What are ICHRA pros and cons for employers and employees?

What is an ICHRA?

An ICHRA is a type of employer-funded health benefit plan that allows an employer to reimburse employees for qualified medical expenses, including some or all of the premiums for individual-market health insurance coverage (or Medicare, if the person is Medicare-eligible),¹ as well as the cost of out-of-pocket medical expenses.³

Since ICHRAs became available in 2020, this type of health reimbursement arrangement (HRA) has seen relatively rapid growth. According to the HRA Council, ICHRA adoption increased by 34% among large employers from 2024 to 2025, and increased by 18% among small employers.² 

What are potential ICHRA pros for employers?

Can be easier to meet employees’ diverse needs and preferences. With an ICHRA, employees can use the ICHRA reimbursement towards the premium for any individual-market plan available in their area. Depending on the location, there can be dozens of available plans – well over a hundred in some areas.⁴ In places where there are a large number of available plans, employees will have a wide range of options from which to choose.

This is in contrast to traditional group health coverage, where business considerations typically limit an employer to offering one or only a few plans.⁵ With a traditional group plan, the responsibility falls on the employer to select a plan that will best meet employees’ needs. But employers don’t have that burden if they use the ICHRA model.

Tax benefits. ICHRA benefits are not subject to payroll taxes and the expense of providing them is a tax deduction for the employer.⁶

No participation or contribution requirements. ICHRAs do not have any participation or contribution requirements,⁷ so it doesn’t matter how many employees accept the ICHRA, or how much the employer contributes to the ICHRA. (As discussed below, large employers need to be aware of the requirement that the coverage they offer be considered affordable.)

This differs from traditional group health insurance. Most states and insurers have established requirements for the minimum share of the premium that the employer must cover (50% of the cost of the employee’s coverage is common), ⁸⁹ as well as a requirement that most eligible employees (70% is common) participate in the plan.^{10 11}

Cost control and predictability. Employers are in control of the ICHRA reimbursement limits they offer, as the government doesn’t set upper or lower limits on this. Applicable Large Employers (ALE), which are those with at least 50 full-time employees, are subject to the ACA’s employer mandate and must offer an ICHRA benefit that’s considered affordable, to avoid a potential penalty.¹²

This means that an employer that is not an ALE can set a predetermined amount that will be reimbursed, knowing that their costs will not exceed this amount, regardless of annual premium increases or changes in health plan designs. Large employers that wish to avoid a penalty may have to adjust their ICHRA reimbursement over time to ensure that it continues to constitute an affordable coverage offer.

What are potential ICHRA cons for employers?

Employees may have more limited plan options. This will vary by geographical area, but some areas have fairly limited individual-market plan options.¹³ And most plans available in the individual market are HMOs (health maintenance organizations) or EPOs (exclusive provider organizations),¹⁴¹⁵ which do not cover out-of-network care. Employers may be hesitant to offer an ICHRA if they worry that the available individual market options won’t meet their employees’ needs.

In contrast to the individual market, PPOs (preferred provider organizations), which do cover out-of-network care, are the most common type of traditional group health plan offered by employers.¹⁶ But PPOs are not available at all in many states’ individual markets.¹⁷

So, depending on the area, an employer may or may not be content with the options available to their employees in the local individual market. To be clear, these plans will all be fully compliant with the ACA. So it’s a subjective decision in terms of whether the employer and employees consider them to be adequate.

And this is more likely to be an issue for an employer that’s transitioning from a traditional group health plan to an ICHRA (as opposed to one that hasn’t previously offered health benefits), as they will have prior experience with the plan options in the group market.

Some employees may lose their Marketplace tax credits. As described in more detail in the examples below, some employees would be better off with an ICHRA, while others (who would be eligible for a Marketplace subsidy if they didn’t have the ICHRA offer) would be better off with a Marketplace plan and the premium tax credit. The specifics depend on the amount of the ICHRA reimbursement, the cost of individual market coverage for the employee, and the employee’s household income.

An employer that uses an ICHRA must offer it on the same terms to all employees in a given class, with adjustments allowed (but not required) only based on the age of the worker and the number of dependents the worker has. (Examples of employee classes are full-time workers, part-time workers, and salaried workers.)¹²

So, an employer cannot tailor their ICHRA offers to specifically accommodate whether or not each employee would otherwise be eligible for Marketplace tax credits (and if so, how much those tax credits would be), which could be a concern for an employer trying to offer flexibility to employees.

Keeping up with ICHRA administration and compliance. Employers that offer ICHRA benefits must adhere to various administrative and non-discrimination requirements.¹⁸ These can be – and often are – outsourced to a third-party vendor, but that will add an administrative cost for the employer.

What are potential ICHRA pros for employees?

From an employee’s perspective, an ICHRA can be beneficial due to the wide range of plan options from which they can pick, as well as the portability of the coverage.

Employees can use their ICHRA benefits, which are not included in taxable wages,¹⁹ to help cover the cost of any individual-market coverage that’s available to them (Medicare premiums can also be reimbursed with an ICHRA allowance. But an ICHRA cannot be used to reimburse other types of coverage, such as group coverage offered by a spouse’s employer.) Depending on where a person lives, this can mean that there are dozens of plan options, and well over a hundred in some areas.

That means each employee can pick any available individual-market health plan that best fits their needs, unlike traditional group coverage, in which the employer selects one or multiple plan options from which employees can choose.

Another benefit of an ICHRA is that the employee’s health plan is not tied to employment. An ICHRA contribution is made by the employer and would cease if the employee were to leave the job. But since the employee purchases their health coverage in the individual market, they can keep the health plan regardless of their future employment circumstances.

This is in contrast to COBRA, which allows some people to keep their group coverage for up to a maximum of 18, 29, or 36 months – depending on the circumstances – after leaving a job.²⁰ In either a traditional employer group plan or ICHRA, employees would lose their employer’s contribution to the premiums. But if they bought their coverage in the individual market, there wouldn’t be a time limit on how long they can keep it, as long as they continue to pay the premiums and the insurer continues to offer the policy. (If the policy were to be discontinued, the person would have the option to pick a different individual market policy available in their area.)

What are potential ICHRA cons for employees?

The potential downsides to ICHRAs depend on an employee’s medical needs, coverage preferences, the plans that are available to them in the individual market, the employee’s household income, and the size of the ICHRA allowance their employer provides.

Access to networks. An ICHRA gives employees access to all individual-market plans available in their area. But those coverage options may or may not include any preferred provider option (PPO) plans, which offer out-of-network coverage. Nationwide, the large majority of plans available in the Marketplaces in 2023 were exclusive provider organization (EPO) plans or health maintenance organization (HMO) plans,¹⁴ which do not offer out-of-network coverage unless it’s an emergency.

Depending on where you live, HMOs or EPOs may be your only coverage option in the individual market. That might suit your needs perfectly well, but it’s quite different from the employer-sponsored group insurance market, where PPOs continue to be the most common type of plan.²¹

Access to Marketplace financial assistance. Another potential issue with ICHRAs involves how they affect access to premium tax credits (premium subsidies) in the Marketplace. Depending on the amount the employer reimburses and the employee’s household income, an ICHRA could potentially result in more affordable coverage or less affordable coverage than the employee would have had without an offer of coverage from the employer. Let’s take a look at some examples to illustrate this.

How much will I have to pay for my health insurance with an ICHRA?

The answer depends on how much your employer contributes to an ICHRA, as well as the cost of the individual-market plan you select.

There are no limits on the amount an employer can contribute to an employee’s ICHRA.¹² As noted above, employers that offer an ICHRA benefit must offer it on the same terms to all employees in a given class. They are allowed to make adjustments to the reimbursement amount based on the age of the worker and the number of dependents the worker has,¹² since both of those factors will affect the premium of an individual-market plan.

However, employers are not required to make adjustments like that. An employer can choose to reimburse the same amount to every employee, regardless of age or dependents. To avoid a potential penalty, a large employer does need to ensure that the coverage offer is considered affordable for each full-time employee. But a small employer – one with under 50 full-time equivalent employees – does not need to worry about this.

According to one analysis of PeopleKeep’s ICHRA customers, the average ICHRA allowance between mid-2022 and mid-2023 was about $909/month. But there was significant variation in allowances depending on several factors, including the size of the employer, whether employees were single or had families, and whether the ICHRA could be used to reimburse only premiums or premiums plus out-of-pocket medical expenses.²⁶

With an ICHRA, do I have to pay for my health insurance directly and get reimbursed?

The answer depends on how your employer sets up the ICHRA. The employer might choose to have employees pay for their own coverage, submit proof of the payment, and then receive their ICHRA reimbursement via the payroll system.

But employers can also choose to provide a mechanism – such as a pre-funded debit card – that employees can use to access their ICHRA allowance directly. With this approach, employees don’t have to pay the cost upfront and then wait to be reimbursed.²⁷

If the ICHRA allowance will cover only part of the cost of the employee’s individual-market health plan, the employee will be responsible for paying the remainder of the premium themselves. Employers can choose to offer a pre-tax payroll deduction option for this, but only if the employee buys coverage outside the Marketplace (off-exchange).¹²

To be clear, employees who are offered an ICHRA can use their ICHRA allowance to purchase any individual-market plan available to them, on-exchange or off-exchange. But if the employer chooses to allow employees to pay their own share of the premiums (the part that isn’t covered by the ICHRA) via pre-tax payroll deduction, that can only be done if the employee purchases their coverage outside the Marketplace.

(The House of Representatives passed a budget bill in 2025 that would remove this restriction and allow payroll deduction for the employee's share of the premium even if the plan is purchased in the Marketplace. But this was not part of the initial Senate version of the bill, so its future is uncertain.)

All individual-market health plans with effective dates of January 2014 or later are compliant with the ACA, which means they all cover pre-existing conditions and the ACA’s essential health benefits without lifetime or annual benefit caps.²⁸  Shopping in the Marketplace is the only way to obtain premium tax credits (subsidies), but premium tax credits aren’t available if you’re receiving an ICHRA benefit.²⁹ So if your employer says they will allow a payroll deduction of your share of the premium, selecting your plan outside the Marketplace will allow you to pay your share of the premiums pre-tax. And you’ll still be getting a health plan that’s fully compliant with the ACA.

Who can help me choose a health plan to use with my ICHRA?

If your employer is offering an ICHRA, you can use it with any individual-market plan that’s available to you. Your employer cannot require you to select a specific plan, nor can they endorse a particular individual-market insurer.¹²

If your employer has a relationship with an insurance broker, your employer may provide that person’s contact information so that you can reach out to them for assistance with plan selection. But you can choose to use any broker you want, or do the whole process yourself. There is no cost for using a broker, and your premiums will be the same whether you have assistance or not.

As is always the case for anyone shopping for individual-market coverage, your opportunity to enroll in a plan is limited to the annual open enrollment period (Nov. 1 to Jan. 15 in most states, although CMS has finalized a shorter window, ending on December 15, which will take effect in the fall of 2026)³⁰ or a special enrollment period. If your employer starts offering an ICHRA, that will trigger a special enrollment period that will allow you to enroll in an individual-market plan without having to wait for the next open enrollment period.

Note that you cannot use an ICHRA allowance to purchase short-term health insurance (which is specifically excluded from the definition of individual-market coverage)³¹ or any plan that’s considered an excepted benefit and thus not regulated by the ACA. However, employers can choose to offer another type of HRA, called an Excepted Benefit HRA, which can provide some reimbursement for those types of coverage.¹²