What Is an ICHRA? The Individual Coverage HRA, Explained for 2027
An ICHRA is a monthly allowance, not a group policy. Any size employer can reimburse employees' individual health or Medicare premiums, class by class. It now also goes by CHOICE Arrangement, and its 2027 affordability number is 10.22%.
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What Is an ICHRA (Individual Coverage HRA)?
An ICHRA, short for Individual Coverage Health Reimbursement Arrangement, is an employer-funded arrangement that reimburses employees for health coverage they buy on their own. Instead of picking one group plan for everyone, you set a monthly allowance, and each employee chooses an individual-market plan, or Medicare, that fits them.
It comes from a 2019 federal rule covering plan years beginning on or after January 1, 2020, and the federal FAQs are blunt: "employers of all sizes may offer an Individual Coverage HRA." In practice, ICHRA health insurance is ordinary individual coverage paid for partly or fully with employer dollars.
Our group health insurance guide for employers covers the traditional route; whether an ICHRA beats a group plan for your roster is a separate decision, covered in ICHRA vs group health insurance.
FreedInsure LLC (NPN: 20230457) is an independent brokerage licensed in 42 states. We quote ICHRA and group plans side by side, free to your business. Call (844) 788-3733 to talk to a group benefits broker.
Quick answer: An ICHRA (Individual Coverage Health Reimbursement Arrangement) lets an employer of any size reimburse employees' individual-market or Medicare premiums, up to a monthly allowance set by employee class. Since September 3, 2026 it is also called a CHOICE Arrangement, with the same rules. For 2027, the offer is affordable if the lowest-cost self-only silver premium minus the allowance is at most 10.22% of monthly household income.
What Is a CHOICE Arrangement?
A CHOICE Arrangement is an ICHRA under a new name. On September 3, 2026, SBA Administrator Kelly Loeffler and CMS Administrator Dr. Mehmet Oz announced "CHOICE Arrangements" as the new name for individual coverage HRAs. On September 10, Groom Law Group summed it up: "The core structure of ICHRAs remains the same."
The House version of the One Big Beautiful Bill Act would have written ICHRAs into law as CHOICE arrangements, but that provision was dropped from the version signed on July 4, 2025. As of fall 2026, the ICHRA rules still come from the 2019 regulation; eligibility, classes, notices and the affordability test did not change on September 3.
KFF reports that in 2025, 9% of firms with 10 or more workers that don't otherwise offer health benefits, and 4% of firms that do, funded individual-market coverage for at least some employees. The HRA Council estimates that at least 500,000 to 1 million people were enrolled in ICHRAs and QSEHRAs in 2025. Under 50 full-time-equivalent employees, with no group plan, and want the simpler, capped cousin? See what a QSEHRA is.
How Does an ICHRA Work?
You set a monthly allowance for each class of employee, employees buy their own individual coverage, and you reimburse premiums up to the allowance. Participants must be enrolled in individual health insurance (bought on or off the Exchange) or Medicare for each month they're covered. Four ICHRA rules shape every design:
🏢 Any Company Size
Federal FAQs say employers of all sizes may offer one. Unlike a QSEHRA, there's no under-50 limit to outgrow.
📄 Individual Coverage Only
Employees need individual health insurance or Medicare. Short-term plans and dental- or vision-only coverage don't count as the required coverage.
👥 Same Terms by Class
Everyone in a class gets the same offer. Amounts can rise with age or number of dependents, and age-scaled amounts have a cap.
📬 Notice and Opt-Out
Employees get a written notice, generally at least 90 days before the plan year, and must be allowed to opt out at least once a year.
Employee classes
Allowed classes include full-time, part-time, seasonal, salaried, non-salaried (such as hourly), employees in the same geographic location (a rating area, a state or a multi-state region), a collective-bargaining unit, employees still in a waiting period, non-resident aliens with no U.S.-based income, temporary employees of staffing firms, and combinations of these.
Allowance amounts
Within a class, the allowance can grow with age or family size. If you age-scale, the spread is capped: under the 2019 rule as benefits law summaries describe it, the oldest participant's amount can be no more than three times the youngest's. Confirm the exact limits with your benefits attorney before you set age bands.
Mixing an ICHRA with a group plan
You can't offer an ICHRA and a traditional group health plan to the same employee, but you can offer a group plan to one class and an ICHRA to another. When you split classes by full-time/part-time, salaried/non-salaried, or a geography smaller than a state, a minimum class size applies: 10 employees if you have fewer than 100, 10% of employees if you have 100–200, and 20 employees if you have more than 200. A separate "new hire rule" also exists.
What Is the ICHRA Affordability Percentage for 2027?
10.22%. IRS Rev. Proc. 2026-26 sets the required contribution percentage at 10.22% for plan years beginning in 2027, up from 9.96% in 2026. An ICHRA is affordable when the employee's cost for the lowest-cost self-only silver plan, after the allowance, stays at or below that share of monthly household income.
The ICHRA affordability test (26 CFR 1.36B-2(c)(5)) has three steps. (1) Find the monthly premium for the lowest-cost silver plan for self-only coverage on the Exchange in the employee's rating area. (2) Subtract the monthly self-only ICHRA allowance. (3) Compare the result with 1/12 of household income × 10.22%. At or below that number, the offer is affordable. (A QSEHRA's test uses the second-lowest silver plan instead.)
Worked example (simple arithmetic from the IRS percentages): for a household earning $60,000, 10.22% is $6,132 a year, or $511 a month. The ICHRA is affordable for that employee if the lowest-cost silver self-only premium minus the monthly allowance is $511 or less. At 2026's 9.96%, the same line was $498, so 2027 gives employers about $13 a month of extra room at that income.
What affordability means for premium tax credits
| Employee's Situation | ICHRA Reimbursement | Premium Tax Credit |
|---|---|---|
| Accepts the ICHRA | Yes, up to the class allowance, while enrolled in individual coverage or Medicare | None for any month covered by the HRA |
| Opts out; offer is unaffordable | None | Can claim the credit if otherwise eligible |
| Opts out; offer is affordable | None | None for the employee or family members |
| Buys only short-term or dental/vision-only coverage | Not eligible; that coverage doesn't qualify | Not available on that coverage; credits come only through the Marketplace |
For an applicable large employer (50+ full-time employees, counting full-time equivalents), an ICHRA offer counts as an offer of coverage, and penalty exposure depends on whether it is affordable. Brokers such as HUB International report that 10.22% also applies to employer-mandate affordability for 2027, though the Rev. Proc. states only the tax-credit figure; the wider mandate rules are in our small business health insurance requirements guide. Employees weighing an opt-out can check the ACA income limits or the 2027 ACA subsidy calculator.
How Do You Set Up an ICHRA?
Most setups follow five steps: define classes, price the local market, set allowances, test affordability, then document, notify and reimburse. The hard deadline is the employee notice, generally 90 days before the plan year.
(1) Map your classes, checking minimum class sizes if any class stays on a group plan. (2) Price the market where your people live: lowest-cost silver self-only premiums by rating area drive affordability and show whether decent plans exist. (3) Set allowances, flat per class or scaled by age (no more than three times the youngest's amount) and dependents. (4) Run the 10.22% test for 2027, especially as an applicable large employer. (5) Document, notify, reimburse: put the plan in writing, send the notice (the federal model notice spells out the tax-credit consequences), offer the annual opt-out, and reimburse premiums only for months an employee is enrolled in qualifying individual coverage or Medicare.
Timing for ICHRA 2027 plan years: working back 90 days from a January 1, 2027 start lands on October 3, 2026 (simple date math). Employees then shop during Open Enrollment, which on HealthCare.gov runs November 1, 2026 – January 15, 2027; enrolling by December 15 gets a January 1 start. State exchanges set their own dates; see our 2027 open enrollment deadlines by state.
We're brokers, not tax advisors: confirm the tax treatment of reimbursements with your CPA or benefits attorney before the first payment goes out.
Is an ICHRA Good for Employees?
It is when local individual plans are solid and the allowance is sized to local silver premiums. Employees pick their own plan and network. It can backfire where individual options are thin, or where an affordable offer takes a lower-wage employee's tax credit off the table.
The upside: a choice among whatever carriers sell locally, allowances that can grow with dependents, and premium help for staff on Medicare. The downside: employees shop on their own, and an ICHRA that passes the affordability test blocks premium tax credits for the employee and family, even if they opt out. Under current law as of fall 2026, 2027 credits stop at 400% of the poverty level (about $63,840 for a single person), so the trade-off hits lower- and middle-income staff hardest. For a healthy team in a weak individual market, compare a level-funded group plan.
Straight talk: An ICHRA works when your employees can buy decent individual plans in your rating areas and you set the allowance against local silver premiums, not a national average. In thin markets with only one or two carriers, a traditional group plan can be the better buy, and for a healthy team a level-funded plan is worth pricing too. We'll quote both and tell you plainly which one wins. Call (844) 788-3733.
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