Sep 9, 2026ICHRA Basics
ICHRA and CHOICE Arrangements: What Changed — and What Didn't
CMS, HHS, and SBA are introducing CHOICE Arrangement terminology for ICHRA. See what changed, what stayed the same, and what employers should watch next.
ICHRA is usually explained in one sentence: the employer provides an allowance, and employees use it toward individual health insurance.
That sentence is accurate enough to start a conversation but not accurate enough to design a benefit.
An Individual Coverage Health Reimbursement Arrangement changes how an employer-sponsored health benefit is structured. Instead of selecting one group health plan for the workforce, the employer establishes a formal health benefit and defines how much it will contribute. Eligible employees then enroll in qualifying individual health coverage that fits their own circumstances.
The employer still sponsors the benefit. The employee takes on a larger role in selecting coverage. Administration connects the two.
That distinction matters, because an ICHRA is not a stipend, a payroll bonus, or an informal agreement to help with premiums. It is an employer-sponsored group health plan subject to specific federal requirements — plan documents, notice deadlines, coverage verification, and, for some employers, affordability testing.
How ICHRA Works
The mechanics come down to four parts.
The employer establishes the arrangement, determines which eligible employees will receive it, and sets the monthly allowance available to each.
Employees shop for individual health insurance — through the federal or state Marketplace, or directly from a carrier, depending on what is available where they live. Each employee selects a plan based on premium, provider network, prescription coverage, deductible, and expected medical needs.
To participate in the ICHRA, the employee must be enrolled in individual health insurance coverage Medicare Part A and B, or Medicare Part C. Coverage is then verified, eligible premium expenses are substantiated, and the employer-funded allowance is administered according to the plan terms.
Depending on its terms, an ICHRA may be limited to individual insurance premiums or may also cover other eligible medical expenses.
The Calendar Is Set by the Notice Deadline
This is where implementation timelines usually break, so it belongs near the front rather than buried in a compliance checklist.
An ICHRA must provide written notice to eligible employees at least 90 days before the beginning of each plan year. Employees who become eligible mid-year — new hires, most commonly — must receive the notice no later than the date their ICHRA coverage can first take effect.
Ninety days is not a formality. It sets the outer boundary of the entire implementation calendar. An employer that decides in early November to launch an ICHRA on January 1 has generally already passed the notice deadline for that plan year. Class design, allowance modeling, affordability analysis, and employee communication all have to fit in front of that date, not after it.
Employees Get a Special Enrollment Period
An employee who newly gains access to an ICHRA generally qualifies for a special enrollment period in the individual market.
When the employee receives the required ICHRA notice at least 90 days before the arrangement begins, the employee generally has the 60 days preceding the start date to select an individual-market plan. Employees who become eligible later and were not required to receive 90 days' advance notice — new hires are the common example — may generally have a window extending 60 days before and 60 days after the triggering event.
That distinction matters. The special enrollment period makes an off-cycle ICHRA start possible, but it does not make timing irrelevant. Employees still need individual coverage in effect when participation begins. An employer that sends the notice and then goes quiet until December will spend December chasing people.
ICHRA Is Not a Group Insurance Policy
With a traditional group health plan, the employer selects the carrier and the plan options made available to employees. Employees choose from that limited menu, and the employer and employees divide the cost according to the contribution structure.
An ICHRA separates the employer's health benefit from a single group insurance contract. The employer sponsors and funds the arrangement, but the policy itself is issued in the individual market. Employees have access to the plans and carriers available where they live, rather than the whole workforce being routed through one group plan lineup.
That is not the same as unlimited choice. Individual-market pricing, carrier participation, networks, and plan availability differ substantially by location — sometimes between counties in the same state. A workable ICHRA strategy depends on more than setting an allowance. It depends on knowing what employees will actually find in the markets where they live.
Who Can Offer an ICHRA?
Employers of any size may generally establish an ICHRA, provided the arrangement is designed and administered in accordance with applicable requirements.
Unlike a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), which is generally limited to eligible small employers that do not offer a group health plan, an ICHRA is not restricted to employers below an employee threshold. A ten-person company, an applicable large employer, and an organization with staff spread across a dozen states can all use the model.
There is also no federal dollar limit on the allowance. The employer sets the amount, subject to plan design, nondiscrimination considerations, affordability strategy, and other applicable rules.
The absence of a ceiling does not make the number arbitrary. The allowance drives employee cost, recruiting competitiveness, premium tax credit eligibility, and — for applicable large employers — potential exposure under the ACA employer shared responsibility provisions.
Which Employees Can Receive an ICHRA?
An employer may offer an ICHRA to its entire eligible workforce, or divide the workforce using permitted employee classes.
The classes are set by regulation. An employer cannot invent one. The permitted classes are:
Full-time employees
Part-time employees
Salaried employees
Non-salaried employees
Seasonal employees
Employees covered by a collective bargaining agreement
Employees who have not satisfied a waiting period
Employees whose primary site of employment is in the same insurance rating area
Certain temporary employees placed by staffing firms
Certain nonresident aliens with no U.S.-based income
A combination of two or more of the classes above
Two points routinely get lost here.
The rating-area class is based on primary site of employment, not on where an employee happens to work on a given day. For distributed and remote workforces, that definition is usually the first thing worth confirming, because it determines whether a location-based class structure holds up at all.
New hires are not a permitted class. They are frequently described as one, and they are not. What the rules allow is a new hire subclass: an employer offering a traditional group health plan to a class may offer an ICHRA to employees hired after a specified date within that same class, while existing employees remain on the group plan. It is a useful transition tool. It is not a class, and treating it as one produces a plan design that does not match the regulation.
Minimum class size
When an employer offers a traditional group health plan to one class and an ICHRA to another, minimum class size rules can apply to certain classes — including full-time and part-time, salaried and non-salaried, rating areas smaller than a state, and combinations built on those.
Full-time and part-time classes have a narrower rule. The minimum class size requirement applies to them only when one of those two classes is offered a traditional group health plan and the other is offered an ICHRA.
The thresholds scale with employer size: 10 employees for an employer with fewer than 100 employees, 10 percent of the workforce for an employer with 100 to 200, and 20 employees for an employer with more than 200.
A 30-person company splitting salaried and hourly staff between a group plan and an ICHRA therefore needs at least 10 employees in the ICHRA class. That single number can invalidate an otherwise sensible design, which is why class structure should be settled before allowances and enrollment workflows are built around it.
Can Allowances Be Customized?
Yes, within defined limits.
Allowance amounts can differ across permitted classes. Within a class, they can also vary by age and by family size, provided the variation follows the applicable rules and is applied uniformly to everyone in the class.
The age variation has a cap: the allowance offered to the oldest participant may not exceed three times the allowance offered to the youngest. The rule broadly reflects the federal individual-market age-rating structure, which generally permits premiums for older adults to reach up to three times those charged to younger adults. State rating rules can differ, so the relationship between age and premium is not identical in every market.
The practical consequence is easier to see with numbers. Take a flat $500 monthly allowance at a 30-person company operating in three states. For a 26-year-old in a competitive rating area, $500 may cover most of a benchmark silver premium. For a 58-year-old in a market with two carriers, the same $500 may cover a third of it. Nothing about that is non-compliant — but the two employees are not receiving a comparable benefit, and they will say so.
Age-banded and family-tier structures narrow those gaps. They also add design work, and they have to be documented and administered consistently, month after month.
There is no clean formula for choosing the number. Allowance design sits between what the employer can fund, what the local markets actually cost, and what affordability testing requires — and those three things rarely point at the same figure. The goal is a contribution structure that fits the workforce and can be administered without exceptions, not the most intricate schedule that technically complies.
What Coverage Does an Employee Need?
An employee must be enrolled in qualifying individual health insurance or eligible Medicare coverage for every period in which they participate.
Qualifying coverage generally includes:
An ACA-compliant individual policy purchased through a Marketplace
An ACA-compliant individual policy purchased directly from a carrier
Medicare Parts A and B
Medicare Part C (Medicare Advantage)
Short-term limited-duration coverage, health care sharing ministries, and coverage consisting solely of excepted benefits do not satisfy the requirement.
Enrollment cannot be assumed. The arrangement must maintain a substantiation process, and employees must be permitted to opt out of the ICHRA and waive future benefits at least annually.
What Happens to Marketplace Premium Tax Credits?
This is the part most often misunderstood, and the part with the most direct financial consequences for employees.
An employee cannot use an ICHRA and a Marketplace premium tax credit for the same period. If the ICHRA offer is considered affordable, the employee generally cannot receive premium tax credits for Marketplace coverage for the same period, even if the employee declines the offer.
If the offer is considered unaffordable, the employee may opt out and claim a premium tax credit instead, assuming they otherwise qualify. What is never available is both.
For applicable large employers, affordability also determines compliance with the ACA employer shared responsibility provisions. The calculation generally looks at the employee's required contribution for the lowest-cost silver plan for self-only coverage in the rating area where the employee resides, after applying the monthly ICHRA amount, measured against the applicable percentage of household income — 9.96% for plan years beginning in 2026. In markets that use age rating, the employee's own applicable age determines which premium applies. That is part of the calculation, not an optional simplification.
Optional safe harbors can reduce the work. The location safe harbor allows an employer to use the employee's primary site of employment rather than their residence. The look-back month safe harbor allows the use of a prior-period premium rather than current-year pricing. The generally applicable Form W-2, rate-of-pay, and federal-poverty-line safe harbors may be used in place of household income. Each carries its own conditions, and safe harbors must be applied uniformly across a class.
Because the affordability percentage is reset annually and individual-market premiums move every year, an allowance that clears the threshold this year will not necessarily clear it next year. This is worth modeling during plan design, while the contribution structure can still change, rather than discovering it during enrollment.
Can an Employer Offer Both an ICHRA and a Group Plan?
Yes — but generally not to the same class of employees.
An employer may offer a traditional group health plan to one permitted class and an ICHRA to another. What the employer cannot do is give employees within a single class a choice between the two. The class determines which benefit is offered, not the individual.
The reason is worth stating plainly: allowing individual choice would let employers steer employees with higher anticipated medical costs out of the group plan and into the individual market. The class structure exists to prevent that.
Is an ICHRA Less Work for the Employer?
It is different work.
The employer may no longer need to select a single plan that attempts to serve an entire workforce. In exchange, the arrangement introduces its own obligations:
Plan design and employee-class decisions
Allowance configuration
Plan documents and required employee notices, on deadline
Affordability analysis, where applicable
Individual coverage verification
Substantiation of eligible premium expenses
Enrollment coordination across multiple markets
Monthly administration and reconciliation
Employee support
ACA reporting and recordkeeping, where applicable
Renewal planning across every market the workforce touches
The policy is individual. The benefit is still employer-sponsored. Moving off a group contract does not move the employer out of benefits administration — it changes which parts are hard.
A platform or administrator can carry most of the operational process. The employer remains responsible for adopting the arrangement and for the decisions assigned to the plan sponsor.
When Does an ICHRA Make Sense?
An ICHRA is worth evaluating when an employer wants a defined-contribution structure, has employees spread across markets, struggles with participation or group-plan availability, or wants employees choosing from the plans available in their own locations. Difficult annual renewals and a geographically diverse workforce both point in the same direction.
None of those conditions makes it the better option automatically.
The quality of the local individual markets matters. So do employee demographics, provider networks, contribution levels, premium tax credit effects, administrative capacity, and the employer's broader benefits strategy. The comparison that matters is the actual ICHRA outcome against the actual group-plan alternative — not against an idealized version of either.
The Idea Is Simple. The Design Is Not.
An ICHRA starts from a straightforward premise: an employer can fund a formal health benefit without requiring everyone to enroll in the same policy.
Turning that premise into a working benefit is where the effort goes. Who is eligible. How allowances are structured, and whether they hold up across age bands and rating areas. Whether the offer is affordable, and whether it still will be next year. How employees evaluate individual plans, and how coverage gets verified month after month.
Which is why the first question is not whether an employer can offer an ICHRA.
The better question is what an ICHRA would actually look like for this workforce, in these markets, at this contribution level.
Disclaimer: This material is provided for general informational purposes and is not intended as legal, tax, or benefits advice. ICHRA requirements may vary based on plan design, workforce structure, and applicable federal and state rules.
