The basics of ICHRA

Healthcare costs are rising, and many employers and HR professionals are seeking better ways to offer quality coverage without blowing their budget. Group health insurance has always been the traditional benefit option. However, group plans have become increasingly expensive and lack the necessary flexibility for many modern workforces. That’s where the individual coverage health reimbursement arrangement (ICHRA) comes in.

This easy-to-understand guide breaks down key ICHRA essentials so that you can learn more about one of the most flexible and cost-effective health benefit solutions available today.

In this blog post, you’ll learn:

• The basics of the ICHRA, including how it differs from traditional employer-sponsored health insurance.
• How the ICHRA works, its key features and advantages, and how to implement the benefit successfully.  
• Why the ICHRA is rising in popularity among businesses and industries nationwide.

What is an ICHRA?

An ICHRA is a flexible, tax-free health benefit that lets employers give their employees a monthly contribution for their individual health insurance premiums. Depending on the plan design, qualified out-of-pocket medical expenses may be eligible for reimbursement. By leveraging the ICHRA, employers and employees alike can take greater control over their healthcare and finances. 

Below are the ICHRA eligibility rules: 

How does the ICHRA work?

Most employers are familiar with how traditional group health insurance works due to its long-standing position as the industry standard. If the ICHRA is new to you, don’t feel discouraged. How it works is simple. 

Here’s the step-by-step process:

1. The employer sets an allowance and chooses eligible expenses. You determine the amount of tax-free money to offer employees each month for health insurance premiums (and eligible medical expenses, if you choose). Allowances can vary by age, family size, or employee class. 
2. Employees choose their own coverage. Employees select and enroll in a qualifying individual health insurance with minimum essential coverage (MEC) to use the benefit. Offering the ICHRA benefit triggers a special enrollment period (SEP), giving employees 60 days to shop for coverage through a public or private exchange. They can also shop during the annual Open Enrollment period.
3. Employees pay for medical services and items (or have automatic premium payments). Typically, with an ICHRA, employees pay their insurance premiums and any qualified medical expenses out of pocket. In the plan details, you can limit eligible expenses to premiums only or include additional healthcare costs as well. However, with Remodel Health, employers deposit their monthly contributions into FDIC-insured accounts for their employees. Then, we automatically make premium payments to the insurance carriers. There’s no need for employees to pay for their premiums and wait for reimbursement.
4. Employees submit claim documents for out-of-pocket expenses. After a purchase, employees must submit a receipt, invoice, or an explanation of benefits (EOB) showing the date of service, cost, and the name of the item or service to receive reimbursement.
5. The employer reimburses employees. After approval of the claim, the employer reimburses the employee up to their monthly allowance. Reimbursements are income tax-free for employees. They’re also tax-deductible and payroll tax-free for employers.

What are the benefits and advantages of the ICHRA?

The ICHRA offers a modern and flexible approach to employee health benefits, benefiting both employers and employees. 

Here are some of its biggest advantages:

• Personalized coverage. Employees can choose their own individual health insurance plan that best fits their medical needs, provider preferences, and budget. Since individual coverage is portable, it stays with them even if they change jobs.
• No contribution limits or participation requirements. There’s no annual cap on how much employers can contribute, and there are no minimum participation requirements. You can adjust their allowance amount, up or down, at the end of the plan year. Applicable large employers (ALEs) can also use the ICHRA to comply with the Affordable Care Act’s employer mandate as long as their allowance is affordable.
• Flexibility and scalability. You can adjust contribution amounts, add waiting periods, and update eligible expenses for out-of-pocket health reimbursements as your team and finances change. You can also tailor your ICHRA allowances and eligibility requirements by creating job-based employee classes, such as hourly and salaried workers.
• Cost control. You set a fixed monthly allowance that your staff can’t exceed, ensuring predictable costs and eliminating unexpected premium rate increases. Unused funds remain with you at the end of the plan year or if an employee leaves your company, helping you keep your budget in check.
• Recruitment and retention. Offering an ICHRA demonstrates your commitment to employee well-being by giving your staff the freedom to choose their own coverage. In a competitive job market, these kinds of personalized employee benefits can strengthen recruitment efforts and improve your retention rate.

What are the key features of the ICHRA?

One of the greatest strengths of an ICHRA is its customization options. These features allow you to design a benefit that your employees will value while you control costs and comply with federal guidelines. 

Here are the key features of the ICHRA:

• Employee classes. Employers can categorize employees into different groups to vary allowances or eligibility rules. There are 11 federally approved classes, including full-time, part-time, seasonal, and salaried workers. However, by law, employees within the same class must receive the benefit on the same terms.
• Age-based contributions. You can adjust allowances by employee age with the ICHRA. Federal rules allow up to a 3:1 ratio between the highest and lowest allowances within the same class, ensuring fairness across all age groups.
• Family-size adjustments. Employers can also modify contribution amounts based on whether an employee has a spouse or dependents. For instance, you can give your employees with families a larger allowance to offset higher premium costs and more frequent healthcare needs.
• Integration with different benefits. ICHRAs can coordinate with other health benefits. For example, you can offer both traditional group coverage and the ICHRA, as long as you don’t provide them to the same employee class. The ICHRA can also pair with group or individually purchased dental or vision insurance. Lastly, employees can contribute to a health savings account (HSA) if you design your ICHRA to reimburse premiums only and they enroll in a qualifying high-deductible health plan (HDHP).

How does ICHRA differ from traditional health insurance options?

With traditional group health insurance, employers typically choose and offer their employees a single policy from an insurer or a broker. While this is the familiar option for both, the costs are becoming unsustainable. In 2025, the average annual premium reached about $9,325 for self-only coverage and $26,993 for family policies¹. These rates, paired with limited plan options and complex carrier negotiations, have made group plans increasingly difficult to maintain.

Some employers look toward self-funded plans instead. With self-funded options, businesses can tailor their coverage to their specific needs, rather than paying a fixed premium to an insurer. However, employers must pay medical claims directly, which can lead to unpredictable costs. While stop-loss insurance helps limit large financial pitfalls, self-funding plans can still be an administrative risk.

In contrast, the ICHRA is a cost-predictable and flexible way to offer health benefits, without the need for group health insurance. Employers set their allowance limits, and employees can purchase the coverage of their choice. Better yet, partnering with an ICHRA administration solution, like Remodel Health, makes benefit design, documentation review, and regulatory compliance easy and hassle-free.

Why is the ICHRA gaining popularity in the healthcare industry?

More and more employers are turning to the ICHRA as a modern health benefit solution. ICHRA participation has grown nearly 34% among ALEs between 2024 and 2025, and experts expect this trend to continue throughout the next decade. 

Here are a few reasons why the ICHRA is becoming more popular:

• Rising group health plan costs. As mentioned above, group health insurance has become expensive and unpredictable. Many employers struggle to keep up with annual premium hikes, making the ICHRA’s defined-contribution model more appealing.
• Employees want choice. Today’s workforce wants more control over their benefits. Instead of being locked into a single group plan, the ICHRA lets employees choose their own coverage and provider network, resulting in higher satisfaction and retention.
• Market competition. More people buying coverage on the individual market encourages insurers to offer better plans, broader provider networks, and lower costs. This growing competition improves the quality and affordability of plans nationwide, giving ICHRA participants better options to choose from.
• Portability and stability. An employee’s group health plan ends when they switch jobs. But individual health insurance through an ICHRA stays with them (though they will lose their ICHRA contribution). This helps employees maintain continuous medical care and prevent a gap in coverage.

What are the steps to implementing an ICHRA at your organization?

By following these steps, you can offer a personalized, compliant health benefit that reduces administrative burden and satisfies your employees:

1. Evaluate your current benefits strategy. Review your existing health benefits, workforce demographics, budget, company size, and long-term goals to determine if the ICHRA is right for you. If you’re an ALE, review your ACA responsibilities regarding affordability and coverage requirements before getting started.
2. Get a personalized quote from Remodel Health. Provide us with details like your employee count, current benefit costs, and goals, and we’ll prepare a custom analysis comparing your existing plan to an ICHRA setup, including potential savings and employee value.
3. Design your ICHRA plan. Next, we’ll help you determine your benefit start date, contribution amounts, and eligibility rules. You can also create employee classes, set up age or family-based allowances, and make sure everything follows IRS and ACA regulations. Our team and technology simplify setup and ensure long-term compliance.
4. Communicate the change. Explain how the ICHRA works, when it begins, and what employees need to do next with clear, timely communication. Remodel Health provides ready-to-use employee communication materials, educational sessions, and one-on-one support to make the transition easy for everyone.
5. Support employees with enrollment. Employees must enroll in a qualifying individual health insurance plan to use their ICHRA allowance. Remodel Health’s licensed advisors will help your staff compare plans, understand comprehensive coverage options, and enroll directly through our platform.
6. Stay compliant. Once your ICHRA is live, Remodel Health manages the compliance and administrative details. For example, our payments system handles premium payments automatically and integrates with major payroll and HR systems to ensure everything remains accurate and stress-free. We’ll also monitor changes to ICHRA regulations and help you with tax reporting requirements at the end of the year.

Conclusion

These days, employers are looking for health benefit solutions that are affordable, compliant, and meet the needs of their employees. Luckily, the ICHRA delivers on all three. By allowing organizations to set predictable budgets and empowering employees to choose their own coverage, the ICHRA offers a smarter, more flexible alternative to traditional group health plans that can support your growing business.

Ready to see how an ICHRA could work for your organization? Book a call with Remodel Health today to learn more!

1. 2025 Employer Health Benefits Survey