An ICHRA (Individual Coverage HRA) lets employers of any size reimburse employees, tax-free, for individual health insurance premiums and other qualified medical expenses. The arrangement emerged from a broader push toward consumer-driven healthcare: with the ACA's rollout, most employers lost a compliant way to fund individual-market coverage. While Congress created a targeted solution for small employers through the QSEHRA, it took several years, and action from federal regulators, to establish the ICHRA as a separate option for employers of any size.
This article covers:
- How the ACA's market reforms made standalone HRAs legally untenable
- Why QSEHRA was the first congressional fix, and why it fell short for most employers
- How Executive Order 13813 set the broader solution in motion
- Why the ICHRA was structured the way it was, from employee classes to premium tax credit coordination
- What the ICHRA's regulatory history reveals about how it works today
ICHRA Rules at a Glance
ICHRA Rules
The Problem ICHRA Was Created to Solve
HRAs had been recognized as group health plans since 2002; when the ACA passed in 2010, its market reform requirements applied to them directly. [2] Two in particular created a conflict: the prohibition on annual dollar limits for essential health benefits, and the requirement to cover preventive services at no cost to employees. In 2013, the IRS and the Department of Labor concluded that HRAs could satisfy those requirements only by integrating with a compliant group health plan, effectively closing off the option to reimburse individual-market premiums for most employers. [2]
Congress responded in 2016 with the 21st Century Cures Act (P.L. 114-255), leading to the [creation of QSEHRAs]. The new arrangement carved small employers out of group health plan classification, allowing those with fewer than 50 full-time-equivalent employees to reimburse individual-market premiums directly, subject to a federal annual contribution cap. [3] While QSEHRA offered a workable model, it only affected small employers; mid- and large-sized employers remained without a compliant path to fund individual-market coverage.
Enter the ICHRA
When congressional efforts to repeal and replace the ACA failed in July 2017, the Trump administration shifted to administrative health policy changes. That October, President Trump signed Executive Order 13813, "Promoting Healthcare Choice and Competition Across the United States," directing the Departments of Treasury, Labor, and Health and Human Services to consider expanding HRA usability with individual-market coverage. [4] The agencies also cited the practical case that a defined-contribution model would give employers more predictable cost control.
By 2019, the individual market itself had been fundamentally reshaped by the ACA's consumer protections. Regulators concluded that, if certain conditions were met, an HRA could be integrated with individual-market coverage without undermining the ACA's market reforms.). Because it was a regulatory reinterpretation, not a statutory one, federal regulators could act without waiting for Congress. They proposed a rule in 2018 and finalized it on June 20, 2019, effective January 1, 2020. [1]
By treating an ICHRA as employer-sponsored group health coverage that is integrated with ACA-compliant individual insurance, regulators created a pathway for employers of any size to fund individual-market coverage without violating the ACA. For applicable large employers, an affordable ICHRA could also satisfy the ACA's employer shared responsibility requirements, allowing individual coverage to function as a compliant alternative to a traditional group health plan.
QSEHRA vs. ICHRA: Two Different Regulatory Paths
QSEHRA vs. ICHRA
Why the ICHRA Plan Was Designed the Way It Was
The ICHRA's structure was deliberate; each design feature responded to a specific concern the agencies had about allowing employer money to flow into the individual market. As an employer, understanding that logic makes the rules easier to apply.
It Is a Group Health Plan
The most important conceptual point about the ICHRA: it is a group health plan. This distinguishes it from QSEHRA, which is statutorily carved out of that classification. The ICHRA fits within the ACA framework. By treating the arrangement as employer-sponsored group health coverage that is integrated with individual insurance, regulators created a compliant way for employers to fund individual-market coverage. This structure also allows applicable large employers to use an affordable ICHRA to satisfy the ACA's employer shared responsibility requirements.
Employee Classes Allow Employers to Tailor Benefits
One of the ICHRA's most important design features is the ability to offer different benefits to different groups of employees. Employers are not required to choose between a traditional group health plan and an ICHRA for their entire workforce. Instead, they may divide employees into defined classes based on objective employment characteristics, such as full-time versus part-time status, geographic rating area, salaried versus hourly status, or seasonal employment. [5]
This flexibility allows employers to tailor benefits to different segments of their workforce. For example, an employer may find that a traditional group health plan works well for one population of employees, while an ICHRA is a better fit for another.
At the same time, regulators wanted to ensure that employers could not create ad hoc employee groups to provide richer benefits to favored employees or shift higher-cost employees into the individual market. To address those concerns, employee classes must be based on objective criteria defined in the regulations, employers cannot offer both a group health plan and an ICHRA to the same class of employees, and minimum class size requirements apply in certain situations. Together, these rules promote consistency, fairness, and protection against adverse selection while preserving employer flexibility.
Minimum Class Sizes
When an employer offers a group health plan to some classes of employees and an ICHRA to others, certain classes must meet minimum size thresholds. The requirement helps prevent adverse selection by limiting an employer's ability to create narrowly tailored classes designed to shift higher-cost employees from the group health plan into the individual market. [6]
The regulations also recognize that employers may have legitimate business reasons for offering different benefits to employees in different locations. As a result, geographic classes based on insurance rating areas are generally not subject to the minimum class size rules. For example, an employer may offer a traditional group health plan to employees in New Jersey while offering an ICHRA to a small number of employees located in California, where the group plan may not be practical or available. This exception preserves flexibility for multi-state employers while maintaining the broader protections against adverse selection. [6]
Minimum ICHRA Class Size Requirements
The Opt-Out and Premium Tax Credit Rules Are Structurally Connected
The ACA does not allow employees to receive both an employer-funded ICHRA and a premium tax credit for the same coverage period. As a result, the regulations must determine which benefit takes precedence.
If the ICHRA is considered affordable under the federal formula, the employee is not eligible for a premium tax credit. If the ICHRA is unaffordable, the employee may opt out of the ICHRA and potentially qualify for premium tax credits through the marketplace. The annual opt-out requirement exists to preserve that choice.
No Federal Contribution Cap
QSEHRA and ICHRA were created to solve different problems. QSEHRA was Congress's answer to small employers that had lost the ability to reimburse employees for healthcare expenses after the ACA. In effect, the goal was to let small employers help employees with healthcare costs again. Because Congress was creating a limited exception for a specific group of employers, it imposed annual contribution limits to bound the tax free contributions.
ICHRA had a different objective. Regulators were trying to create a viable alternative to traditional group health insurance for employers of any size. Because traditional group health plans are not subject to federal contribution limits, regulators did not impose a federal cap on ICHRA contributions. Employers may contribute any amount they choose, subject to the other rules governing the arrangement.
Frequently Asked Questions
What is the difference between an ICHRA and a QSEHRA for small businesses?
From a practical perspective, 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.
For a deeper dive, read: ICHRA vs QSEHRA
Can employers of any size use an ICHRA?
Yes. There is no employer size restriction for the ICHRA. If a large employer subject to the ACA's employer shared responsibility provisions offers an ICHRA, the arrangement must meet federal affordability standards for the offer to satisfy those obligations. Small employers can choose between ICHRA and QSEHRA to best suit their business and employees.
Why does the ICHRA remain a group health plan if it is funding individual coverage?
Instead of exempting the ICHRA from group health plan classification (as Congress did with QSEHRA), the agencies reinterpreted the integration requirement to allow individual-market coverage to serve as the qualifying plan. Regulators chose an integration framework rather than a carve-out.
Can an employee use an ICHRA and still receive a premium tax credit?
No. An affordable ICHRA makes the employee ineligible for a premium tax credit for that coverage period. [7] If the ICHRA is considered unaffordable under the federal formula, the employee can opt out and may then qualify for premium tax credits on the marketplace. The two benefits cannot be received simultaneously for the same coverage.
Is there a limit to how much an employer can contribute to an ICHRA?
There is no federal contribution cap. Employers set the reimbursement limit when they establish the benefit. Contribution amounts can vary by employee age and family size within limits specified in the final rule, and the same terms must apply to every employee within a given class. [5]
When does it make sense to offer an ICHRA instead of traditional group coverage?
The ICHRA tends to make sense when an employer wants defined-contribution cost predictability, when employees would benefit from choosing their own plans on the individual market, or when a workforce spans multiple geographic areas where a single group plan is impractical. The class rules also give employers flexibility to offer traditional group coverage to one segment of employees while offering an ICHRA to another.
Why the ICHRA Still Matters
The ACA's market reforms created a conflict the law itself did not fully resolve. Every rule in the ICHRA framework reflects a specific policy choice made in response to that conflict. For employers today, that history is the clearest way to understand what ICHRA means in practice: a defined-contribution benefit that works across workforce types, geographies, and budget sizes in ways that traditional group coverage cannot match.
Start Your Company's HRA Now with SalusionLast updated: July 23, 2026
Sources
[1] "Health Reimbursement Arrangements and Other Account-Based Group Health Plans." 84 Federal Register 28888. U.S. Departments of Treasury, Labor, and Health and Human Services. June 20, 2019. https://www.federalregister.gov/documents/2019/06/20/2019-12571/health-reimbursement-arrangements-and-other-account-based-group-health-plans
[2] IRS Notice 2013-54. "Application of Market Reform and Other Provisions of the Affordable Care Act to HRAs, Health FSAs, and Certain Other Employer Healthcare Arrangements." Internal Revenue Service. https://www.irs.gov/pub/irs-drop/n-13-54.pdf; DOL Technical Release No. 2013-03. U.S. Department of Labor. https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/technical-releases/13-03
[3] Congressional Research Service (Ryan J. Rosso). "Health Reimbursement Arrangements (HRAs): Overview and Related History." R47041. March 7, 2022. https://www.everycrsreport.com/reports/R47041.html; 21st Century Cures Act, P.L. 114-255, Section 18001 (2016).
[4] Executive Order 13813. "Promoting Healthcare Choice and Competition Across the United States." October 12, 2017. 82 Federal Register 48385. https://www.federalregister.gov/documents/2017/10/17/2017-22677/promoting-healthcare-choice-and-competition-across-the-united-states
[5] 26 C.F.R. §54.9802-4(d)(2); see [1].
[6] 26 C.F.R. §54.9802-4(d)(3); see [1].
[7] 26 U.S.C. §36B(c)(4)(C); see [1].
