What Is an ICHRA and How Can It Help California Employers?

Health benefits can be one of the biggest expenses for a small business. But what if there was a way to offer your employees tax-free reimbursement for health insurance without the complexities of traditional group plans? That’s where an Individual Coverage Health Reimbursement Arrangement (ICHRA) comes in.

What Is an ICHRA?

An ICHRA is a type of employer-funded arrangement that reimburses employees for their individual health insurance premiums and qualified medical expenses. Rather than offering a one-size-fits-all group plan, employers provide a set monthly allowance. Employees then choose their own ACA-compliant individual plans, pay their premiums, and get reimbursed.

This model gives both the employer and employee more flexibility. It was created in 2020 under a federal rule to expand access to affordable coverage without the administrative burden of managing a group plan.

How Does an ICHRA Work?

• Employer sets a monthly allowance (no minimum or maximum)

• Employees purchase individual health insurance plans (on or off Covered California or the federal marketplace)

• Employees submit proof of insurance and expenses

• Employer reimburses expenses tax-free, up to the allowance amount

Employers can offer different allowances based on job classifications (e.g., full-time vs part-time, salaried vs hourly, geographic location, etc.)

Who Can Use an ICHRA?

• Small businesses that can’t afford traditional group coverage

• Large employers seeking cost control and compliance with the employer mandate

• Self-employed individuals with W-2 employees

• Nonprofits and startups looking for a benefits alternative

To participate, employees must be enrolled in a qualifying individual health plan. ICHRA is not compatible with sharing ministries or short-term plans.

Pros of an ICHRA

• Cost control – You decide the reimbursement cap

• Flexibility – Employees choose the plan that suits their needs

• Tax benefits – Reimbursements are usually tax-free for both parties

• Compliance – Meets ACA employer mandate for large businesses

• No participation minimums like traditional group plans

Cons to Consider

• More employee responsibility – Workers must shop for and manage their own coverage

• Setup and compliance – May require help from a broker or third-party administrator (TPA)

• No group rate discounts – Premiums are based on the individual market

What Does It Cost?

You control the budget. There is no required minimum contribution, and you can vary allowances by class. You may also pay a small administrative fee if using a platform or TPA to manage reimbursements.

Is an ICHRA Right for You?

If you're a California business owner in Los Angeles, Ventura County, or the San Fernando Valley, and you want to offer flexible health benefits without breaking the bank, an ICHRA may be worth exploring. It's also an excellent option for employers with remote teams in multiple states.

Ready to design a flexible benefits solution? Book a free consultation to find out if an ICHRA is the right fit for your business.