ICHRA explained
ICHRA, explained for employers who actually have to make a decision.
Tax-free reimbursement for individual coverage. No size limits. No contribution caps. The 2026 affordability threshold is 9.96% of household income — up from 9.02% in 2025.
The short version
An Individual Coverage Health Reimbursement Arrangement (ICHRA) is a tax-advantaged employer benefit that reimburses employees tax-free for individual health insurance they buy themselves. ICHRA was created by IRS final rule in 2019 and is now used by tens of thousands of employers as an alternative to traditional group health. There is no minimum or maximum employee count — any size company can use ICHRA — and reimbursements are uncapped, unlike QSEHRA.
How ICHRA actually works
Five steps. Same flow regardless of company size.
Set the allowance
Employer defines a monthly reimbursement allowance per employee class.
Employee buys coverage
Employee buys individual health insurance from any source — marketplace, broker, direct from carrier.
Submit proof
Employee submits proof of coverage, typically monthly via a designated platform.
Tax-free reimbursement
Employer reimburses up to the allowance — no payroll tax, no income tax for either side.
Unused funds stay
Funds not claimed at year-end stay with the employer (unlike a flat group plan contribution).
The 11 employee classes
ICHRA permits 11 IRS-defined classes. Within a class, all employees get the same offer.
Full-time
Standard W-2 full-time employees.
Part-time
Below the standard FT threshold.
Salaried
Pay structure-based class.
Hourly
Pay structure-based class.
Seasonal
Seasonal employment.
Temporary
Limited-duration employment.
Waiting period
Employees in a waiting period.
Foreign abroad
Employees working abroad.
CBA-covered
Collective bargaining agreement.
Geographic
Different rating areas (location).
Combinations
Combinations of the above categories.
2026 affordability rules
If you're an ALE, your ICHRA must be affordable to avoid the B Penalty.
The 2026 ESR B Penalty is $417.50/month or $5,010/year per affected employee. Threshold: 9.96% of household income.
2026 ICHRA affordability safe harbors
| Safe harbor | How it works | When to use | |
|---|---|---|---|
| FPL | Use Federal Poverty Level instead of household income. ~$129.90/month maximum employee contribution for self-only in 2026. | Simplest; works for most workforces | |
| W-2 wages | Use Box 1 W-2 wages. | Better for higher-paid workforces | |
| Rate of pay | 9.96% of monthly pay rate (130 hours/month for hourly). | Best when wages vary mid-year |
ALEs under 50 FTEs aren't subject to the ESR penalty, but ICHRA is still subject to ACA non-discrimination and class consistency rules.
Does ICHRA save money?
Often yes — but not always. Here's the honest read.
✓ ICHRA wins for
- ·Geographically dispersed workforces — group plans price by HQ rating area; ICHRA prices in the employee's actual area
- ·Older or sicker workforces — individual market underwrites differently than small group
- ·Multi-class businesses — pay full-time more than part-time legally and predictably
- ·Companies tired of renewal volatility — cost is what you set
✕ Group plans usually win for
- ·Young, healthy, single-location workforces where small-group community rating undercuts individual premiums
- ·Employees who place high value on the "group plan" perception
- ·Companies in markets where individual carrier networks are weak
The only honest answer is to model both. TMRW runs a free ICHRA affordability + savings analysis comparing your current plan against ICHRA structures.
Setup timeline
30–60 days from discovery to first reimbursement.
Discovery
Employee census, current plan, locations.
ICHRA design
Class definitions, allowance amounts, affordability modeling.
Plan documents
IRS-required Plan Document, SPD, 90-day employee notice.
Employee enrollment
Employees shop and enroll in individual coverage.
Effective date
First reimbursement period begins.
FAQ
Frequently asked questions
What is ICHRA?
ICHRA stands for Individual Coverage Health Reimbursement Arrangement. It is a tax-advantaged employer benefit where the company reimburses employees tax-free for individual health insurance they buy themselves. ICHRA was created by IRS final rule in 2019 and is now used by tens of thousands of employers as an alternative to traditional group health.
How does ICHRA work?
The employer sets a monthly reimbursement allowance per employee class. Employees buy individual health insurance from any source and submit proof of coverage. The employer reimburses up to the allowance, tax-free for both employer and employee — no payroll tax, no income tax. Unused funds stay with the employer at year-end.
Who is ICHRA right for?
ICHRA fits employers who want predictable benefits costs, have geographically dispersed workforces, run multiple employee classes (full-time, part-time, seasonal), want to attract employees who already have individual coverage they like, or are tired of traditional group renewal volatility. Companies of any size can use ICHRA — there's no minimum or maximum employee count.
What's the 2026 ICHRA affordability threshold?
The 2026 affordability threshold is 9.96% of household income, up from 9.02% in 2025. The math: the lowest-cost silver plan (LCSP) premium in the employee's rating area, minus the ICHRA monthly reimbursement, can't exceed 9.96% of the employee's household income. Three IRS safe harbors apply: FPL, W-2 wages, and rate of pay.
What classes can I create with ICHRA?
ICHRA permits 11 employee classes: full-time, part-time, salaried, hourly, seasonal, temporary, employees in a waiting period, foreign employees abroad, employees in a CBA, employees in different rating areas (geographic location), and combinations of the above. Class definitions must be applied consistently — you cannot reclassify individuals subjectively.
Do employees still qualify for ACA subsidies if my company offers ICHRA?
It depends on whether the ICHRA is affordable under IRS rules. If affordable, the employee can't claim ACA premium tax credits. If unaffordable (the lowest-cost silver plan in the employee's area exceeds 9.96% of household income after the ICHRA reimbursement), the employee can decline ICHRA and claim ACA subsidies instead.
What documents are required for ICHRA?
An ICHRA requires: a written Plan Document, an SPD, an annual notice to eligible employees (sent 90 days before plan year start), and a process for substantiating employee coverage and reimbursement claims. TMRW provides templated documents, ICHRA-compliant claim forms, and ongoing administration.
How does ICHRA reimbursement actually flow?
Two common models. Reimbursement model: employee pays carrier directly, submits proof, employer reimburses via payroll. Direct-pay model: employee enrolls through a platform that bills the employer directly. Direct-pay is simpler for employees and is usually how TMRW structures ICHRA setups for clients.
See the math both ways
Free ICHRA affordability analysis.
We model your current plan against ICHRA structures using your actual census. Takes 48 hours. Show you the numbers, not the marketing.