ICHRA explained: how it works and when it beats a group plan
An Individual Coverage HRA lets any business, even one with a single employee, give staff a fixed, tax-free monthly allowance to buy their own health insurance. No carrier contract, no renewal shock, no minimum participation. Here is how it works, what it costs, and the one trap to avoid.
How an ICHRA works, in four steps
- 1You set an allowance. For example $400 a month for every full-time employee, with higher amounts allowed for older employees and families within the same class.
- 2Employees buy their own plan. Any individual plan with minimum essential coverage: Marketplace, off-exchange, or Medicare. They can use the PlanVoyager estimate to compare.
- 3They submit proof, you reimburse. An administrator verifies the premium and reimburses through payroll, tax-free to the employee and deductible to you.
- 4Unused allowance stays with you. If an employee picks a cheaper plan, the difference is not paid out. Your cost never exceeds the allowance.
ICHRA vs group plan
| ICHRA | Small-group plan | |
|---|---|---|
| Who can offer it | Any employer, any size, even 1 employee | Usually needs 1–2 non-owner W-2 employees enrolled |
| What the employer pays | A fixed monthly allowance you set | A share of the premium, typically 50%+ of employee-only |
| Who picks the plan | Each employee, on the Marketplace or off-exchange | The employer picks 1–3 plans for everyone |
| Renewal risk | None. The allowance is the budget | Premiums reprice yearly, often up 8–15% |
| Tax treatment | Deductible to the business, tax-free to the employee | Deductible to the business, tax-free to the employee |
| Effect on employee subsidies | An affordable ICHRA offer cancels the Marketplace credit | An affordable group offer cancels the Marketplace credit |
| Admin cost | About $15–$30 per employee per month | None beyond the premium |
| Owner eligibility | W-2 owners (C-corp) yes; S-corp 2% owners, partners, sole props no | Owners can enroll |
The subsidy trap
An ICHRA offer that counts as affordable cancels the employee's premium tax credit, even if they decline it. Affordable means the employee's cost for the benchmark Silver plan, after your allowance, is below the IRS affordability percentage of household income (9.96% for 2026). For a low-wage employee who was getting a large subsidy, a modest allowance can leave them worse off.
If the offer is unaffordable, the employee may opt out of the ICHRA and keep the Marketplace credit. Good administrators run this test for each employee before enrollment. If you own an E-2 or other visa business, note that from 2027 you personally no longer qualify for the credit anyway, so the trap matters only for your employees and citizen family members.
Who should and shouldn't use one
- 1 to 10 employees, or headcount that changes
- Employees in different states or cities
- You want a fixed benefits budget
- Carriers turned you down for group participation rules
- Employees already like their Marketplace plan
- Most employees are low-wage and getting big subsidies
- You are an S-corp owner or sole proprietor who wants coverage for yourself
- You want one simple plan everyone recognizes
- Your state has few individual-market carriers
Get a quote on both
A licensed small-business broker prices an ICHRA and a small-group plan side by side for your headcount and state. Free, no obligation.