ICHRA, explained: health benefits with a budget you set.

What is an ICHRA?

An ICHRA is a way for an employer to pay for health insurance without buying a group plan. Instead of choosing one plan for everyone, you set a monthly allowance. Each employee buys their own individual health insurance, and the ICHRA reimburses them — tax-free — up to that allowance.

It was created by a federal rule in 2019 and has been available since January 2020. On September 3, 2026, the Small Business Administration and CMS began calling it a CHOICE Arrangement. Nothing about how it works changed; it's the same benefit under a new name. What the rename means.

How an ICHRA works, step by step

1. You set an allowance for each class of employees — for example, $400 a month for full-time staff and $200 for part-time.
2. You tell employees in writing at least 90 days before the plan year starts, explaining the allowance and how it affects Marketplace subsidies.
3. Each employee buys an individual plan that fits them — on the Marketplace or directly from an insurer — and confirms they have qualifying coverage.
4. The ICHRA reimburses them each month, up to the allowance. If their plan costs less, the difference isn't paid out as cash. If it costs more, they pay the rest.

Depending on how the plan is written, the allowance can cover premiums only, or premiums plus out-of-pocket costs like deductibles and copays.

Who can offer an ICHRA?

Employers of any size, from a business with two employees to one with thousands. The only requirement is at least one W-2 employee who isn't an owner — there's no participation minimum like most small-group plans have.

One thing that surprises owners: business owners usually can't join their own ICHRA tax-free. Sole proprietors, partners and more-than-2% shareholders in an S corporation are treated as self-employed for this purpose. Their employees can participate; they generally can't.

If you have 50 or more full-time-equivalent employees, an ICHRA can satisfy the Affordable Care Act's employer mandate — but only if it's affordable (more on that below). For a small business walk-through, see ICHRA for small businesses; for multi-location and franchise structures, see ICHRA for franchises.

How employers set contributions

You choose the allowance. What you can't do is pick and choose between individual employees — the amount has to be the same for everyone in a class, with two exceptions.

Employee classes

The rules list the classes you can use; you can't invent your own. They include full-time, part-time and seasonal employees; salaried and hourly employees; employees in a waiting period; union employees; employees in different geographic rating areas; and combinations of these.

What can vary within a class

• Age — older employees can get more, up to three times what the youngest employee in the class gets. This matters because individual premiums rise with age.
• Family size — you can give more to employees covering a spouse or children.

If you offer a group plan to some classes and an ICHRA to others, minimum class sizes apply to certain classes: 10 employees if you have fewer than 100, 10% of employees if you have 100 to 200, and 20 if you have more than 200. If you don't offer a group plan to anyone, they don't apply. The full contribution rules.

How employees use an ICHRA

To use the allowance, an employee — and any family member they want reimbursed — needs individual health insurance: a Marketplace plan, an individual plan bought directly from an insurer, or Medicare Parts A and B or Part C. Short-term plans and dental- or vision-only coverage don't count.

• A special enrollment period opens when an ICHRA is first offered, so employees don't have to wait for open enrollment to buy a plan.
• They confirm their coverage before reimbursements start, and again when they submit expenses.
• Any amount above the allowance can be paid with pre-tax payroll deductions — but only for plans bought outside the Marketplace.
• The policy is theirs. If they leave, they lose the allowance but can usually keep the plan by paying for it themselves.

There's a full employee guide at what an ICHRA means for employees.

Affordability and premium tax credits

This is the part most worth getting right. An ICHRA offer is affordable for an employee if the cost of the lowest-cost silver plan available to them, for self-only coverage, minus your allowance, is less than a set percentage of their household income:

• 9.96% for plan years starting in 2026
• 10.22% for plan years starting in 2027

That determination matters in two directions:

• For employees: if the offer is affordable, they can't get a Marketplace premium tax credit — even if they decline the ICHRA. If it isn't affordable, they can opt out and take the tax credit instead.
• For employers with 50+ full-time equivalents: an affordable ICHRA satisfies the employer mandate for that employee. An unaffordable one can trigger a penalty if the employee gets a tax credit.

The Rikor calculator shows this employee by employee for your own team, using real plan prices.

What it takes to administer an ICHRA

An ICHRA is a formal group health plan with federal requirements. The core ones:

• A written plan document and summary plan description.
• The 90-day employee notice, with specific required content.
• Coverage verification — reasonable procedures to confirm employees have qualifying individual coverage.
• An annual opt-out opportunity for employees.
• Reimbursement processing and records, plus ACA reporting if you have 50 or more full-time equivalents.

Every employer requirement, in detail.