ICHRA Explained: A Defined-Contribution Model Built for Employers of Any Size

If you’ve heard the term “ICHRA” thrown around but never gotten a plain-English explanation, here’s the short version: it’s a way for employers to fund employee health coverage without sponsoring a traditional group plan at all.

The basic mechanics

An Individual Coverage Health Reimbursement Arrangement (ICHRA) lets you:

1. Set a monthly contribution amount — per employee, or per class of employees (full-time vs. part-time, salaried vs. hourly, different locations, and so on).
2. Employees shop for their own individual health plan on the ACA marketplace or off it, choosing the coverage that actually fits their life — their doctors, their prescriptions, their family’s needs.
3. You reimburse their premium, tax-free, up to the amount you set. If they choose a plan that costs less than your contribution, they keep the difference tax-free (up to your allowance) as often as your plan design allows; if they choose one that costs more, they pay the difference themselves.

That’s the entire structure. No carrier negotiation. No annual renewal roulette. No one-size-fits-all plan that works for some of your team and poorly for the rest.

Where it came from

ICHRA has been available to employers of every size since 2020, created specifically to give businesses an ACA-compliant alternative to traditional group coverage. It’s not a workaround or a gray-area strategy — it’s a fully sanctioned benefit structure, and it’s grown substantially since it launched, particularly as group renewal costs have climbed.

Who it’s for

Practically any employer:

• Small businesses that can’t get competitive group rates because of their size, or that have a handful of employees with very different coverage needs
• Larger employers looking for cost predictability instead of annual uncertainty
• Multi-location or multi-state businesses, since ICHRA allowances can vary by geography — matching contribution amounts to local plan costs rather than forcing one national number
• Businesses with a mix of full-time, part-time, salaried, and hourly staff, since you can set different contribution classes for each group

What it isn’t

ICHRA isn’t a way to avoid offering benefits or to under-fund coverage. If you have 50 or more full-time-equivalent employees, the IRS requires your contribution to meet an affordability threshold (9.96% of household income for 2026, adjusted annually) or you risk penalties. Smaller employers aren’t legally bound by that threshold, but it’s still the right benchmark to aim for if you actually want your team enrolling in and using their coverage.

The bottom line

ICHRA turns an unpredictable group insurance expense into a fixed, controllable one — while giving your employees more say over the coverage they actually get. In the next few articles, we’ll walk through exactly how employees benefit, how the math changes (or doesn’t) based on your company’s size, and what the switch actually looks like step by step.

Want to see what an ICHRA allowance would look like for your specific team? Book a free consultation or call (952) 210-9456.