Short answer: an individual coverage HRA (ICHRA) lets an employer of any size give employees a tax-free monthly allowance to buy their own individual health insurance, instead of offering a group plan. For employers with 50 or more employees it is the main alternative to group coverage, because a QSEHRA is limited to employers with fewer than 50. An ICHRA can satisfy the ACA employer mandate, but only if the allowance makes the cheapest silver plan in each employee’s area affordable.
Key takeaways
- Any size, no cap. There is no employer size limit and no IRS maximum on the allowance.
- Classes matter. Allowances can differ by employee class, such as full-time, part-time, hourly, salaried or location.
- Affordability is tested per person. For 2026, the cheapest local silver plan minus the allowance must stay under 9.96% of income.
- Not a cost cure on its own. It fixes the employer’s budget; what employees pay depends on the individual market where they live.
ICHRA Tax Benefits: Cut Costs, Keep Coverage
- Set classes and allowances. The employer decides who is eligible and how much each class receives each month.
- Give notice. Eligible employees get a written notice at least 90 days before the plan year starts, or when they become eligible.
- Employees buy coverage. Each employee enrolls in an individual health plan, on or off the marketplace, or in Medicare. A new ICHRA offer opens a special enrollment period.
- Reimburse. The employer, usually through an administrator, reimburses premiums and, if the plan allows, other qualified medical expenses up to the allowance.
Reimbursements are tax-free to employees and deductible for the employer. Employees can pay any premium above the allowance pre-tax through a Section 125 plan only for plans bought off the marketplace; marketplace premiums cannot run through a cafeteria plan.
Employee classes and the rules that come with them
The allowance must be the same for everyone in a class, except that it can rise with age (up to three times the youngest rate) and with family size. Permitted classes include full-time, part-time, seasonal, salaried, hourly, employees in a waiting period, employees under a collective bargaining agreement, and employees in a particular rating area.
- An employer cannot offer the same class both a group plan and an ICHRA.
- An employer can offer a group plan to one class and an ICHRA to another, for example group coverage for salaried staff and an ICHRA for hourly staff.
- When it does, minimum class sizes apply to some classes, which stops an employer from carving out a handful of high-cost employees.
ICHRA and the ACA employer mandate
An employer with 50 or more full-time employees, including full-time equivalents, must offer affordable, minimum value coverage to avoid ACA penalties. An ICHRA counts as an offer of coverage. It is affordable for 2026 if the monthly premium for the lowest-cost silver plan for the employee alone in the employee’s rating area, minus the monthly allowance, is no more than 9.96% of one-twelfth of the employee’s income. Employers can use safe harbors, such as the employee’s work location and W-2 wages, to test it.
If the ICHRA is unaffordable for an employee, that employee can decline it and take a marketplace premium tax credit, which can trigger the 4980H(b) penalty of $5,010 per such employee for 2026. An employer that offers no coverage to at least 95% of full-time employees faces the 4980H(a) penalty of $3,340 per full-time employee, minus the first 30. See ACA affordability for 2026 and 2027.
ICHRA vs group coverage vs QSEHRA
| Group health plan | ICHRA | QSEHRA | |
|---|---|---|---|
| Employer size | Any | Any | Fewer than 50 full-time equivalents |
| Employer cost | Premium or claims, changes at renewal | Fixed allowance you set | Fixed allowance, capped by the IRS |
| Allowance cap | n/a | None | $6,450 self-only, $13,100 family (2026) |
| Different amounts by class | Contribution can vary by class | Yes | No |
| Satisfies the ACA mandate | Yes, if affordable and minimum value | Yes, if affordable | Not applicable (small employers only) |
| Employee choice of plan | The employer’s lineup | Any individual plan in their area | Any individual plan in their area |
When an ICHRA fits a mid-market employer
- Usually a good fit: a workforce spread across several states or rating areas, a large hourly or part-time population, a group whose claims make group renewals volatile, or an employer that wants a fixed budget more than it wants to control the plan design.
- Usually a poor fit: a workforce concentrated where individual premiums are high relative to wages, employees with complex ongoing care who depend on a specific network, or leadership that values offering one plan everyone shares.
- Often best as a hybrid: group coverage for one class and an ICHRA for another can lower cost without moving everyone.
The deciding numbers are local: what the cheapest silver plan costs where each employee lives, and what they currently pay for group coverage. We model both before recommending a change. See ICHRA strategy support, ICHRA fit analysis and ICHRA class design.
Frequently asked questions
Can a company with more than 50 employees offer an ICHRA?
Yes. An ICHRA has no employer size limit. A QSEHRA is the arrangement limited to employers with fewer than 50 full-time equivalents.
Does an ICHRA satisfy the ACA employer mandate?
It can. The ICHRA counts as an offer of coverage, and it avoids penalties if the allowance makes the lowest-cost silver plan in each employee’s rating area affordable, 9.96% of income for 2026.
Is there a maximum ICHRA contribution?
No. Unlike a QSEHRA, an ICHRA has no IRS cap. The allowance can vary by employee class, and within a class by age and family size.
Can we offer a group plan to some employees and an ICHRA to others?
Yes, if the groups are different permitted classes, such as salaried and hourly. The same class cannot be offered both, and minimum class sizes apply to some classes.
Can employees pay the rest of their premium pre-tax?
Only for individual plans bought off the marketplace, through a Section 125 plan. Premiums for marketplace plans cannot be paid pre-tax through a cafeteria plan.
What notice does an ICHRA require?
A written notice to eligible employees at least 90 days before the plan year starts, or by the date a new employee becomes eligible, describing the allowance and its effect on premium tax credits.
Wondering whether an ICHRA would work for your group?
CFH Insurance Consultants is an independent employee benefits firm, founded in 2007. We are licensed insurance brokers, and for proper coverage of an account we work in teams of five: an account executive, an account manager, a plan analyst, customer service and IT. We will price the lowest-cost silver plan where each of your employees lives, test affordability by class, and compare an ICHRA, a hybrid and your current group plan side by side. Send us your renewal, call 248.370.8853, or book a 30-minute call.
Related reading: What is an ICHRA? · ICHRA and QSEHRA guide · QSEHRA for small Detroit employers
This article is general information, not legal or tax advice. Affordability percentages and plan rules change each year; confirm current figures before setting allowances.
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