What Is ICHRA? A Plain-English Guide for Small Business Owners

Small businesses that want to offer employee health insurance don't have to rely on traditional group plans. An individual coverage health reimbursement arrangement (ICHRA), also known as a CHOICE Arrangement, lets employers provide employees with tax-free reimbursements for health insurance they purchase themselves, rather than selecting a single plan for the entire workforce.

Here’s how an ICHRA or CHOICE Arrangement works, the requirements and trade-offs, and how employers like you can set up an insurance model that fits your team.

What is an ICHRA (CHOICE Arrangement)?

ICHRAs, which were recently rebranded as CHOICE Arrangements by several federal organizations, are employer-sponsored health benefit arrangements that reimburse employees for individual health insurance premiums and other qualified medical expenses. Unlike a traditional group health insurance policy chosen by the employer, employees enrolled in an ICHRA choose a qualifying individual health coverage policy themselves. 

Unlike traditional group health insurance, employees purchase their own qualifying individual coverage rather than enrolling in a health plan selected by their employer. Businesses of any size can offer an ICHRA, but small employers often prefer it because they may not have the resources or access to offer traditional group insurance.

How does an ICHRA work?

If you’re considering offering an ICHRA at your small business, here’s how you and your employees  can expect the arrangement to operate:

1. The employer sets an allowance. The employer determines how much it will reimburse. There is no federal annual contribution cap.
2. Employees purchase individual coverage. Eligible employees enroll in qualifying individual health insurance plans of their choosing.
3. Employees submit their expenses. Employees provide appropriate documentation for premiums and/or other qualified medical expenses covered by the arrangement.
4. The employer reimburses them. Approved expenses are reimbursed up to the employee's available allowance — generally tax-free — when ICHRA requirements are met.

[Read more: ICHRA vs. QSEHRA: What Is the Difference?]

ICHRA vs. traditional group health insurance

Traditional group insurance is often considered the standard for health benefits, but this arrangement comes with financial uncertainty. 

“Healthcare costs continue to rise, and employers often have limited control over what those increases will look like year after year,” explained Kevin Deutsch, Chief Growth Officer at healthcare operations platform Softheon.

With an ICHRA, the employer establishes a reimbursement benefit and employees gain more freedom over their health insurance choices.

Here’s a quick comparison of how ICHRA and traditional group insurance models differ:

• Budgeting. An ICHRA lets the employer set a defined reimbursement amount for the employee, rather than tying those costs directly to group premiums.
• Employee choice. Employees enrolled in ICHRAs select individual qualified coverage that fits their own needs rather than choosing among employer-selected group plans.
• Employee experience. ICHRAs place more responsibility on employees to shop for and maintain the coverage they want.
• Administration. ICHRA employers manage only reimbursement amounts compared to traditional group coverage; however, the model adds its own plan documentation, substantiation, notice, and compliance responsibilities.
• Tax credits. You can’t receive reimbursements through both an ICHRA and the Premium Tax Credit (PTC). You can receive the PTC only if you opt out of the ICHRA or the plans are deemed unaffordable.

Pros and cons of ICHRAs

ICHRAs can give small businesses greater flexibility in how they offer health benefits, but they also shift some responsibilities to employees and add administrative considerations.

Pros

Potential advantages include:

• More predictable benefits spending. Employers establish their own reimbursement budgets without a federal annual contribution cap.
• Flexibility for different workforce segments. Employee classes can help businesses structure benefits around different types of workers, subject to applicable requirements.
• Less dependence on a single group plan. Employers aren't responsible for selecting one health insurance policy intended to meet the needs of their entire participating workforce.
• Potential coverage portability for employees. Because the underlying individual policy belongs to the employee, workers may be able to keep their coverage after leaving the company, although employer reimbursements end.

Cons

Potential drawbacks include:

• Individual-market differences. Premiums, plan availability, provider networks, and coverage options can vary significantly by location.
• A greater need for employee education. Employees who are accustomed to employer-selected coverage may need help understanding how to shop for and maintain individual insurance.
• More complicated initial plan design. Employers must decide on eligibility, employee classes, allowance amounts, and reimbursable expenses while complying with applicable requirements.
• Potential affordability considerations. The value of a set allowance can differ among employees based on factors such as age, household circumstances, and local individual-market premiums.

[Read more: Small Business Health Insurance Abbreviations and Acronyms]

How to set up an ICHRA in 6 steps

Here’s what to expect when implementing an ICHRA for your small business.

1. Determine employee eligibility and classes.

Under the ICHRA model, employers can divide their workforce into up to 11 government-approved classes based on employment type, hours worked, and geographic location. The flexibility even allows employers to offer a traditional group insurance plan to one class, while offering an ICHRA to another. However, if you plan to offer both types of insurance models, you will be subject to minimum size rules.

2. Set reimbursement amounts

Employers must budget and establish a reimbursement allowance for employees. There is no federal minimum or maximum contribution amount set. Monthly ICHRA allowances (the industry standard) can vary based on the defined employee classes. Class allowances may also vary based on age or number of dependents, subject to federal rules.

Carson Hornish, an independent health insurance broker and Owner of Carson Health Advising, suggested employers price the individual market before choosing allowance amounts. 

“Individual premiums vary by age and county, so I run a quick census of the team's ages and zip codes first,” Hornish said. “An allowance that sounds generous can fall short for an older employee in a higher-cost area.”

3. Define reimbursable expenses

Determine whether your ICHRA model will reimburse individual insurance premiums only or also cover additional qualified medical expenses. Define this clearly upfront for each employee enrolling in the ICHRA.

[Read more: Employee Benefits Tax Deductions: Guide for Business Owners]

4. Create formal plan documents

Prepare the formal documents establishing how your ICHRA will operate, including employee eligibility, classes, allowance amounts, reimbursable expenses, and claims procedures. Because ICHRAs are subject to federal benefits and tax requirements, consider working with an ICHRA administrator, benefits professional, or legal counsel to ensure you have the appropriate documentation in place.

5. Notify and educate employees

Provide eligible employees with the required ICHRA notice within the applicable timeframe, explaining coverage requirements, important dates, tax implications, and opt-out rights. Beyond the formal notice, give employees clear guidance on how the benefit works and what they need to do to obtain qualifying individual coverage.

“It’s easy to focus only on the financial side of healthcare benefits, but employees still need to understand what’s changing and what they need to do,” Deutsch explained. “For many people, choosing their own coverage is a new experience. They need clear communication and guidance along the way.”

Hornish also emphasized the importance of helping employees navigate their options, including provider networks, deductibles, and prescription drug coverage.

6. Verify coverage and administer reimbursements

Ensure you’ve established a clear process to verify coverage and expenses, approve claims, maintain records, and reimburse employees.

If you’re unsure whether an ICHRA is right for your small business or need help setting one up, seek guidance from a benefits professional or legal counsel.

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