Overview
An ICHRA is an alternative to traditional employer-sponsored group health insurance. Instead of selecting and partially funding a group plan, the employer establishes a defined monthly allowance for each eligible employee. The employee uses that allowance to purchase an individual major medical plan on their own — either through the Marketplace or from an insurance company, broker, or agent — and is reimbursed by the employer up to the ICHRA allowance amount. Some ICHRAs also allow reimbursement of other qualified medical expenses such as copays and prescriptions.
The ICHRA does not change what the plan covers or how it works; it changes how the purchase is funded. Employer contributions to an ICHRA are not taxed as income to the employee, making the arrangement tax-advantaged.
Plan Requirements
An employee using an ICHRA must be enrolled in a major medical plan for every month they use the ICHRA. "Excepted Benefits" (like standalone dental or vision) can be reimbursed by an ICHRA in addition to the medical plan, but they do not satisfy the requirement to have a medical plan first. Excepted benefits are limited to specific categories such as dental, vision, hearing, and certain limited medical services.
ICHRA funds cannot be used to purchase short-term limited-duration insurance, health care sharing ministry memberships, fixed indemnity plans, or any other product that is not ACA-compliant (all major medical plans are) or an “excepted benefit.”
Eligibility
Employees who are offered an ICHRA may purchase a major medical plan through the Marketplace or an insurance company, broker, or agent. However, whether an employee can receive premium tax credits through the Marketplace depends on the affordability of the ICHRA, as explained below.
ICHRA or Premium Tax Credits
This is the most important consideration for anyone offered an ICHRA. An employee cannot use the ICHRA and Marketplace premium tax credits at the same time — they must choose one or the other.
If the ICHRA is considered “affordable,” the employee is not eligible for premium tax credits. Affordability is determined by taking the cost of the lowest-cost Silver plan available in the employee’s area and subtracting the monthly ICHRA allowance. If the remaining amount the employee would pay out of pocket is no more than the affordability threshold set by the IRS for the plan year, the ICHRA is affordable and the employee cannot receive premium tax credits. For the 2026 plan year, the threshold is 9.96% of household income.
If the ICHRA is not affordable by this standard, the employee may opt out of the ICHRA entirely and claim premium tax credits through the Marketplace instead. Opting out means forgoing the employer’s ICHRA allowance completely; you cannot use the ICHRA and also receive partial premium tax credits. You can only opt out of ICHRA before the plan year starts.
The Marketplace application process includes a step to assess ICHRA affordability. Employees will need to know their ICHRA allowance amount, which their employer is required to provide in writing before the start of each plan year.
Enrollment
There is no separate ICHRA enrollment. The employee shops for and enrolls in a plan during Open Enrollment or a Special Enrollment Period, then submits proof of coverage to the employer for reimbursement. The employer sets its own ICHRA plan year, gives 90 day notice before the plan begins, and communicates the allowance amount and reimbursement procedures.
An employee who is newly offered or loses an ICHRA — for example, because they were recently hired, because the employer is switching from a group plan to an ICHRA, or they leave the job — may qualify for a Special Enrollment Period, since gaining or losing an ICHRA offer is treated as a change in eligibility.
Key Considerations
Employees offered an ICHRA should compare two scenarios. In the first, they accept the ICHRA, use the employer’s allowance toward a plan of their choice, and pay any remaining premium and cost-sharing out of pocket. In the second, they decline the ICHRA, enroll in a Marketplace plan, and claim premium tax credits if their income qualifies. The appropriate choice depends on individual circumstances, such as the size of the ICHRA allowance, household income, any applicable subsidies, plan premiums, and expected healthcare utilization.
It is also worth noting that because the employee selects their own health plan under an ICHRA, they are also choosing their provider network, formulary, and plan tier. This can be an advantage over a traditional employer plan where the employer makes those choices. However, it also means the employee bears the responsibility of comparing plans and understanding the trade-offs.
Unused ICHRA funds typically do not roll over to the next year; consult your employer's plan documents or administrator for specifics.