Individual Coverage HRA

Individual coverage HRA

Individual coverage Health Reimbursement Arrangements (ICHRAs) are a type of HRA that started on January 1, 2020. They're not a traditional group health insurance plan.

• Employees must buy their own health insurance, and their company provides some reimbursement.

♦ It's a specific account-based health plan that lets employers give employees tax-free reimbursements for qualified medical expenses, including monthly premiums and out-of-pocket costs like copayments and deductibles.

Employees must be enrolled in individual health insurance coverage (like a plan they bought through the Marketplace) to use the funds.

Generally, employers of any size can offer an individual coverage HRA, as long as they have one employee who isn't a self-employed owner or the spouse of a self-employed owner.

♦ These HRAs are only for employees, not self-employed individuals.

Individual coverage HRAs can be tax-advantaged and flexible, but they can also lead to coverage loss and more burden on the employee.

Individual coverage HRAs, often promoted as alternatives to Affordable Care Act coverage, can hurt low-income workers.

Since January 1, 2020, employers have been able to offer employees individual coverage HRAs instead of a traditional job-based health plan.

♦ The fear is that this type of HRA could draw healthier people away from the Affordable Care Act marketplace plans. That could cause individual marketplace premiums to skyrocket.

There's a real potential that employers might try to shift sicker employees to this HRA and keep their healthier employees in their more expensive employer-sponsored health plan.

If your individual coverage HRA is considered "affordable," you can't get a premium tax credit, even if you opt out of the HRA.

If it's NOT affordable, you can opt out and apply for a premium tax credit on the Marketplace instead.

♦ Individual coverage HRAs may be one of the better health coverage initiatives to come out of the Trump administration.

They may be a good option for part-time and gig workers, but most companies are likely to focus on their full-time employees.

♦ Congress has tried to write ICHRAs into federal law under a new name, "CHOICE arrangements." The idea was dropped from the 2025 tax law, but a new bill passed the House in December 2025 and still needs Senate approval. For now, ICHRAs exist only through federal rules, which a future administration could change.

♦ In 2023, the average monthly allowance was around $900.

Employers can choose whether to offer a premium-only or premium-plus plan.

With a premium-only plan, employers limit reimbursements to the cost of their employees' individual health insurance premiums.

With a premium-plus plan, employers reimburse their employees' premiums and qualifying out-of-pocket medical expenses.

• Individual coverage HRAs could provide considerable savings for employers while shifting more health care expenses to the employee, under the catchphrases "cost-sharing" and "employee responsibility."

In 2023, about half of employers offering individual coverage HRAs reimbursed for premiums only, while the other half also covered out-of-pocket expenses.

How do they work?

The individual coverage HRA can be set up to reimburse employees, tax-free, for medical care and the purchase of individual insurance policies. Employers can offer funding to part-time or seasonal employees to help them pay for health care on the open market.

♦ An employer can't offer the same group of employees both a traditional group health plan and an individual coverage HRA. But it can offer different groups different benefits, like a group plan for full-time workers and an ICHRA for part-time workers.

Unlike other HRAs, the individual coverage HRA is available to businesses of any size. There are no allowance caps, and businesses can vary eligibility and allowance amounts among different classes of employees.

♦ Employers of any size can offer their employees a monthly allowance of tax-free money.

Employees then buy the health care services they want, including individual health insurance, and the business reimburses them up to their allowance amount.

Employers can also use these HRAs to pay employees' Medicare premiums. Rules are stricter for larger employers, so check with a benefits adviser.

Employee benefits

• Reimbursements don't count as income for an employee.

To participate in an individual coverage HRA, employees must have coverage through an individual health insurance policy, including on-exchange or off-exchange coverage, Medicare Parts A and B, or Medicare Part C.

The employee can be the main policyholder, or they can be covered under a family member's individual policy.

• Employees' family members can participate too, if they meet the same qualifications and the employer chooses to extend eligibility to spouses and dependents.

In theory, individual coverage HRAs give employees the freedom to choose a plan that best meets their family's needs. Their company then reimburses them up to a certain monthly allowance for premiums and possibly other medical expenses. The reimbursements are tax-free.

♦ In truth, the words "freedom of choice" hide the fact that a heavy burden is now placed on the employee.

Few employees understand what they should be shopping for. The insurance industry describes most consumers as having "low health literacy," a point many brokers readily exploit.

Disadvantages

To participate in an individual coverage HRA, employees have to buy individual health insurance or be enrolled in Medicare Parts A and B or Part C.

♦ Individual coverage HRAs do NOT provide benefits to uninsured employees.

Employees covered under a spouse's group plan (from another employer) can't participate in this type of HRA.

• ICHRA users buy their own coverage, so rising Marketplace premiums hit them directly. If your allowance doesn't keep up, you pay the difference.

♦ Whether an ICHRA is "affordable" is based on the cost of the cheapest silver plan for the employee alone, minus the employer's monthly allowance, compared with household income. The 2023 "family glitch" fix, which looks at family costs, applies to regular group plans, not ICHRAs.

Employer benefits

Individual coverage HRAs can be useful for smaller businesses that can't afford the rising health care costs of employer-sponsored health plans.

By setting up individual coverage HRAs, companies can better predict their health care expenses. They no longer have to haggle with insurance companies over plan benefits and yearly premium increases. That burden can be shifted to the employee.

♦ Employers have a high degree of control over individual coverage HRAs.

Employers can create different classes of employees and fund those classes differently. The employer then reimburses the employee up to their allowance amount.

It's assumed that the entire individual coverage HRA balance is spent on health care premiums and cost sharing each year. The employee covers expenses beyond their allowance.

♦ Individual coverage HRAs are NOT the property of the employee.

In the rare case that an employee doesn't use all their allotted funds, the employer can keep the funds and reset the employee's balance at the end of the year, or carry over the unspent balance to the next year.

Employers control whether individual coverage HRA funds are available to employees after they leave.

Administration is complex

Administration is complex without an individual coverage HRA administrator. There are numerous rules and notices an employer must follow to offer this HRA.

Benefit management companies are eager to point out that there are significant penalties for violations if an employer gets things wrong.

• It should come as no surprise that these management companies, along with insurance brokers, are heavily promoting these HRAs as the best thing to come along since Texas toast.

♦ Promoters of individual coverage HRAs talk about the benefits for employers, like getting out of the business of managing employees' health risks, and reducing costs by replacing a defined benefit plan (employer-sponsored insurance) with a defined contribution plan.

Sound familiar? It's the same argument that led many employers to ditch pension plans for defined contribution plans, like a 401(k).

• Individual coverage HRAs can be offered to a variety of employee types, including part-time, seasonal and temporary employees of staffing firms. Employers can create different classes of employees for the purpose of offering individual coverage HRAs, and the funding for these groups can vary.

Compared to the freedom of the old stand-alone HRA, the employee classes allowed with the individual coverage HRA are narrow. It may be hard for businesses to use these classes to pay high-value employees differently. Hiring and keeping their most valuable workers may be more challenging.

♦ There's no minimum required funding amount and no upper limit either. However, employers subject to the ACA employer mandate must make sure their individual coverage HRAs are considered "affordable."

An employer can offer a group health insurance policy, but it can't offer the same employee class both an individual coverage HRA and a group health insurance policy.

A business could offer full-time employees group health insurance and part-time employees an individual coverage HRA, but it can't offer full-time employees a choice between group health insurance and the individual coverage HRA.