ICHRA glossary: Essential terms to know

The first step toward understanding the individual coverage health reimbursement arrangement (ICHRA) starts with learning the terminology that describes how it works. Employers, brokers, and HR professionals must become familiar with basic ICHRA terms to design and administer a compliant and effective health benefit. 

This ICHRA glossary clearly and concisely breaks down the most important terms to help you get started. It provides a good foundation for understanding how the ICHRA functions and communicating the benefit effectively to your team or clients.

In this blog post, you’ll learn:

• The key terms and definitions behind how an individual coverage health reimbursement arrangement (ICHRA) works.
• How core ICHRA concepts, such as allowances and eligibility, affect plan design, compliance, and employee participation.
• How to confidently interpret plan documents, understand qualified expenses and coverage requirements, and evaluate ICHRA administration options for your organization.

1. Health reimbursement arrangement (HRA)

A health reimbursement arrangement (HRA) is an IRS-approved, employer-funded benefit. Contrary to popular belief, HRAs aren’t health insurance coverage. Instead, they’re a way for employers to give tax-free money to employees for medical costs. Depending on the HRA and your benefit design, individual health insurance premiums can also be eligible expenses.

Some HRAs only work with group health coverage, such as integrated HRAs. However, others are stand-alone health benefits that don’t coordinate with group plans. In either case, employees typically pay for eligible medical services and items upfront. 

Then, once they submit proof of purchase and their HRA administration approves the documentation, they receive tax-free reimbursement up to their monthly allowance amount. An ICHRA with Remodel Health makes this process easier by establishing automatic premium payments for off-exchange plans.

With most plans, unused HRA funds stay with the employer at the end of the plan year without any annual rollover. And unlike an HSA, unused funds stay with the organization if the employee leaves the company. 

Lastly, HRAs have tax advantages for both parties. Employers can deduct reimbursements as business expenses and don’t pay payroll taxes on contributions. HRA reimbursements are also free of income taxes for employees.

An ICHRA is a type of HRA, though it has many features that make it unique.

2. Individual coverage health reimbursement arrangement (ICHRA)

The ICHRA is a stand-alone HRA for employers of all sizes and industries with at least one W-2 employee. With this health benefit, employers set a tax-free monthly allowance that employees can use to pay for individual health insurance and, in some cases, out-of-pocket medical costs.

The ICHRA works like other HRAs, but offers more customization options. For example, there are no minimum or maximum contribution limits, and businesses can tailor the benefit using 11 job-based employee classes. This flexibility makes the ICHRA a scalable and budget-friendly alternative to group health insurance.

 We’ll dive into more details about the nuances of the ICHRA in the sections below.

3. Allowance

An ICHRA allowance, or employer contribution, is the tax-free amount of money that employers offer their employees for their individual health insurance premiums and ancillary coverage. In most cases, you’ll set a monthly ICHRA allowance. While unused funds can roll over from month to month, they typically don’t roll over annually (though the ICHRA Final Rules allow for this).

As mentioned above, the ICHRA has no contribution limits. This means you can offer as little or as much allowance as your budget allows and adjust accordingly at the end of the plan year. You can also vary allowance amounts by employee classes, age, or family size.

4. Eligibility

The ICHRA has specific rules regarding employee eligibility. Only W-2 employees and their eligible dependents can participate in an ICHRA. This means international employees and independent contractors don’t qualify. Employees (and their dependents, if the plan allows) must also have a qualified individual health insurance plan that provides for minimum essential coverage (MEC) to use the benefit.

Business owners may qualify if the IRS considers them employees. This means that C corporation owners can participate in the ICHRA, but S corporation owners, partners, and sole proprietors are typically ineligible. However, these employers may be able to take advantage of the benefit through their spouse if they’re a W-2 employee of the business.

Employers may also establish fair and non-discriminatory eligibility rules, such as a waiting period of up to 90 days for new hires

5. Employee classes

Another way to customize eligibility rules and allowance amounts is with employee classes. Employee classes allow employers to categorize workers into separate groups and tailor ICHRA benefits based on job type, employment status, or geographic location. 

For example, you could provide salaried employees a monthly allowance of $500 while offering your hourly employees $300. 

Below are the 11 ICHRA employee classes:

1. Full-time employees
2. Part-time employees
3. Seasonal employees
4. Temporary employees of staffing firms
5. Salaried employees
6. Non-salaried employees
7. Employees covered under a collective bargaining agreement
8. Employees in a waiting period
9. Foreign employees who work abroad
10. Employees working in different geographic locations, either rating areas or states
11. A combination of two or more of the above

Under federal law, all employees within the same class must receive the benefit on identical terms to comply with nondiscrimination rules. However, you can still differ allowances by other permitted factors like age or family status.

6. Effective date

The effective date is when your ICHRA plan officially begins. Employers can start an ICHRA at any time during the year. The effective date doesn’t have to start January 1 or align with the annual Open Enrollment Period, which runs from November 1 to January 15 in most states. If your current group health plan renews mid-year, you can transition to an ICHRA when your policy period ends.

Offering an ICHRA mid-year counts as a qualifying life event. This will give employees a 60-day special enrollment period to purchase qualifying individual health coverage so they can participate in the benefit.

7. Qualified medical expenses

Qualified medical expenses are healthcare costs eligible for reimbursement under an HRA. IRS Publication 502 and the CARES Act outline more than 200 eligible services and items. Qualified costs include prescription drugs, mental health services, and over-the-counter medications.

Employers can choose to reimburse only individual health insurance premiums or include additional eligible out-of-pocket medical costs. This helps you design an ICHRA benefit that aligns with your employees’ healthcare needs and your company’s budget.

8. Plan documents

Under the Employee Retirement Income Security Act of 1974 (ERISA), the ICHRA is an employer-sponsored group health plan. To comply with Section 402(a) of ERISA, employers offering an ICHRA must maintain formal, written plan documents.

Below are the ICRHA documents and notices that you must draft and share with your participating employees and their dependents:

• Legal plan documents that outline the following details:
  • The ICHRA effective dates, eligibility rules, and any waiting periods.
  • A summary of the ICHRA’s covered benefits.
  • The procedures for making claims, plan amendments, ICHRA reimbursement payments, and plan terminations.
  • How the ICHRA interacts with specific federal laws, including rules for protecting health information and adhering to HIPAA.
  • The ICHRA’s plan administrator and contact information.

9. Individual health plan

An individual health plan is coverage a person buys for themselves or their family through a public or private exchange, rather than through an employer or a government program (though Medicare Parts A and B together or Part C also count). Individual insurance plans include self-only policies as well as family coverage.

Since the Affordable Care Act (ACA), individuals can shop for affordable health coverage on federal or state-based Health Insurance Marketplaces, which are public exchanges. Individuals can also purchase these policies directly from an insurance carrier or through a certified agent or broker, which are private exchanges. 

In most cases, individual health insurance is cheaper than traditional group coverage. According to KFF, in 2024, the average annual premium was about $8,951 for self-only coverage ($746/month) and $25,572 for family plans ($2,131/month). In contrast, the average cost of a benchmark silver plan in the U.S. in 2024 was $477/month.

10. Qualified health plan (QHP)

A qualified health plan (QHP) is an ACA-certified health insurance plan that meets federal standards for MEC. QHPs are sold on public and private exchanges and organized by metal tiers: bronze, silver, gold, and platinum. This categorization system aims to make cost comparisons for premium and out-of-pocket costs easier for consumers shopping for health plans. 

To use the ICHRA, employees must enroll in a qualified individual health plan, such as:

• A Marketplace or private exchange plan that provides MEC
• Medicare Parts A and B or Part C on its own (Medicare Advantage)
• Student health plans meeting ACA requirements
• Catastrophic plans for those under 30 or with a hardship exemption

Plans that don’t qualify for ICHRA include COBRA, Medicaid, TRICARE, and association health plans. Short-term policies, fixed indemnity plans, and healthcare sharing ministries are also ineligible.

11. On-exchange and off-exchange plans

On-exchange plans are individual health insurance policies purchased through a federal or state marketplace. These public exchanges enable individuals and families to compare plans by cost, coverage, and provider networks on one convenient platform. 

Individuals can purchase off-exchange plans directly from insurers, licensed brokers, or agents. While on-exchange plans must always comply with the ACA, off-exchange plans can include both ACA-compliant major medical coverage and non-ACA options, such as supplemental or ancillary plans. However, only ACA-compliant plans qualify for an ICHRA.

Enrolling in an off-exchange plan offers the bonus of automatic premium payments through Remodel Health. Plus, you can deduct any portion that an employee owes for their coverage on a pre-tax basis.

12. Substantation

Substantiation is the process employees use to confirm that they have qualifying individual health coverage before they can receive ICHRA payments and reimbursements. Federal regulations require employees to attest that they’re enrolled in a plan that provides MEC throughout the benefit year. 

There are two main substantiation requirements:

1. Annual substantiation: Employees must verify coverage before the plan year begins (or before their ICHRA effective date, if joining mid-year).
2. Ongoing substantiation: Employees must confirm coverage each time they submit a reimbursement request.

Employers may use government-provided sample attestation forms or create their own custom forms. Proof of recurring health plan premium payments can also serve as eligible documentation. While employees are responsible for completing attestations, employers must collect and review them before approving ICHRA reimbursements.

With Remodel Health, most employees can skip the substantiation process. When they enroll in individual health insurance through the Remodel Health platform, we can automatically substantiate that they have coverage.

13. Applicable large employer (ALE)

An applicable large employer (ALE) is a business that averages 50 or more full-time equivalent (FTE) employees during the previous calendar year. Under the ACA, a full-time employee works at least 30 hours per week (or 130 hours per month). However, your FTE count is your full-time employees plus the equivalent full-time hours worked by your part-time staff members.

To calculate your FTE count:

1. Add up all part-time employees’ hours for each month.
2. Divide that total by 120 to convert to full-time equivalents.
3. Add the result to your number of full-time employees, rounding down to the nearest whole number.

If your company averages at least 50 FTEs for the year, it is considered an ALE for the following year and must comply with ACA employer requirements.

14. Employer mandate

With the inception of the ACA came the employer mandate, also called the employer shared responsibility provision (ESRP). The mandate requires all ALEs to offer affordable health coverage that provides both MEC and minimum value to at least 95% of full-time employees and their dependents.

If an ALE fails to offer qualifying coverage that doesn’t meet minimum coverage or value standards, the IRS may assess costly tax penalties. Employers with fewer than 50 FTEs aren’t subject to the mandate or any penalties.

Read more about ALEs and the employer mandate in our blog

15. Affordability

The first part of the employer mandate refers to affordability. Under the ACA, affordability determines whether an employer’s ICHRA allowance makes individual health insurance coverage reasonably priced for employees. 

For the 2026 plan year, the federal government considers coverage affordable if the employee’s share of the premium for the lowest-cost silver health plan (after applying their ICHRA allowance) doesn’t exceed 9.96% of their household income.

Because most employers don’t know employees’ exact household incomes, they can use IRS affordability safe harbors — such as those based on W-2 wages, rate of pay, or federal poverty level — to calculate compliance with affordability standards.

16. Minimum essential coverage (MEC)

Minimum essential coverage (MEC) refers to the minimum level of health insurance required under the ACA and is an important part of the employer mandate. 

To participate in an ICHRA, employees must have an individual health plan that provides MEC. If they don’t have a health plan with MEC, they can change to one during Open Enrollment or during a special enrollment period if you offer them the benefit for the first time mid-year.

Plans that qualify as MEC and work with ICHRA include:

• Individual health insurance policies purchased through federal or state marketplaces
• Medicare Parts A and B together and Part C

Short-term medical, fixed indemnity, or healthcare sharing ministry plans don’t provide MEC and therefore won’t qualify for ICHRA reimbursement.

17. Minimum value

Minimum value is an ACA requirement that determines whether a health plan pays for a sufficient share of covered healthcare expenses. A plan meets the minimum value standard if it’s designed to cover at least 60% of total allowed medical costs for a standard population and includes substantial inpatient and physician services.

While the minimum value rule mainly applies to traditional employer group plans, it’s also relevant to ALEs under the employer mandate. ACA-compliant individual plans already satisfy this requirement.

18. Premium tax credits

Premium tax credits are federal subsidies established by the ACA to help eligible individuals and families lower the cost of monthly health insurance premiums. These credits can be applied in advance to reduce premiums throughout the year or claimed later when filing federal taxes.

To qualify, individuals must do both of the following:

1. Purchase an ACA-compliant health plan through a federal or state marketplace.
2. Meet specific income requirements based on household size.

Employees offered an ICHRA must choose between using their premium tax credit or participating in the ICHRA — they can’t have both. If their ICHRA allowance is considered affordable, they aren’t eligible for the credit. Therefore, it’s in their best interest to opt into their ICHRA benefit. 

If their allowance is unaffordable, they may opt out of the ICHRA and collect their premium tax credits.

19. Integration

Integration describes how an ICHRA interacts with other types of employer-sponsored benefits. For example, an ICHRA can’t integrate with traditional group health insurance for employees within the same class. However, employers can provide both benefits at their organization as long as they offer one or the other to separate employee classes. 

For example, you can provide group coverage to your full-time employees and an ICHRA to your part-time staff. But you can’t give your full-time workers the choice between which benefit they prefer to join.

Additionally, the ICHRA can integrate with group ancillary benefits, or your employees can enroll in their own supplemental plans and participate in the ICHRA simultaneously. If your plan design allows it, they can even use their ICHRA allowance to pay for many of those individual ancillary premiums.

20. ICHRA administration

ICHRA administration involves managing all aspects of an employer’s ICHRA benefit, including compliance, documentation, reimbursement review, and employee communication.

HRA administrators are typically software-only or full-service solutions. Software-only platforms automate core functions such as setting allowances, processing claims, and generating reports. In contrast, full-service administrators combine technology with expert guidance for compliance support, onboarding, and employee education.

One of the best full-service ICHRA administrators out there is Remodel Health. With our dedicated team and innovative ICHRA+® solution, we make designing and managing your employee benefits easier and more robust than self-administration or software-only options. 

Here are the services we offer:

• Expert assistance with plan design and compliance documentation.
• Required legal notices and employee communications.
• Automated premium payment (AutoPay) with built-in protection.
• In-house employee onboarding and health plan shopping support.
• Seamless HRIS and payroll integrations.

Conclusion

Mastering ICHRA terminology is a great first step toward navigating the benefit with ease. With this glossary as your reference, you’ll have the information needed to educate employees, fulfill compliance requirements, and manage your company’s ICHRA from design to administration more effectively. 

If you need help tackling some of the more complex and time-consuming aspects of ICHRA administration, Remodel Health’s team of experts is standing by to assist. Chat with us today to learn how we can help you and your employees get the most out of the ICHRA.