Individual Coverage Health Reimbursement Arrangement (ICHRA)

An individual coverage HRA is a health reimbursement arrangement that meets the conditions in 26 C.F.R. 54.9802-4, which allow it to be integrated with individual health insurance coverage rather than with an employer's group health plan. The regulation states its own purpose plainly: it "provides the conditions that an HRA must satisfy in order to be integrated with individual health insurance coverage for purposes of Public Health Service Act sections 2711 and 2713 ... (referred to as an individual coverage HRA)." A parallel paragraph allows integration with Medicare Part A and Part B, or with Medicare Advantage, for employees who are Medicare beneficiaries. The rule was created by a 2019 tri-agency final rule and applies to plan years beginning on or after 1 January 2020.

The design turns employer health coverage from a plan into a budget. Instead of selecting insurance for everyone, the employer sets a dollar amount and the employee buys their own policy with it. That has a consequence worth stating at the outset: the employee owns the coverage, so it does not end when the job does, though the money helping to pay for it does.

The naming is genuinely in flux, and a reader will meet both words. CMS's Marketplace pages for employers, last modified 3 September 2026, now say: "A CHOICE Arrangement is a type of health reimbursement arrangement (HRA) that allows employers to give employees tax-free money to buy their own individual health insurance, instead of offering a traditional group health plan. CHOICE Arrangements were previously known as Individual Coverage Health Reimbursement Arrangements (ICHRAs)." The Small Business Administration uses the same phrasing. But the operative regulation at 26 C.F.R. 54.9802-4 still defines the term as "individual coverage HRA," the IRS uses that name, and a full-text search of the Federal Register returns no documents using the CHOICE label at all. This page uses the regulatory name because that is what the law says; anyone meeting "CHOICE Arrangement" on a government page is reading about the same arrangement.

Enrollment in individual coverage is a monthly condition, not a one-time check. The regulation requires the HRA to provide that the participant and any dependents are enrolled in complying individual health insurance coverage "for each month that the individual(s) are covered by the HRA," and to forfeit the arrangement if that coverage ceases. If someone drops their policy mid-year, the HRA may not reimburse expenses incurred after the coverage ends. There is a narrow accommodation for a premium grace period, and a duty on the participant to tell the HRA when coverage has been canceled or terminated. Coverage consisting solely of excepted benefits does not count.

The classes rule is what stops the arrangement being used to sort by health. An employer may not offer the same class of employees a choice between an individual coverage HRA and a traditional group health plan, and it may divide its workforce only along the classes the regulation lists: full-time employees, part-time employees, salaried employees, non-salaried employees, employees whose primary site of employment is in the same rating area, seasonal employees, employees covered by a particular collective bargaining agreement, employees who have not satisfied a waiting period, non-resident aliens with no U.S.-based income, and temporary employees of staffing firms. Those ten are the classes; an eleventh entry in the list simply permits a combination of two or more of them. Where an employer offers a traditional plan to one class and an individual coverage HRA to another, a minimum class size requirement attaches to the classes offered the HRA that are defined by full-time or part-time status, salaried or non-salaried status, or rating area. The regulation says outright what all of this is for: the conditions "are intended to prevent an HRA plan sponsor from intentionally or unintentionally, directly or indirectly, steering any participants or dependents with adverse health factors away from its traditional group health plan, if any, and toward individual health insurance coverage."

Same terms, with two permitted variations. Within a class the arrangement must be offered on the same terms. The amount may rise with the number of covered dependents, provided everyone in the class with the same number of dependents gets the same amount. And it may rise with age, subject to a hard ceiling: "the maximum dollar amount made available to the oldest participant(s) is not more than three times the maximum dollar amount made available to the youngest participant(s)." Both variations exist because individual-market premiums vary the same way, which is the point.

The employee has to be able to say no, and be told in time to. The regulation requires that a participant be permitted to opt out of and waive future reimbursements once, and only once, for each plan year, generally before the plan year begins, and that on termination of employment they either forfeit the remaining amounts or may permanently opt out. It also requires a written notice at least 90 calendar days before each plan year, listing the amount available, whether dependents are eligible, the enrollment requirement, the fact that different kinds of HRA exist, and the effect on the premium tax credit. The opt-out is not paperwork: because an offer of the arrangement can block the credit, an employee for whom the credit is worth more than the employer's contribution needs the right to decline.

The premium tax credit trade-off, and how affordability is measured. The income tax regulations treat an offered individual coverage HRA as employer coverage that disqualifies a month if either the arrangement is affordable for that month or the employee does not opt out. Affordability has its own formula: the employee's required HRA contribution is the monthly premium for the lowest cost silver plan for self-only coverage offered in the Exchange for the rating area where the employee lives, minus the monthly self-only HRA amount. If that difference does not exceed one twelfth of household income multiplied by the required contribution percentage the IRS publishes each year, the arrangement is affordable and no credit is available for the month. Note the benchmark differs from the credit's own: the credit is computed off the second-lowest-cost silver plan, and this test uses the lowest-cost one.

Two practical points that catch people. Gaining access to an individual coverage HRA is a triggering event for a Marketplace special enrollment period, so an employee is not stranded until the next open enrollment. And pairing the arrangement with a cafeteria plan runs into a limit CMS states directly: employees "generally cannot use a cafeteria plan to pay the remaining premium for 'on-Exchange' coverage purchased through a Marketplace." An employee who wants to pay their share of the premium with pre-tax salary therefore generally has to buy off-Exchange, which in turn forecloses the premium tax credit, since the credit is only available on Marketplace coverage.

1. The employer decides which classes get the arrangement. It may not offer the same class a choice between this and a traditional group plan, and where it offers both to different classes, the minimum class size rule applies.

2. It sets the dollar amount for each class, varying it by age and by number of dependents if it wishes, within the three-to-one age band.

3. It sends the written notice at least 90 days before the plan year, including the amount, the enrollment requirement, and the effect on the premium tax credit.

4. Each employee decides. Enroll in the arrangement and buy individual coverage, or opt out and, if eligible, claim the premium tax credit instead. Gaining access to the arrangement opens a Marketplace special enrollment period for the purpose.

5. The employee enrolls in individual coverage and substantiates it, both at enrollment and with each request for reimbursement.

6. The employer reimburses premiums, and other medical care expenses if the plan allows, tax-free to the employee.

7. Coverage lapses, reimbursement stops. If the individual policy ends, the HRA may not reimburse expenses incurred after that date.

A hypothetical affordability calculation, which is the decision an employee actually faces. Nadia's employer offers an individual coverage HRA of $400 a month for self-only coverage. The lowest-cost self-only silver plan in her rating area costs $610 a month. Her required HRA contribution is therefore 610 − 400 = $210 a month.

Her household income is $54,000, so one twelfth of it is 54,000 ÷ 12 = $4,500. Her required contribution is 210 ÷ 4,500 = 4.67 percent of monthly household income. Whether that counts as affordable depends on the required contribution percentage the IRS publishes for the year, which is not fixed and is not reproduced here. If the published percentage is above 4.67, the arrangement is affordable, no premium tax credit is available, and taking the $400 is the only help on offer. If it is below 4.67, Nadia may opt out and claim the credit instead, and the right answer then depends on which is worth more. The dollar figures are illustrative; the comparison is the mechanism.

Pros

• The employer's cost is a stated dollar amount rather than a renewal quote, which is why small employers facing steep group-premium increases look at it.
• Employees choose their own plan, network and deductible, and can weigh those against the premium themselves.
• The coverage belongs to the employee, so it continues after they leave the job if they keep paying for it.
• It works for a workforce spread across states, where a single group plan is awkward or impossible.
• It can be integrated with Medicare, so an employer can support employees who are Medicare beneficiaries through the same arrangement.

Cons

• It is an either-or with the premium tax credit. An employee offered an affordable arrangement cannot claim the credit, and one who accepts it cannot claim the credit at all.
• Shopping for individual coverage is genuinely harder than choosing from an employer's menu, and the employee absorbs that work every year.
• The reimbursement stops the moment the individual policy lapses, which creates a cliff a group plan does not have.
• Pre-tax payment of the employee's share through a cafeteria plan generally requires off-Exchange coverage, which forecloses the credit as well.
• The employer takes on substantiation, notice and class-design obligations that a fully insured group plan handles for it.