What Is ICHRA and How Does It Work? Your 2025 Guide to Individual Coverage HRAs

For years, traditional group health plans have been the go-to option for employee benefits. But rising premiums and rigid structures make them a tough fit for modern workforces. Employers want predictability. Employees want flexibility. And that’s where ICHRA comes in.

Short for Individual Coverage Health Reimbursement Arrangement, ICHRA is a tax-advantaged model that gives employers more control over healthcare costs while offering employees more say in their coverage. 

This guide walks through what ICHRA is, how it works, what plan types are available, and why more businesses are making the switch.

The quick cut

• ICHRA lets employers reimburse employees for individual health insurance premiums and medical expenses—tax-free.
• It offers predictable costs for employers and greater plan choice for employees.
• Employers set monthly allowances; employees choose the coverage that works best for them.
• ICHRA works well for growing, distributed, or cost-conscious teams looking for flexibility.

What is ICHRA?

ICHRA stands for Individual Coverage Health Reimbursement Arrangement. It’s a modern alternative to traditional group insurance that lets employers set a tax-free monthly contribution for employees to use on individual health insurance premiums and eligible medical expenses.

Introduced in 2020, ICHRA expands on earlier models like QSEHRA. It’s available to employers of all sizes and doesn’t have contribution limits. Best of all, it puts employees in control. They choose and manage their own health insurance plan, so coverage can match their needs and stay with them even if they switch jobs.

How does ICHRA work?

In a nutshell: Employers offer a fixed monthly allowance. Employees then use that allowance to purchase individual health insurance that meets their personal needs, either through the ACA Marketplace or directly from a carrier.

This model gives employees access to the full individual market (often 50 to 100+ plan options) rather than a few group plan options through a single carrier. 

Here’s how it works in practice:

1. Set an allowance

Employers decide how much to contribute each month. While there are some specific guidelines to ensure equitable contributions, businesses can vary the monthly amount by employee class, like:

• Full-time versus part-time
• Salaried versus hourly
• Geographic location
• And more

This makes it easy to align benefit spend with real workforce dynamics.

2. Notify employees

ICHRA regulations require employers to notify employees at least 90 days before the plan takes effect. This ensures they understand their benefits, how they work, and how the model impacts eligibility for premium tax credits.

3. Employees shop and enroll

Employees select their own health plan through the Marketplace, a carrier, or an enrollment platform like Zorro. After purchasing coverage, they submit documentation and receive tax-free reimbursements, up to their monthly allowance. If a plan costs more, they can cover the difference out of pocket or through payroll.

ICHRA plan types: Premium-only vs. excess-allowance

Employers can choose between two primary ICHRA configurations: premium-only and excess-allowance plans. 

Premium-only plans are the most straightforward. They’re ideal for employers looking to help employees afford coverage without overcomplicating administration.

Excess-allowance plans allow unused funds (after premiums) to be applied to eligible expenses like dental, vision, or copays. This option gives employees more value while keeping employers in control.

Choosing between these options depends on your goals. Many companies start with premium-only plans and expand over time based on employee needs.

ICHRA pros and cons

Before making the switch, it’s important to understand where ICHRA shines and what to watch out for.

Benefits of ICHRA:

• Cost control: Employers set fixed contributions, avoiding the unpredictability of group premium hikes.
• Greater choice and flexibility: Employees can select from dozens of plans that meet their individual needs.
  Plan portability: Employees own their coverage, so it stays with them if they change jobs.
• Simplified admin: No more managing group plan renewals or wrangling carrier negotiations.

Potential drawbacks:

• Initial setup: There’s a learning curve, but the right ICHRA administration partner (like Zorro) can smooth the transition.
• Employee education: Employees may need help understanding their options and the reimbursement process.
• Medicare coordination: Special attention may be needed for Medicare-eligible employees.

With the right support and a robust ICHRA provider at your side, these challenges are easily addressed.

Is ICHRA a fit for your business?

ICHRA may be a strong fit if:

• You want to control benefit costs without sacrificing quality
• Your team is spread across different states or regions
• You’re scaling quickly and need a solution that grows with you
• You want to increase employee choice and satisfaction
• Your current group plan has low participation or mixed feedback

If several of these points hit a nerve, it’s worth exploring whether ICHRA could work for your team.

In conclusion

ICHRA represents a meaningful shift toward more flexible, employee-centric health benefits. With predictable costs, a wide range of plan options, and simplified administration, it offers a modern alternative to traditional group health insurance.

Want to see how ICHRA could work for your business? Book a demo or download Zorro’s ICHRA A-Z guide to get started.