How does an ICHRA work?

The basic flow

The employer decides a monthly reimbursement amount (the allowance), which can vary by employee class and family size. Employees use it to buy an individual plan on or off the ACA marketplace. They submit proof of coverage, and the employer reimburses them tax-free — usually through payroll or an administration platform. That''s the whole model: the employer funds, the employee chooses, and the reimbursement flows tax-free.

Step by step

• The employer sets the allowance (per class, scaled by age and family size).
• Employees buy a qualifying individual plan or use Medicare.
• Employees submit proof of coverage and, for expense reimbursement, proof of expenses.
• The employer reimburses up to the allowance, tax-free, through payroll.
• Coverage is re-verified each plan year.

Where the money goes

Reimbursements can cover individual insurance premiums and, if the plan is designed that way, other qualified medical expenses (copays, deductibles, prescriptions, dental, vision). The employer defines the scope in the plan document. A premium-only design keeps the money focused on coverage and preserves HSA eligibility; a broader design covers more out-of-pocket costs.

What the employer controls vs. the employee

• Employer controls: the budget (allowance), which classes are eligible, what''s reimbursable, and when the plan year starts.
• Employee controls: which individual plan and network they choose, and their own enrollment.

What makes it tax-free

Because the arrangement is documented, employees attest to qualifying coverage, and reimbursements are substantiated, the money is free of income tax for employees and payroll tax for the employer — and deductible for the business. This compliance layer is exactly what separates an ICHRA from simply handing employees cash, which would be taxable wages.

Timing and unused funds

Reimbursements are typically processed monthly. Because you only pay against substantiated expenses up to the allowance, unused amounts generally aren''t paid out — so your real cost can land at or below budget. The funds belong to the employer until reimbursed; employees don''t take a balance with them.

The employee experience

From the employee''s side: they choose a plan that fits their family (ideally with a broker''s help), submit proof once, and then see tax-free reimbursements arrive through payroll each month. After the initial setup, it runs quietly in the background. Good enrollment support is what makes the experience smooth.

Setting up an ICHRA (the employer side)

Behind the simple employee experience, the employer sets a few things up once: choose which employee classes are offered the ICHRA, set the monthly allowance for each, adopt a written plan document, and send the required employee notice. After that, the month-to-month runs on reimbursements and proof.

Substantiation: how proof works

Before reimbursing, you confirm two things: that the employee is enrolled in qualifying individual coverage, and that the expense (usually the premium) was actually incurred. Employees submit that proof, you verify it, and you keep the records. This substantiation is what keeps the reimbursements tax-free.

What happens when an employee leaves

Because the health plan belongs to the employee, they keep their coverage when they leave — it is their own individual policy, not tied to your business. Their ICHRA reimbursements simply stop as of their eligibility end date, with no plan to unwind.