Individual Coverage HRA (ICHRA) Explained | CafeHealth
What is Individual Coverage HRA (ICHRA)?
The short answer: an ICHRA (Individual Coverage Health Reimbursement Arrangement) lets you give employees a set dollar amount each month to buy their own individual health insurance, instead of you picking and managing a group plan with one insurance carrier. You get a predictable, fixed cost. Your employees get to choose a plan that actually fits their doctors, their family, and their budget. It's not a group plan with extra steps — it's a legally different structure built under a 2019 IRS, DOL, and HHS final rule (26 CFR, 29 CFR, 45 CFR), and it works completely differently under the hood.
If you're an employer staring down another double-digit renewal increase, or a broker trying to give a client real options before open enrollment, this guide walks through exactly how ICHRA stacks up against a traditional group plan, what the compliance rules actually require, and what the switch looks like in practice.
What Is an ICHRA, and How Is It Legally Different From a Group Plan or a QSEHRA?
A traditional group health plan means you contract with one insurance carrier, pick a network and plan design, and every eligible employee gets access to that same plan (or a small menu of plans from that carrier). You're on the hook for whatever the carrier decides at renewal — the deductible, the premium, the drug formulary, all of it.
An ICHRA flips that. You don't buy insurance at all. You set a monthly reimbursement allowance, employees go buy their own individual market plan through the ACA marketplace or a private exchange, and you reimburse them tax-free up to your allowance amount once they submit proof of coverage and premium payments. There's no IRS dollar cap on how much you can offer through an ICHRA, unlike its smaller cousin.
How a QSEHRA Is Different
A QSEHRA (Qualified Small Employer HRA) is only available to employers with fewer than 50 full-time equivalent employees who don't offer any group plan at all, and it comes with strict annual contribution caps set by the IRS. For 2025, those caps are $6,350 for self-only coverage and $12,800 for family coverage (IRS Revenue Procedure 2024-35). An ICHRA has no such cap and is open to employers of any size, which is why most mid-size and larger employers looking at this space land on ICHRA rather than QSEHRA.
●Group plan: employer picks the plan, one carrier, contribution caps set by the market not the IRS, uniform coverage for all eligible employees.
●QSEHRA: employer under 50 FTEs, no group plan allowed, IRS dollar caps apply ($6,350/$12,800 for 2025), employee buys own individual plan.
●ICHRA: any size employer, group plan and ICHRA can't be offered to the same employee class, no IRS contribution cap, employee buys own individual plan, contributions can vary by defined employee classes.
Why Are Employers Dropping Group Coverage for an ICHRA in 2026?
Group premiums keep climbing faster than wages. According to KFF's 2024 Employer Health Benefits Survey, the average annual premium for family coverage hit $25,572, up 7% from the year before, and single coverage averaged $8,951. Employers don't control that number — the carrier sets it at renewal, and you either absorb the increase, shift more cost to employees, or downgrade the plan design.
ICHRA changes who holds the pen. You decide the monthly allowance for each employee class, and that number doesn't move unless you decide to move it. A few concrete reasons employers are making the switch heading into 2026:
●Budget certainty: you set the contribution once a year instead of reacting to a renewal letter.
●No plan design decisions: you're not choosing deductibles, networks, or drug tiers — employees pick a plan that fits them from the individual market.
●Easier multi-state hiring: group plans get complicated when employees are spread across states with different carrier networks. An ICHRA sidesteps that because employees buy locally.
●Class-based flexibility: you can offer a different allowance to full-time employees than part-time or seasonal staff, without the nondiscrimination headaches that come with self-funded group plans.
How Do ICHRA Contributions, Employee Classes, and Reimbursements Actually Work?
The final rule defines 11 permitted employee classes you can use to structure contributions, including full-time, part-time, seasonal, salaried, non-salaried, temporary staffing employees, those under a collective bargaining agreement, employees in a waiting period, and employees grouped by geographic rating area (26 CFR 54.9802-4(d)). You can offer a different dollar amount to each class, as long as everyone within a class gets the same offer (contributions can still vary by age and family size within a class, following IRS-permitted variation rules).
The Minimum Class Size Rule
If you're using certain classes — full-time/part-time, salaried/non-salaried, or geographic classes — to vary contributions, the rule requires a minimum number of employees in that class to prevent employers from carving out one sick employee into their own tiny class:
●Employers with fewer than 100 employees: minimum class size of 10 employees
●Employers with 100 to 200 employees: minimum class size of 10% of the total workforce
●Employers with more than 200 employees: minimum class size of 20 employees
On the reimbursement side, employees submit proof of their individual market premium (and sometimes other qualified medical expenses, depending on plan design), and you reimburse them tax-free up to their monthly allowance. Unused allowance doesn't roll over as cash and isn't taxable to the employee as long as it's used for qualified expenses.
What ACA Affordability Rules Do You Have to Meet?
If you're an Applicable Large Employer (50 or more full-time equivalent employees under the ACA employer mandate), your ICHRA offer needs to be affordable for at least one employee class, or you risk exposure under Section 4980H penalties. Affordability is measured against the employee's required contribution toward the lowest-cost silver plan on the marketplace, compared to their household income.
The IRS updates the affordability percentage every year. For the 2026 plan year, that threshold is set at 9.96% of household income under IRS Revenue Procedure 2025-25 — a notable jump from 9.02% in 2025, which actually gives employers a bit more room on contribution amounts. Since most employers can't verify actual household income in real time, the IRS allows three affordability safe harbors:
1.W-2 safe harbor: based on the employee's Box 1 wages for the year.
2.Rate of pay safe harbor: based on the employee's hourly rate or monthly salary at the start of the plan year.
3.Federal Poverty Line (FPL) safe harbor: based on the federal poverty guideline for a household of one.
The FPL safe harbor is the easiest to apply because it's a flat number. For plan years beginning in 2026, employers generally use the FPL guideline published in January 2025 for a household of one, which HHS set at $15,650 annually. Divide that by 12 to get $1,304.17 a monthBook a free chat with Shannon.
