What an ICHRA allowance actually pays for

An ICHRA is money your employer sets aside to buy your own health insurance. You pick the plan. The allowance pays the premium, and your employer can also let it cover other medical costs. You must be enrolled in individual coverage to use it, and you cannot also claim a premium tax credit.

By Brett Spain · Published · Last updated

What an ICHRA is

ICHRA stands for individual coverage health reimbursement arrangement. Say it as "ick-rah" if you have to say it out loud.

The old way: your employer buys one group plan and everyone is on it. The ICHRA way: your employer sets a monthly amount, you buy your own plan on the individual market, and the allowance pays for it.

The rules are in the federal regulation at 26 CFR 54.9802-4. Two things in there matter most to you. You have to be enrolled in individual health insurance to use the money. And your employer has to offer the same terms to everyone in the same class of employees, so it cannot quietly give you less because of your health.

What the money can pay for

Always the premium. That is the point of the arrangement — the monthly bill for the individual plan you chose.

Your employer may also allow it to cover other medical care expenses. That usually means the things you pay on top of the premium:

Whether you get that second part depends on your employer's plan document. Some ICHRAs are premium-only. Read the notice they give you, because the answer is written in it.

The money is not taxed to you. It is not counted as wages, so it does not show up as income on your W-2.

What it cannot pay for

It cannot pay for a group health plan. That includes a spouse's group plan at their job. The whole design assumes you are on the individual market.

It cannot pay for short-term plans, health care sharing ministries, or anything else that is not individual health insurance coverage under the rule.

It cannot be taken as cash. If you do not spend it, you do not get it. There is no cheque at the end of the year.

And it cannot be used alongside a premium tax credit. That one has a section of its own below.

How your employer decides the amount

Your employer picks the number. There is no federal minimum and no federal maximum. A company can offer $200 a month or $2,000 a month.

They may vary the amount by class of employee — full time against part time, salaried against hourly, one location against another — and they may vary it by your age and by how many family members you cover. What they may not do is offer different terms to two people in the same class.

Most employers set the number by looking at what the plans actually cost where their people live. That is why the employer calculator prices against real rates by county rather than a national average: the same allowance is generous in one county and thin in the next one over.

The trade with the premium tax credit

This is the part that catches people out, so read it twice.

If you take the allowance, you cannot also claim the premium tax credit — the subsidy that lowers marketplace premiums for people under a certain income. You get one or the other, not both.

If you turn the allowance down, you can only claim the credit when the allowance counts as unaffordable under the IRS rule. The test is in 26 CFR 1.36B-2(c)(5), and it works like this: take the monthly premium of the lowest-cost silver plan for self-only coverage in your area, subtract your monthly allowance, and compare what is left against a set percentage of your household income. If what is left is more than that percentage, the offer is unaffordable and you may claim the credit instead.

So a small allowance can leave you better off refusing it. A large one almost never does. Work out both before you decide, because the choice is made once per plan year.

What your employer has to tell you, and when

The regulation gives you a written notice, and it gives you a deadline.

Under 26 CFR 54.9802-4(c)(6), the notice has to arrive at least 90 calendar days before the start of each plan year. New hires and people joining mid-year get theirs no later than the day the allowance can first take effect.

The notice has to state the maximum dollar amount available to you, whether your dependants are eligible, that this is an individual coverage HRA specifically, and that you and anyone you cover must be enrolled in individual health insurance to use it.

You also get an opt-out. Under 26 CFR 54.9802-4(c)(4) you must be allowed to refuse the allowance and waive future reimbursements once per plan year, and in general that chance has to come before the plan year starts.

What happens if you leave the job

Your plan is yours. You bought it, it is in your name, and it does not end when the job does.

The allowance does end. Under the same regulation, when you leave, either the remaining amount is forfeited or you are allowed to opt out permanently — your employer's plan document says which. Either way the money stops.

You then keep paying the premium yourself, or switch. Losing an ICHRA is a qualifying life event, so you get a window to change plans outside open enrolment.

Questions people ask

Is the allowance taxed?

No. Reimbursements from an ICHRA are not treated as taxable wages, so the money does not appear as income on your W-2.

Can I use the allowance on my spouse's plan at their work?

No. An ICHRA can only be integrated with individual health insurance coverage. A group plan at another employer does not qualify.

Can I take the allowance and a premium tax credit?

No. If you are enrolled in the ICHRA you cannot claim the credit. If you opt out, you can claim the credit only when the offer is unaffordable under the test in 26 CFR 1.36B-2(c)(5).

How much notice do I get before the plan year?

At least 90 calendar days, under 26 CFR 54.9802-4(c)(6). If you join partway through the year, the notice comes no later than the day the allowance can first apply to you.

Can my employer give different people different amounts?

Yes, but only by class — such as full time against part time, or by location — and within a class only by age and by family size. Two people in the same class with the same age and family size must be offered the same terms.

What happens to the money if I do not spend it?

It stays with the employer. An ICHRA is a reimbursement arrangement, not an account you own, so there is nothing to cash out and nothing to take with you.

How do I tell whether the offer is any good?

Compare the allowance against what plans actually cost where you live, and check that the doctors you already see are in the plan you would buy. Those are two different questions and both have to come out right. You can price it against real rates without giving us an email address.