What is an ICHRA? Pros and cons for employers in 2026

Group health renewals keep getting worse. Premiums are rising faster than wages, and HR and finance teams are left choosing between absorbing the cost, shifting more of it to employees, or paring back the plan itself. None of those options fix the real problem: a single group plan often doesn't fit a workforce that's more distributed, more contingent, and more varied than it used to be.

If you're a total rewards or HR leader weighing your renewal options this year, you've probably come across the term ICHRA, described as everything from a smart cost-control move to a compliance headache. Both can be true, depending on how you set one up.

What is an ICHRA (individual coverage health reimbursement arrangement)?

An individual coverage health reimbursement arrangement, or ICHRA, lets employers fund employee health coverage by reimbursing them tax-free for individual market health insurance premiums and other medical expenses, instead of offering a traditional group health plan. You set a monthly allowance, employees pick their own plan on the individual market, and you reimburse eligible costs up to that allowance.

This guide covers how an ICHRA works, the pros and cons, and how to decide if it fits your organization, plus the compliance rules you'll need once you're ready to move forward.

This guide draws on a webinar Nava hosted with Thatch, a leading ICHRA technology platform, where Nava's Marie Holmes and Thatch's Mark Kubera broke down how employers are actually using this model.

Why ICHRAs are growing in 2026

ICHRAs became legal in 2020 under a federal rule that let employers reimburse individual market premiums tax-free for the first time. Adoption has been slow but steady since then, and steep group health plan renewal increases are pushing more employers to take a second look.

Among firms with 10 or more workers, 9% of firms not currently offering health benefits and 4% of firms already offering benefits fund individual market coverage through an ICHRA or QSEHRA-style arrangement. Enrollment is still small relative to the more than 150 million Americans covered by traditional employer group plans, but the trend is moving upward, particularly among employers with distributed or hard-to-cover workforces.

A few reasons ICHRAs keep coming up in renewal conversations:

• Cost predictability: You set a fixed monthly allowance instead of absorbing a group plan's annual rate increase.
• Plan choice: Employees choose the individual market plan that fits their situation, rather than being limited to whatever your group plan offers.
• Distributed teams: Companies with employees across many states or regions can offer consistent benefits without negotiating multiple regional group plans.

How an ICHRA works

An ICHRA works in four basic steps:

1. You set a monthly allowance. There's no minimum or maximum contribution required by law, so you decide what fits your budget.
2. Employees shop for a plan. They pick an individual market plan, on or off the ACA marketplace, that works for them.
3. Employees submit proof of coverage. This is required before reimbursement starts, and it's an ongoing requirement, not a one-time step.
4. You reimburse eligible expenses tax-free, up to the allowance, through payroll or a third-party administrator.

Unused funds at the end of the year typically don't carry over unless your plan document says otherwise, so allowance design matters more than it might seem.

ICHRA pros and cons for employers and employees

Pros for employers

• Predictable, fixed healthcare costs instead of unpredictable group renewal increases
• No participation minimums or employer size requirements
• Ability to offer different allowances to different employee classes
• Tax-advantaged contributions, similar to a traditional group plan

Cons for employers

• A real learning curve for HR and finance teams in the first year
• Ongoing compliance requirements, including notices and documentation
• Employees may end up with narrower network options depending on what's available in their area
• Change management: employees used to a group plan may need support adjusting to shopping for their own coverage

Pros for employees

• Portability: coverage isn't tied to their job the way group coverage is
• Choice among individual market plans, rather than one employer-selected option
• The ability to pick a plan that fits their specific provider network or medication needs

Cons for employees

• Individual market plans in some areas skew toward HMOs and EPOs, with fewer PPO options
• Accepting an ICHRA can mean losing eligibility for a marketplace subsidy, depending on the allowance amount and household income
• More responsibility falls on the employee to shop for and manage their own plan

ICHRA vs. QSEHRA: what's the difference

ICHRAs and QSEHRAs (qualified small employer HRAs) both let employers reimburse individual coverage tax-free, but they're built for different situations.

If you're a smaller employer that has never offered group coverage, a QSEHRA might be the simpler starting point. If you're a larger or mid-size employer transitioning away from a group plan, an ICHRA gives you more flexibility.

Is an ICHRA right for your company?

ICHRAs tend to make the most sense for:

• Mid-size and larger employers facing steep group renewal increases who want more cost predictability
• Companies with distributed or remote teams spread across multiple states, where negotiating one group plan doesn't fit everyone
• Small businesses that have never offered health coverage and want a lower-lift way to start, though a QSEHRA may fit better below the 50-employee threshold
• Employers with a mix of employee types, such as full-time staff alongside seasonal or contract workers, who want to offer different benefits to each group

They tend to make less sense if your employees are concentrated in an area with limited individual market plan options, or if your team strongly prefers the simplicity of a single group plan that HR manages end to end.

ICHRA employee classes explained

If you've decided an ICHRA is worth exploring, employee classes are one of the first design decisions you'll make, and one of the most misunderstood parts of ICHRA design.

Under federal ICHRA rules, you can offer different allowances to different classes of employees, as long as everyone within a class gets the same offer (with adjustments allowed for age and family size). The permitted classes include:

• Full-time employees
• Part-time employees
• Salaried employees
• Non-salaried (hourly) employees
• Employees in a waiting period
• Seasonal employees
• Employees covered under a collective bargaining agreement
• Temporary employees placed by a staffing firm
• Foreign employees who work abroad
• Employees in different geographic locations, such as different states or rating areas
• Any combination of two or more of the classes above

This matters because it lets you offer an ICHRA to one group of employees, such as remote or part-time staff, while keeping a traditional group plan for another group. Some class splits, like full-time versus part-time, come with additional minimum class size requirements when you're using them alongside a traditional group plan for another class. Confirm the specifics with a benefits advisor or ERISA counsel before you finalize your class design.

ICHRA rules and compliance requirements

Notice requirements

You're required to give employees a written notice at least 90 days before the start of the plan year, explaining the ICHRA offer, the allowance amount, and how it affects their eligibility for marketplace subsidies.

Non-discrimination within a class

Within a given class, you have to offer the ICHRA on the same terms to everyone. You can vary the allowance by age and number of dependents, but you can't pick and choose within a class based on health status or other factors.

Opt-out requirements

Employees have to be allowed to opt out of the ICHRA, both when they're first offered it and annually afterward. This matters because accepting an ICHRA affects their marketplace subsidy eligibility, covered below.

ICHRAs and ACA affordability: the 2027 threshold

If you're subject to the ACA's employer shared responsibility provisions, generally applicable large employers with 50 or more full-time equivalent employees, your ICHRA allowance has to be considered affordable for at least one available plan, or you could face a penalty.

For plan years beginning in 2027, the IRS set the affordability threshold at 10.22% of an employee's household income, according to IRS Revenue Procedure 2026-26. That's up from 9.96% for 2026, reflecting a recent change in the indexing methodology. In practice, most employers use a safe harbor, such as the employee's W-2 wages or rate of pay, since you don't have access to actual household income. Under the rate of pay safe harbor, an employee earning $12 an hour could be charged up to $159.43 a month for 2027 coverage and still be considered affordable, up from $155.37 under the 2026 standard.

For ICHRAs specifically, employers using the federal poverty line safe harbor, which sets affordability based on a fixed dollar amount instead of each employee's wages, can treat 2027 coverage as affordable at $135.92 a month or less, up from $129.89 in 2026. This gives you automatic affordability status regardless of what any individual employee earns, which is part of why it's a common choice for ICHRA administration.

This threshold also determines whether an employee can decline your ICHRA and claim a premium tax credit on the marketplace instead. If your ICHRA is affordable under this standard, the employee generally isn't eligible for a subsidy. If it isn't, they can decline the ICHRA and shop the marketplace with a subsidy instead.

How to set up an ICHRA: a step-by-step roadmap

1. Assess your current spend and renewal trajectory. Compare what you're paying for group coverage against realistic ICHRA allowance levels.
2. Decide on your employee classes. Determine whether you'll offer the ICHRA to all employees or structure it by class.
3. Set your allowance amounts. Factor in age and dependent adjustments if you're varying by those factors.
4. Choose an administrator. Most employers use a third-party platform to handle reimbursement, documentation, and compliance tracking.
5. Communicate early and often. Give employees more notice than the required 90 days if you can, and budget time to help them shop for a plan for the first time.

Most employers should plan for a one to three month implementation window from decision to launch.

Frequently asked questions

Are ICHRA reimbursements taxable to employees?

No. Reimbursements made through an ICHRA for qualifying individual health insurance premiums and medical expenses are excluded from an employee's taxable income, the same as traditional group health plan contributions.

Can an ICHRA reimburse Medicare premiums?

Yes. Employees enrolled in Medicare Part A and Part B, or Part C, can generally use an ICHRA to reimburse their Medicare premiums, which makes ICHRAs a useful option for employers with older or retiring employees.

Is an ICHRA reported on my W-2?

No, and this catches people off guard. Unlike traditional group health coverage, which is reported in box 12 using code DD, or a QSEHRA, which is reported using code FF, ICHRA contributions don't have a W-2 reporting requirement at all. Employers still have separate reporting obligations through Forms 1094-B or 1094-C and 1095-B or 1095-C. For more on how group coverage value gets reported, see Nava's guide to Form W-2 box 12 code DD.

Who is eligible for an ICHRA?

Any employee in a class you've offered the ICHRA to is eligible, as long as they have or obtain individual health insurance coverage, including marketplace coverage, Medicare, or in some cases individual coverage through a spouse's employer.

Is an ICHRA a group health plan?

Yes, technically. An ICHRA is classified as a group health plan under federal law, even though it funds individual market coverage rather than a traditional group policy. That classification is part of why ICHRAs are subject to notice requirements, nondiscrimination rules, and ERISA obligations.

Watch: ICHRA 101 with Nava and Thatch

Want more detail on how this plays out in practice? Watch the full conversation between Nava and Thatch's Mark Kubera, where they cover when an ICHRA makes sense, what the transition actually looks like, and how to build internal buy-in.

The future of employer-sponsored health benefits

As the workforce continues to evolve, so must our approach to employee benefits. ICHRAs represent the next generation of employer-sponsored healthcare: flexible, predictable, and built for modern organizations.

For HR leaders, that means less time firefighting renewals and more time building a benefits program that actually works for everyone.

Ready to explore whether an ICHRA is right for your organization? Connect with Nava’s benefits experts to model what this could look like for your team.