What Is ICHRA? A Plain-Language Overview
Plain-language explanation of ICHRA for readers new to the concept: what it is, how it works, who it's for, and how it differs from traditional group health. Entry point for the content library.
KNOWLEDGE ARTICLE — ICHRA FUNDAMENTALS
What Is ICHRA? A Plain-Language Overview
A defined contribution health benefit that lets employers fund individual health coverage instead of sponsoring a group plan.
ICHRA stands for Individual Coverage Health Reimbursement Arrangement. It is a type of employer-sponsored health benefit that works differently from traditional group health insurance. Instead of selecting a health plan and enrolling employees in it, the employer sets a dollar amount — the reimbursement allowance — and employees use that money to purchase their own individual health insurance coverage.
Congress created ICHRA in late 2019, with rules effective for plan years beginning January 1, 2020. It replaced and significantly expanded the earlier HRA framework by removing size restrictions and allowing employers of any size to offer the benefit.
How It Works
The mechanics are straightforward:
- The employer establishes an ICHRA and sets a monthly reimbursement amount. Different amounts can be set for different classes of employees.
- Employees shop for and enroll in their own ACA-compliant individual health insurance — on or off the marketplace.
- Employees submit proof of their premium payments (and optionally other eligible expenses) to the plan administrator.
- The administrator verifies the documentation and the employer reimburses the employee up to the allowance amount, tax-free.
The employer never selects or sponsors a specific health plan. That decision belongs entirely to the employee.
What Makes It Different from Group Coverage
In a traditional group health plan, the employer selects a carrier, negotiates rates, and offers employees a set menu of plan options. Everyone is on the same plan or set of plans. Premiums are shared between employer and employee on a defined split.
With ICHRA, the employer's role ends at setting the contribution amount. Employees choose any qualifying individual plan available in their area — which means plan selection, carrier, network, and cost-sharing structure are all employee decisions. The employer's financial exposure is fixed at the reimbursement amount.
Key Rules
- Employees must be enrolled in ACA-compliant individual or family health insurance coverage to participate. Non-qualifying coverage — like short-term plans, health sharing ministries, or student health plans — does not make an employee eligible for reimbursement.
- Employers can vary reimbursement amounts by employee class (full-time vs. part-time, salaried vs. hourly, by geographic location, etc.), but must offer the same amount to all employees within a class.
- Employers cannot offer ICHRA and a traditional group health plan to the same class of employees simultaneously.
- For employers with 50 or more full-time equivalent employees (Applicable Large Employers), ICHRA can satisfy ACA employer mandate obligations if the reimbursement amount meets the affordability standard for the employee's coverage area.
Why Employers Use It
ICHRA appeals to employers for several reasons. It converts health benefit costs from a variable, unpredictable expense — subject to annual carrier negotiations and claims-driven increases — into a fixed, defined contribution. It also eliminates the administrative complexity of managing a group plan: no annual renewal negotiations, no carrier relationship management, no network adequacy concerns.
For employers with geographically dispersed workforces, ICHRA is particularly useful. A single group plan rarely serves employees across multiple states well. ICHRA lets each employee access the best coverage available in their own market.
- ICHRA is not a fit for every employer or workforce. The individual market in some geographies is thin, and employees unfamiliar with shopping for coverage need meaningful support. The benefit works best when the reimbursement is well-calibrated to local premium costs and employees have access to good decision support tools.
Kyndly provides an enablement layer for TPAs and GAs operating ICHRA programs — the tools, integrations, and operational infrastructure to run defined contribution health benefits at scale.