ICHRA Explained: How an Individual Coverage HRA Works in 2026

An ICHRA, or individual coverage HRA, is an employer allowance that reimburses you tax-free for health insurance you buy and own yourself. Your employer sets the dollar amount each year. Accepting it, though, ends your eligibility for ACA premium tax credits, so run the 9.96% affordability test before you say yes.

TL;DR: Key takeaways

• Your employer funds an allowance. You buy and own the individual-market policy.
• Accepting the allowance disqualifies your household from ACA premium tax credits for the months it covers.
• The 2026 affordability test is 9.96% of household income, measured against the lowest-cost self-only Silver plan in your area.
• To keep a subsidy instead, opt out in writing and document the offer as unaffordable before you enroll.
• Reimbursement requires coverage in force and proof of payment each cycle. Unused allowance never becomes cash.

An ICHRA is a tax-free allowance, not a health plan your employer buys

So what is an ICHRA? An individual coverage health reimbursement arrangement lets an employer of any size reimburse employees tax-free for qualified medical expenses, including individual-market premiums, instead of offering a traditional group health plan. You pick the plan, you own the policy, and your employer pays you back up to the allowance it set. Nothing is bought on your behalf.

Two names, one program. As of September 3, 2026, federal regulators renamed it the CHOICE Arrangement, short for Custom Health Option and Individual Care Expense. The rules did not change, so your employer's paperwork and HealthCare.gov may use the new name while every search result still shows the old acronym.

There is also no federal minimum or maximum allowance. The employer decides, each plan year, which is why the number on your notice tells you almost nothing on its own.

If all of this feels unfamiliar, that is because it is uncommon. Only 4% to 9% of firms with 10 or more employees offer one, and the Peterson-KFF Health System Tracker puts total enrollment in individual coverage and qualified small employer HRAs combined at roughly 500,000 to 1 million people.

The subsidy trap: taking the allowance can cancel your ACA tax credit

An individual coverage HRA is not free money stacked on top of an ACA subsidy. It is an either/or. Accepting the offer disqualifies your household from premium tax credits for every month the allowance covers, and that holds even when the offer fails the federal affordability test, if you take it anyway.

To keep Marketplace subsidies, you have to do two things before you enroll: formally opt out of the arrangement, and document that the offer is unaffordable. Sequence matters here more than almost anything else on this page.

Your actual decision window is the employer's written notice, which must arrive at least 90 days before the plan year starts. That document carries the allowance amount, and the allowance amount is the one input you cannot source anywhere else.

The catch: the opt-out is generally a once-per-plan-year decision, so guessing wrong costs you for twelve months. Have a licensed broker confirm the current-year rule before you sign.

How an ICHRA works: one fixed sequence, and two deadlines that control it

How does an ICHRA work once your employer commits to one? In a fixed sequence, controlled by a 90-day notice deadline and a 60-day enrollment window.

1. The employer defines employee classes and sets each allowance. Different groups can be funded differently.
2. Written notice goes out at least 90 days before the plan year begins, per HealthCare.gov's notice requirement.
3. You enroll in an individual-market plan. A new offer triggers a 60-day special enrollment period, so you are not stuck waiting for open enrollment.
4. You submit substantiation. Proof of enrollment, plus proof you paid.
5. Your employer reimburses you, tax-free.

Step four is the one employees underestimate. Substantiation recurs. It is not a single form at signup: each reimbursement cycle, you show that the policy is still active and that the premium was actually paid. Coverage must be in force for every month you want reimbursed, so a lapsed payment in March means no reimbursement for March.

And the money is reimbursement only. Whatever you do not spend does not convert to cash or appear in your paycheck.

The affordability test, not the size of your allowance, decides the better deal

ICHRA affordability is a specific piece of arithmetic, and the figure on your notice is meaningless until you run it. For plan years beginning in 2026, the IRS required contribution percentage is 9.96% of household income for self-only coverage. The 9.02% figure still floating around search results was the 2025 number, and it is out of date.

The benchmark is the lowest-cost self-only Silver Marketplace plan in your area, not the plan you actually buy.

Work a hypothetical. Household income of $40,000. Multiply by 9.96% and you get $3,984 a year, about $332 a month. That is your ceiling. Say the lowest-cost self-only Silver plan in your ZIP code runs $600 a month.

With a $500 monthly allowance, your net cost is $100, comfortably under the $332 ceiling. The offer is affordable, and no premium tax credit is available to you. With a $200 allowance, your net cost is $400, over the ceiling. The offer is unaffordable, and you may decline it and claim a premium tax credit instead. Same benchmark plan, opposite answer.

Both inputs take an afternoon to gather: the allowance from the 90-day notice, the benchmark premium from the Marketplace plan browser for your ZIP code.

Here is what most pages will not tell you: the test is run against a plan you may never enroll in, and household income means the ACA household income measure, not your take-home pay. Confirm the current-year percentage before you rely on your own math.

Your employer can legally give your coworker a bigger allowance

ICHRA employee classes explain why two people doing similar work can receive very different allowances, lawfully. Employers may split the workforce into defined groups and fund each one differently. The permitted classes:

• Full-time and part-time employees, defined by the employer's consistent standard.
• Seasonal employees, hired for a limited part of the year.
• Employees covered by a collective bargaining agreement.
• Employees still in a waiting period for benefits.
• Foreign employees working abroad, with no US-source income.
• Salaried employees and non-salaried or hourly employees.
• Employees in the same insurance rating area, meaning work location.
• Temporary employees placed at another entity by a staffing firm.
• Any combination of the above.

Within a class, the offer must be on the same terms, although the amount may vary by age at a maximum 3:1 ratio between the oldest and youngest employees, and by number of dependents.

Minimum class sizes apply only in one situation: when the employer offers a traditional group plan to some classes and the allowance to others. In that case the floors are 10 employees for employers with fewer than 100 workers, 10% of the workforce at 100 to 200, and 20 employees above 200. A class offered the allowance generally cannot also be offered the group plan. It is one or the other. Ask your broker to verify both points against the current regulation.

Eligibility is two checklists: one for the employer, one for you

ICHRA eligibility requirements split cleanly in two. On the employer side, any size company qualifies, but there must be at least one employee who is not the self-employed owner or the owner's spouse, which is why self-employed people cannot set one up for themselves.

On your side, you must be enrolled in individual health insurance bought on or off the Marketplace, or in Medicare Part A, B, or C, for every month you want reimbursed. Short-term plans do not qualify. Neither does dental-only or vision-only coverage.

The rule people miss: a spouse's or child's premium can be reimbursed only if that family member is also enrolled in their own individual-market, non-group plan. Being listed on someone else's household policy does not transfer eligibility automatically.

If the allowance will not stretch across your family, check first whether your children qualify for CHIP insurance, and whether your household income opens a Medicaid pathway, including Medicaid waiver programs, rather than funding everything out of a fixed allowance.

The bottom line: do the arithmetic before you accept or decline

Three numbers settle this: the allowance on your 90-day notice, the lowest-cost self-only Silver premium for your ZIP code, and 9.96% of your 2026 household income. If your net premium after the allowance falls under that third number, the ICHRA offer is affordable and the subsidy door is shut.

Decide and document before you enroll in a Marketplace plan, never after. Request the notice in writing if it never arrived, price the benchmark Silver plan, and have a licensed broker or benefits adviser confirm your affordability result. Between appointments, a health companion app like August AI can help you keep track of medical costs and the questions you want to ask, as an adjunct for organizing your own information rather than insurance, tax, or legal advice.

This page is general information about health coverage rules, not tax, legal, or insurance advice. Allowance amounts, affordability percentages, and benchmark premiums change every year, so verify current figures before acting on them.

Disclaimer: This article is for informational purposes only and does not constitute medical advice. Always consult a qualified healthcare provider for diagnosis and treatment decisions. If you are experiencing a medical emergency, call 911 or go to the nearest emergency room immediately.