ICHRA Legal Structure: A Regulatory Reference for Employers

An individual coverage HRA (ICHRA) is an employer-sponsored group health plan that delivers health benefits through individual health insurance or Medicare, rather than a traditional pooled group policy.

Most guides to the ICHRA explain what it does: it lets employers set a defined annual budget that employees use to buy their own health insurance. Far fewer explain where all the rules come from, or why they are structured the way they are. For businesses considering an ICHRA, or already running one, understanding its legal structure makes each requirement easier to follow with confidence.

This article covers:

• The legal identity of the ICHRA and where it came from
• The structural requirements every compliant ICHRA must satisfy
• How the ICHRA interacts with ACA premium tax credits, cafeteria plans, and the employer mandate
• What ongoing obligations come with the plan as an ERISA group health plan

ICHRA at a Glance

Requirements for a Compliant ICHRA

The ICHRA's compliance requirements are organized below in the sequence of its underlying regulation.

Individual Coverage Enrollment

Every employee and covered dependent must be enrolled in qualifying individual health insurance or Medicare for each month the ICHRA is used. [1] Qualifying coverage means individual-market health insurance or Medicare. Short-term limited-duration insurance, coverage consisting solely of excepted benefits, and employer-sponsored group health coverage (such as a spouse's employer plan) do not qualify. This requirement distinguishes the ICHRA from the QSEHRA, which only requires that the employee have any minimum essential coverage.

If an individual's qualifying coverage lapses, the ICHRA cannot reimburse expenses incurred during the lapse period for that person.

Coverage Substantiation

Before issuing any reimbursement, the employer must verify that the participant and any covered dependents are enrolled in qualifying individual coverage for the month the expense was incurred. [1] Acceptable documentation includes an insurance card, Exchange enrollment confirmation, or a written employee attestation specifying coverage details. The employer may rely on employee attestations unless it has actual knowledge that coverage has lapsed.

Standard expense documentation requirements, such as receipts or explanation of benefits forms, also apply when employees submit reimbursement requests.

Employee Classes

Employers may offer different ICHRA amounts, or a traditional group plan, to different segments of their workforce, using only the objective employment categories defined in the regulations. [1] Classes must be established before the plan year begins and are locked for that year.

The ten permitted categories are:

• Full-time employees
• Part-time employees
• Salaried employees
• Hourly/non-salaried employees
• Employees in the same geographic rating area
• Seasonal employees
• Collectively bargained employees
• Employees in a waiting period
• Non-resident aliens without U.S.-based income
• Temporary placement employees

Two or more of these categories may also be combined to define a given class.

In practice, the class system allows employers to structure benefits around meaningfully distinct groups. A common approach for multi-state employers: offer a traditional group plan to employees in the employer's home state while offering an ICHRA to employees in other states, where individual-market options may be stronger or more cost-effective. Geographic rating area classes defined by an entire state, or a combination of whole states, are exempt from the minimum class size requirements described below, which is one reason this structure works cleanly in practice.

Minimum class size requirements apply when an employer offers a traditional group plan to at least one class and an ICHRA to at least one other class. The required minimum is based on total employer size on the first day of the plan year, and is measured on the number of employees offered the ICHRA, not those who enroll.

There is one additional exception.  An employer currently offering a traditional group plan to an existing class can open an ICHRA to employees hired on or after a specified future date within that class, without the minimum class size requirement applying to that new-hire subgroup.

For more on the class system, see our class guide and employee eligibility guidance.

Same Terms Requirement

Within each employee class, the ICHRA must be offered on the same terms to all employees. 

However, the ICHRA allowance may vary between employees based on the following: Contribution amounts may increase with the number of covered dependents, reflecting the higher cost of family coverage in the individual market. Amounts may also increase with participant age, up to a 3:1 ratio ceiling between the oldest and youngest participants. Contributions cannot decrease as a participant ages.

The employer must determine before the plan year begins whether employees who join mid-year receive the full annual contribution or a prorated amount based on remaining months. The chosen method must be applied consistently across the class.

No Traditional Group Plan to the Same Class

An employer cannot offer both a traditional group health plan and an ICHRA to employees in the same class. Employees in a class cannot be given a choice between the two.

The new hire special rule provides one exception. An employer may continue offering a traditional group plan to existing employees in a class while opening the ICHRA to employees hired on or after a specified future date within that same class. The minimum class size requirement does not apply to the new-hire subgroup under this arrangement.

Annual Opt-Out Right

Every employee must be given the opportunity to decline the ICHRA once per plan year, generally before the plan year begins. [1] This right exists primarily to allow employees with an unaffordable ICHRA the ability to opt out in order to access marketplace premium tax credits.

Upon termination of employment, the employee must either forfeit the remaining HRA balance or permanently opt out of and waive future reimbursements from the plan.

Notice Requirements

Before ICHRA coverage can take effect for any participant, the employer must provide a written notice explaining the plan's terms and the employee's rights. [1]

For new participants (and the first plan year of a newly established ICHRA), notice must be provided no later than the date coverage can first take effect. For employers established fewer than 120 days before the plan year starts, the same standard applies. For established ICHRAs in subsequent plan years, the notice must be distributed at least 90 days before the plan year begins, by early October for a January 1 plan year.

Required notice content includes: 

• The ICHRA's annual contribution amount and any proration rules
• Confirmation that individual health insurance or Medicare enrollment is required
• An explanation of how the ICHRA affects premium tax credit eligibility and how to opt out
• Information about the special enrollment period to purchase individual coverage
• Contact information
• A statement that individual coverage purchased through the ICHRA is generally not subject to ERISA as a separate plan

Eligible Expenses

ICHRAs reimburse qualified medical care expenses as defined under IRC §213(d), including individual health insurance premiums and out-of-pocket costs such as deductibles, copays, coinsurance, and prescription drugs. [6] The plan document determines which §213(d) categories the ICHRA covers; a plan can be limited to premiums only or structured to include both premiums and out-of-pocket expenses.

An ICHRA can also be designed to be compatible with health savings accounts (HSAs) by limiting reimbursements to premiums, allowing employees enrolled in a qualifying high-deductible health plan to also contribute to an HSA.

For a full list of reimbursable items, see our eligible expenses guide.

The ICHRA and the ACA Tax Framework

The ICHRA intersects with the ACA's tax framework in three ways: cafeteria plan coordination, premium tax credit eligibility, and (for applicable large employers) the employer shared responsibility mandate.

Cafeteria Plan Coordination

Employers with ICHRAs can allow employees to use pre-tax salary reductions through a Section 125 cafeteria plan to pay the portion of individual health insurance premiums not covered by the ICHRA. [1] This option applies only to coverage purchased outside of an ACA marketplace Exchange; pre-tax salary reductions cannot be used for Exchange-purchased coverage.

Without an ICHRA, employees cannot use pre-tax salary reductions to pay individual-market premiums. The 2013 guidance that established this restriction remains in effect for arrangements that do not meet the ICHRA integration conditions. [7]

Premium Tax Credit Coordination

Whether an ICHRA is considered affordable determines an employee's eligibility for marketplace premium tax credits (federal subsidies that help qualifying individuals pay for health insurance purchased through an ACA marketplace Exchange).

An ICHRA is affordable for a given month when the employee's net cost for self-only coverage does not exceed the ACA affordability percentage of their household income. [2] Net cost is calculated as the lowest-cost silver plan premium in the employee's rating area minus the monthly ICHRA contribution amount. For plan years beginning in 2026, the affordability percentage is 9.96%, per IRS Revenue Procedure 2025-25; [3] this figure is indexed annually and should be verified each plan year.

Three rules govern how the ICHRA interacts with marketplace premium tax credits:

1. An employee offered an affordable ICHRA is not eligible for marketplace premium tax credits, whether or not they accept the ICHRA.
2. An employee enrolled in the ICHRA is not eligible for marketplace premium tax credits for the months the ICHRA covers.
3. An employee offered an unaffordable ICHRA may opt out before the plan year begins and may be eligible for marketplace premium tax credits, subject to other eligibility conditions.

An employee who does not exercise the opt-out right before the plan year begins cannot claim marketplace premium tax credits for the months covered by that plan year.

For more detail, see our premium tax credit guide.

Employer Mandate (Applicable Large Employers Only)

Two separate provisions of the ACA employer mandate apply to ALEs offering an ICHRA.

Under §4980H(a), ALEs must offer minimum essential coverage to at least 95% of their full-time employees. Offering an ICHRA to a full-time employee satisfies this obligation for that employee.

Under §4980H(b), the coverage offered must also be affordable. This requires a separate calculation, and the affordability definition for the employer is not the same as for the employee. Both use the same 9.96% threshold for 2026, but the inputs differ. Employees calculate against their actual household income and the lowest-cost silver plan in their home rating area. ALEs may use safe harbor proxies instead: the location-based safe harbor (lowest-cost silver plan at the employee's primary work location), the W-2 wages safe harbor, the rate-of-pay safe harbor, or the federal poverty line safe harbor. A chosen safe harbor must be applied consistently within each class.

The practical implication: an ICHRA that satisfies an ALE's §4980H(b) obligation via safe harbor may still be unaffordable for a given employee's personal PTC calculation. That employee can opt out and potentially claim marketplace PTCs; the ALE's §4980H(b) obligation remains satisfied.

Proposed regulations governing ICHRA affordability for §4980H purposes (REG-136401-18) were issued in September 2019; employers may currently rely on them. [4]

ALEs are generally those that averaged at least 50 full-time employees plus full-time equivalents in the prior calendar year. For the full calculation methodology, see our ALE calculator.

ERISA, COBRA, and Reporting Obligations

As an employer-sponsored group health plan, the ICHRA carries ongoing obligations under ERISA (the Employee Retirement Income Security Act) and federal reporting requirements.

The ICHRA as an ERISA Plan

The ICHRA is a group health plan subject to ERISA, and must be established under a written plan document before the plan year begins. [5] For most private-sector employers, a Summary Plan Description (SPD) must also be provided to participants. Form 5500 annual reporting requirements apply to ICHRA sponsors meeting applicable plan size thresholds; see our compliance guide for details.

ERISA Safe Harbor for Individual Coverage

The individual insurance policy an employee purchases through an ICHRA is a separate matter from the ICHRA itself. Under 29 CFR §2510.3-1(l), that individual policy is not treated as part of an ERISA plan (and remains individual-market coverage) if three conditions are met: [5] 

• The employer does not endorse or control the specific coverage purchased
• Participation is voluntary
• The employer receives no consideration beyond reimbursement of premiums.

The annual notice must include a statement informing employees of this.

COBRA

Loss of individual health insurance coverage is not a COBRA qualifying event; standard qualifying events such as termination and reduction in hours apply. [1] Some states have comparable continuation coverage statutes for employers below the federal threshold.

ICHRA COBRA differs from group plan COBRA: because the employee's individual insurance policy is their own, they can continue paying the premium directly to the carrier. Electing COBRA continuation extends only the employer's HRA contribution subsidy, and doing so generally makes the employee ineligible for marketplace premium tax credits during the covered months. Employees should compare this against marketplace coverage with potential PTCs before making a final decision.

ACA Information Reporting

Two annual reporting obligations apply to all ICHRA sponsors. Non-ALEs file Forms 1094-B and 1095-B to report minimum essential coverage. ALEs file Forms 1094-C and 1095-C to satisfy §4980H reporting obligations; these forms include special reporting codes for ICHRA offers and require the employee's age, zip code, and required contribution amount. [11]

Employee copies are due January 31. IRS filings are due February 28 for paper returns and March 31 for electronic filings.

For a detailed breakdown, see our tax reporting guide.

PCOR Fee

ICHRAs are applicable self-insured health plans subject to the Patient-Centered Outcomes Research fee under IRC §4376. [12] The fee is reported and paid annually on Form 720, due July 31 of the year following the plan year end, based on the average number of covered lives under the plan.

See our compliance guide for a full walkthrough.

Frequently Asked Questions

Can I Offer an ICHRA to Some Employees but Not Others?

Yes, provided the groups are in different employee classes as defined in the regulations. An employer cannot offer both a traditional group plan and an ICHRA to employees within the same class, and employees cannot be given a choice between the two.

What if an Employee Doesn't Have Individual Health Insurance?

The employee cannot receive ICHRA reimbursements for any month they are not enrolled in qualifying individual health coverage or Medicare. Expenses incurred during a coverage gap cannot be reimbursed retroactively. Note that an employee covered under a spouse's or parent's employer group plan does not have qualifying ICHRA coverage; individual-market enrollment or Medicare is specifically required.

Is There a Minimum ICHRA Contribution?

There is no federally mandated minimum. Employers set the annual contribution at any level. For ALEs, the contribution amount determines whether the ICHRA satisfies the §4980H(b) affordability standard, which affects both employer mandate compliance and whether employees can access marketplace premium tax credits.

Can a Business Owner Participate in an ICHRA?

It depends on the business structure. C-corporation owner-employees generally can participate. Sole proprietors, partners in a partnership, LLC members taxed as partners, and S-corporation shareholders with more than 2% ownership generally cannot.

What Is the Difference Between an ICHRA and a QSEHRA?

The biggest difference is who can participate. A QSEHRA can reimburse employees who have qualifying health coverage, including employees covered through a spouse's group health plan. As a result, a QSEHRA can often benefit nearly an entire workforce.

An ICHRA is more restrictive. To participate, employees generally must be enrolled in individual health insurance or Medicare. Employees covered under a spouse's employer-sponsored health plan are generally not eligible to participate. As a result, ICHRAs tend to focus on employees who need to purchase their own health insurance, making them function more like a traditional group health plan.

From Rules to Practice

The ICHRA's requirements all trace back to the same design principle: integration with individual health insurance markets within the ACA's framework. Understanding that foundation makes it easier to follow the rules with confidence. Our platform handles plan documentation, annual notices, substantiation, reimbursements, and tax reporting reminders to ensure your ICHRA runs properly from day one.

Last updated: July 22, 2026

Sources

1. U.S. Departments of Treasury, Labor, and Health and Human Services. "Health Reimbursement Arrangements and Other Account-Based Group Health Plans." 84 Fed. Reg. 28888 (June 20, 2019). https://www.federalregister.gov/documents/2019/06/20/2019-12571/health-reimbursement-arrangements-and-other-account-based-group-health-plans
2. 26 CFR §1.36B-2. "Eligibility for Premium Tax Credit." https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR0b4ec30b3c9e09a/section-1.36B-2
3. IRS Revenue Procedure 2025-25. 2026 ACA Affordability Percentage (9.96%). https://www.irs.gov/pub/irs-drop/rp-25-25.pdf
4. IRC §4980H; IRS Proposed Regulations REG-136401-18 (September 30, 2019). 84 FR 51471. https://www.federalregister.gov/d/2019-20034
5. 29 CFR §2510.3-1(l). "ERISA Safe Harbor for Individual Health Insurance Policies." https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-C/part-2510/section-2510.3-1
6. IRC §213(d). "Medical Care Expenses." https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section213&num=0&edition=prelim
7. IRS Notice 2013-54; DOL Technical Release 2013-03 (September 13, 2013). https://www.irs.gov/pub/irs-drop/n-13-54.pdf
8. 21st Century Cures Act, §18001 (Pub. L. 114-255, December 13, 2016). https://www.congress.gov/114/plaws/publ255/PLAW-114publ255.pdf
9. Executive Order 13813 (October 12, 2017). https://www.federalregister.gov/documents/2017/10/17/2017-22677/promoting-healthcare-choice-and-competition-across-the-united-states
10. 45 CFR §155.420(d)(14). "Special Enrollment Periods." https://www.ecfr.gov/current/title-45/subtitle-A/subchapter-B/part-155/subpart-D/section-155.420
11. IRS. "About Form 1095-C, Employer-Provided Health Insurance Offer and Coverage." https://www.irs.gov/forms-pubs/about-form-1095-c
12. IRC §4376. "Patient-Centered Outcomes Research Trust Fund Fee." https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section4376&num=0&edition=prelim