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ICHRA: What it is and how it works

This article is for employers and employees using Take Command who want a clear explanation of how ICHRA works, how reimbursement is structured, and what employees must do to participate.

Written by Support

An Individual Coverage Health Reimbursement Arrangement (ICHRA) is an employer-funded health benefit that allows employers to reimburse employees tax-free for individual health insurance premiums and eligible medical expenses, while employees choose their own health insurance plan.

What is an ICHRA?

ICHRA stands for “Individual Coverage Health Reimbursement Arrangement” and is a modern approach to employer-sponsored health benefits. It enables employers of all sizes to reimburse their employees tax-free for health insurance premiums and medical expenses, providing employees with flexibility in choosing their health coverage. Employees typically purchase their own individual health insurance policies through the marketplace and submit proof of coverage for reimbursement.
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ICHRA is an employer-funded HRA that reimburses employees for medical premiums and expenses. Employees pay their individual insurance premiums and/or medical expenses (depending on how the employer designs the ICHRA) and then submits receipts for reimbursement from the employer. The employer establishes the reimbursement allowances per employee. Additionally, employees should note that the monthly rates displayed on the platform may include advanced premium tax credits, but they are not eligible for these credits while participating in an ICHRA. Employees are encouraged to compare plan prices without tax credits to make informed decisions. ICHRA allowances are defined on a monthly basis and vary depending on the employer's plan setup and the employee's coverage class. For example:

  • Single rate: Monthly allowance for employees only.

  • Couple rate: Monthly allowance for employees covering themselves and a spouse.

  • Kids rate: Monthly allowance for employees covering children only, without a spouse.

  • Family rate: Monthly allowance for employees covering themselves, a spouse, and children, or themselves and children only.

ICHRA allowances are a flexible way for employers to support employees in obtaining health coverage. By understanding the monthly allowance structure, the impact on plan selection, and the platform's support features, employees can make informed decisions and maximize their benefits. For further assistance, employees are encouraged to utilize the platform's resources and consult with enrollment specialists.

How does an ICHRA work?

ICHRA follows a simple flow:

  1. Employer sets a monthly reimbursement amount

  2. Employee shops for individual health insurance

  3. Employee enrolls in a qualifying plan

  4. Employee uploads proof of coverage

  5. Employee submits eligible premiums or medical expenses

  6. Employer reimburses the employee tax-free through the HRA platform

Reimbursements are limited to the employer-defined allowance.

Who is eligible for an ICHRA?

Employees must meet two core requirements:

  • Be offered participation in the employer’s ICHRA

  • Be enrolled in Minimum Essential Coverage (MEC) to receive tax-free reimbursements- Note that Medicaid does not qualify for ICHRA, and premiums cannot be reimbursed while enrolled in Medicaid.

Eligible MEC plans include:

  • ACA Marketplace plans

  • Off-exchange individual plans

  • Medicare

  • COBRA

  • Certain student health plans

Employees cannot receive reimbursements without valid MEC coverage.

How do employee classes work in ICHRA?

Employers can group employees into IRS-approved classes and offer different allowance amounts by class.

Common classes include:

  • Full-time employees

  • Part-time employees

  • Seasonal employees

  • Salaried or hourly employees

  • Employees in different geographic regions

  • Employees in waiting periods

  • Employees covered by collective bargaining agreements

  • Temporary or staffing employees

All employees within the same class must be treated consistently.

Can employers offer different benefits to different employees?

Yes. Employers can:

  • Offer different monthly allowances by employee class

  • Offer traditional group health insurance to some classes

  • Offer ICHRA to other classes

However, the same employee cannot be offered both options simultaneously.

How does affordability affect ICHRA and taxes?

Affordability determines whether employees can access Premium Tax Credits (PTC):

  • Affordable ICHRA → Employees cannot receive Premium Tax Credits

  • Unaffordable ICHRA → Employees may choose either:

    • ICHRA reimbursement, or

    • Premium Tax Credits (but not both)

Affordability is calculated using IRS rules based on the cost of a silver-level Marketplace plan and household income.

What expenses can be reimbursed?

ICHRA can reimburse:

  • Individual health insurance premiums

  • Medicare premiums (where applicable)

  • Eligible out-of-pocket medical expenses (depending on employer plan design)

  • Dental and vision expenses (if included in plan design)

Employees must submit receipts and documentation for all reimbursements.

What employees must do to participate

To use an ICHRA, employees must:

  1. Enroll in a qualifying individual health insurance plan

  2. Submit proof of coverage

  3. Submit eligible expenses in the Take Command portal

  4. Maintain active coverage for continued reimbursement5. Upload required documentation to the employer’s ICHRA platform for compliance review.

Without active coverage, reimbursements are paused.New hires should ensure all required documents are submitted promptly to avoid delays in reimbursement eligibility.

Can ICHRA replace traditional group health insurance?

Yes. ICHRA is designed as an alternative to traditional group plans and allows employers to:

  • Control and predict healthcare costs

  • Offer flexible benefits across diverse workforces

  • Support remote, hourly, seasonal, or multi-state employees

  • Provide employees with more plan choice

New Hire Enrollment and Policy Communication

Steps for New Hires to Elect ICHRA Coverage

  1. Verify Eligibility: Ensure you are enrolled in a qualifying individual or family health insurance plan (on or off the exchange) or Medicare. If transitioning off Medicaid, update your status to avoid dual coverage.

  2. Enroll in ICHRA: Once eligible, proceed with ICHRA enrollment through your employer’s program.

Documentation and Compliance Processes

  1. Document Submission: After being added to the employer’s ICHRA program, upload the required documentation to the admin account.

  2. Review Process: The compliance team will review the submitted documents. If they meet the requirements, you will become eligible for reimbursements.

Handling Policy Updates and Communication

  1. Providing Policies to New Hires:

    • If the ICHRA policy is under revision, provide the current (old) policy until the updates are finalized.

    • Once the revised policy is officially in effect, share the updated version with employees.

  2. Including Policies in Offer Letters:

    • If drafting an offer letter before the employee’s start date, include the revised ICHRA policy. This ensures compliance with the requirement to provide notice on or before the first day of eligibility and gives the employee time to review the policy.

FAQs

Q: Can I enroll in ICHRA if I am on Medicaid?

  • No, Medicaid does not qualify for ICHRA, and premiums cannot be reimbursed while enrolled in Medicaid. Transition off Medicaid and enroll in a qualifying health plan to become eligible. Q: What happens if my ICHRA policy is updated after I’ve already received the old version?

  • You will receive the revised policy once it is finalized and officially in effect. Q: Is it mandatory to include the ICHRA policy in a new hire’s offer letter?

  • Yes, including the policy ensures compliance and provides the employee with sufficient time to review it before coverage begins.

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