "affordable" to satisfy the employer shared responsibility requirement. An unaffordable ICHRA does not satisfy the mandate, exposing the employer to §4980H(b) penalties of $4,460 per full-time employee who receives a marketplace subsidy in 2025 (IRS Rev. Proc. 2024-37).

ICHRA affordability definition: An ICHRA is affordable if the employee's required monthly contribution for the lowest-cost silver plan in their rating area — plan premium minus ICHRA allowance — does not exceed the required contribution percentage of the applicable safe harbor wage figure. For 2025, the required contribution percentage is 9.02% (IRS Rev. Proc. 2024-37).

Affordability safe harbors (IRS Notice 2021-84):

Safe Harbor	Basis	2025 Test
W-2 Wages	Employee's Box 1 W-2 wages	(Lowest-cost silver premium − ICHRA allowance) ≤ 9.02% × monthly W-2 wages
Rate of Pay	Hourly rate × 130 hours, or monthly salary	(Lowest-cost silver premium − ICHRA allowance) ≤ 9.02% × rate of pay
Federal Poverty Line	FPL for a single individual	(Lowest-cost silver premium − ICHRA allowance) ≤ 9.02% × FPL ÷ 12

The FPL safe harbor is the simplest to administer, but requires running the affordability calculation by employee age and county before the plan year is locked in.

Geographic variation matters. An ICHRA that is affordable in a rural county may be unaffordable in an adjacent urban county with materially higher silver plan premiums. A flat national allowance with employees in high-cost markets requires county-level affordability verification before the plan year begins — not after the first §4980H(b) penalty letter arrives.

Step 6: Manage the Premium Tax Credit Opt-Out Process

Employees offered an affordable ICHRA cannot claim ACA premium tax credits on the marketplace — even if their household income would otherwise qualify them. This is the single most important communication point in any ICHRA implementation, and the one most likely to generate employee dissatisfaction if poorly explained.

When the ICHRA is affordable: The employee cannot claim PTCs. They can still enroll in marketplace coverage and use ICHRA reimbursements to offset the premium, but the net premium after reimbursement is their out-of-pocket cost. The ICHRA is valuable; the PTCs are simply unavailable while the affordable ICHRA offer stands.

When the ICHRA is unaffordable: The employee may formally opt out of the ICHRA and claim marketplace PTCs instead if their household income is between 100% and 400% of the federal poverty level (IRC §36B). The opt-out election must be in writing, documented before the plan year begins, and retained by the employer. An employee cannot simultaneously receive ICHRA reimbursements and claim PTCs.

ALE implication: An employee who opts out of an unaffordable ICHRA and receives a marketplace PTC triggers a §4980H(b) penalty for the employer. The affordability calculation in Step 5 is the mechanism that determines whether the opt-out path is open and whether the employer is exposed when employees take it.

Step 7: Deliver the Required ICHRA Notice and Open Enrollment Window

Employers must provide a written ICHRA notice to all eligible employees before the plan year begins. Under 26 CFR §54.9802-4(l), the notice must be delivered at least 90 days before the ICHRA plan year for existing employees, or by the first day of employment for newly eligible hires.

Required notice content per the final rule (84 FR 28888):

• The employee's permitted class and ICHRA allowance amount for the upcoming plan year
• The plan year start and end dates
• A statement that qualifying individual health insurance must be maintained to receive reimbursements
• The premium tax credit interaction — whether the ICHRA is affordable (blocking PTCs) or unaffordable (permitting opt-out and PTC eligibility)
• Opt-out election procedures and submission deadline
• A description of the marketplace special enrollment period triggered by ICHRA eligibility
• Contact information for healthcare.gov or the applicable state-based exchange

The DOL does not publish a model ICHRA notice (unlike the model COBRA notices at dol.gov/agencies/ebsa). Employers typically use notices drafted by their ICHRA administrator or benefits counsel, or generated by third-party ICHRA administration platforms.

Special enrollment period: ICHRA eligibility is a qualifying life event that triggers a 60-day special enrollment period on the ACA marketplace, beginning 60 days before the ICHRA start date. Employees do not need to wait for open enrollment to enroll in individual coverage — but they must be informed about this window proactively, or they will miss it. This is especially critical when transitioning an employee class from group health to ICHRA mid-year, when marketplace open enrollment is already closed.

For how ICHRA notice requirements integrate with the broader open enrollment compliance calendar — ERISA-required notices, CHIP notices, SBC distribution, and HIPAA special enrollment mechanics — see How to Manage Open Enrollment Compliance for Employer Health Plan Clients.

Step 8: Handle COBRA, Terminations, and Mid-Year Events

ICHRA is a group health plan for COBRA purposes under ERISA §§601–608 when the employer has 20 or more employees. When a qualifying event occurs — termination, reduction in hours below full-time, divorce — qualified beneficiaries may elect COBRA continuation of the ICHRA. Under COBRA, the former employee continues to receive the ICHRA allowance for the standard continuation period (generally 18 months for termination or reduction in hours), at up to 102% of the employer's cost. For the complete COBRA notice workflow, qualifying event categories, and DOL penalty exposure, see How to Explain COBRA Continuation Coverage to Employer Clients and Departing Employees.

Loss of qualifying individual coverage mid-year: If an employee loses their individual health insurance during the plan year — through carrier exit, non-payment of premiums, or a life event that ends marketplace eligibility — their ICHRA reimbursements must stop. An employee without current qualifying individual coverage cannot receive ICHRA funds, regardless of whether the allowance is still available. Build a coverage verification process into the administration workflow: most ICHRA platforms require employees to attest at enrollment and annually that qualifying coverage remains in force.

Mid-year class changes: If an employee moves from a class receiving ICHRA to a class receiving group health — due to a status change from part-time to full-time, for example — the transition triggers a special enrollment period for both the individual market and the group plan. Coordinate carefully to prevent a coverage gap at the transition point.

Common Mistakes

Setting a flat national allowance without running affordability by county. An allowance that satisfies the 9.02% affordability threshold in a low-cost rural county may be meaningfully unaffordable in high-premium urban markets in the same state. Run the affordability math county by county, by age band, before committing to a fixed allowance.

Offering ICHRA and group health to the same class. The final rule prohibits this. Employers who want to add ICHRA for a segment of their workforce must structure it around a distinct permitted class — not as an optional alternative for employees already receiving group health.

Missing the 90-day notice deadline. A January 1 ICHRA start requires employee notices by October 3 of the prior year. This deadline is missed frequently in first-year implementations. Build the notice calendar into the implementation timeline before the plan design is finalized — not after.

Failing to document opt-out elections in writing. Employees who opt out of an unaffordable ICHRA and claim marketplace PTCs without a documented written election create an ambiguous compliance record for ALE reporting. Opt-out documentation is not optional; it is the paper trail that supports the employer's affordability position if a §4980H penalty letter arrives.

Not explaining the marketplace special enrollment window. Employees who aren't told about the 60-day special enrollment period before the ICHRA start date may find themselves uninsured — and therefore unable to use their allowance — because open enrollment has passed. This failure generates complaints, potential coverage gaps, and eliminates the benefit the ICHRA was designed to provide.

FAQs

Can a small employer under 50 FTEs use ICHRA?

Yes. There is no minimum employer size for ICHRA eligibility. Employers below the ACA employer mandate threshold can use ICHRA purely as a tax-advantaged health benefit without the administrative complexity of group underwriting. The structural constraint is that employers offering group health to any employee class cannot also offer ICHRA to that same class — the two must serve distinct permitted classes under 26 CFR §54.9802-4.

Does ICHRA satisfy the ACA employer mandate for ALEs?

An ICHRA satisfies the IRC §4980H employer shared responsibility requirement if it is affordable — meaning the employee's net monthly cost for the benchmark silver plan (premium minus ICHRA allowance) does not exceed 9.02% of the applicable safe harbor wage figure for 2025. An unaffordable ICHRA does not satisfy the mandate. The employer remains exposed to §4980H(b) penalties for each full-time employee who formally opts out and receives a marketplace premium tax credit.

What is the difference between ICHRA and QSEHRA?

QSEHRA (under IRC §9831(d)) is available only to employers with fewer than 50 FTEs that do not offer any group health plan to any employee. It carries annual IRS contribution limits ($6,350 individual / $12,800 family in 2025 per IRS Notice 2024-80). ICHRA has no employer size limit, no contribution cap, and permits employers to offer group health to some classes while offering ICHRA to others. A key ACA distinction: an affordable ICHRA satisfies the employer mandate's minimum essential coverage requirement under §4980H; a QSEHRA offer does not constitute an employer plan offer for mandate purposes, and employees receiving QSEHRA funds may still access marketplace PTCs (reduced by the QSEHRA amount under IRC §36B(c)(2)(C)(iv)).

Can employees use ICHRA funds to pay for a spouse's employer plan?

No. An employee cannot use ICHRA funds to pay premiums for coverage under a spouse's employer-sponsored group health plan. Qualifying individual coverage for ICHRA purposes must be an ACA-compliant individual market plan or Medicare. Employees whose spouse has group health coverage must enroll in their own individual market plan to use the ICHRA allowance.

How does COBRA work for an ICHRA?

ICHRA is a group health plan subject to COBRA for employers with 20 or more employees. Qualified beneficiaries who experience a COBRA-triggering qualifying event may elect to continue the ICHRA arrangement for the applicable continuation period — typically 18 months for termination or reduction in hours — at up to 102% of the employer's cost. The qualified beneficiary must maintain qualifying individual health insurance during the COBRA continuation period to actually receive reimbursements from the continued ICHRA.

Does the broker earn commissions on an ICHRA implementation?

ICHRA compensation differs from traditional group health. Brokers typically earn fees from the ICHRA administration platform rather than carrier commissions, because the employer-broker relationship centers on plan design, class structuring, and affordability compliance rather than carrier placement. Employees who purchase individual marketplace plans may have a separate broker relationship for their individual coverage selection. State insurance compensation disclosure requirements apply to ICHRA engagements in the same way they apply to traditional group placements.

Arvori helps insurance brokers design ICHRA class structures, model ACA affordability by employee and county, and coordinate employee notices and enrollment workflows. Learn more at arvori.app.