Group health insurance is the traditional employee health benefit option. But that doesn’t mean it works for every company or workforce. If you’re an employer looking for an affordable and flexible alternative to group coverage, a health reimbursement arrangement (HRA) is a great option.
With an HRA, you can provide your employees with a monthly allowance to spend on qualifying medical expenses, including individual health insurance premiums. Once employees submit proof of an eligible purchase, you reimburse them tax-free up to their allowance amount.
One type of HRA popular with employers is the individual coverage HRA (ICHRA). If you’re new to HRAs, setting up your ICHRA may seem challenging. However, when working with an ICHRA administrator, the process can be easier than you think.
The article below will walk you through the seven steps of setting up an ICHRA and discuss the advantages of using HRA administration software to help you manage your benefit.
In this blog post, you’ll learn:
- What an ICHRA is and how it works for employers and employees.
- The seven key steps to setting up an effective ICHRA benefit.
- How HRA administration software simplifies ICHRA management for employers.
An ICHRA is a formal health benefit that allows employers to reimburse their employees, tax-free, for their individual health plan premiums and other qualified out-of-pocket medical expenses.
Rather than offering a traditional healthcare option, you provide your eligible employees with a set monthly allowance to buy individual coverage on a public or private exchange. This saves you money on your health benefits budget and enables employees to have a more personalized health benefit that suits their unique needs.
The following are some key features of the ICHRA:
Lastly, ICHRAs are particularly beneficial for applicable large employers (ALEs) looking to comply with the Affordable Care Act’s employer mandate. As long as an ALE’s ICHRA allowance is affordable, their ICHRA can meet ACA requirements if they offer the benefit to at least 95% of their full-time workers and their dependents. Employees’ qualifying individual health plans through an ICHRA will already provide MEC and minimum value.
Before offering an ICHRA at your organization, you must design your benefit compliantly. Let’s look at the seven steps of the process below.
First, you must decide when you want your benefit to begin. You can start an ICHRA any time during the year, so there’s no need to wait until Open Enrollment Period or January 1. Offering an ICHRA mid-year is also a qualifying event that triggers a special enrollment period (SEP) for your employees, allowing them to enroll in eligible health coverage to participate in the benefit.
Suppose you currently have an employer-sponsored health insurance plan at your company and want to switch to an ICHRA. In that case, your benefit start date should be one day after you cancel your group policy to prevent a gap in coverage.
Lastly, you generally must notify eligible employees about their new ICHRA offering at least 90 days before the benefit’s start date, or as soon as possible if shorter.
Next, you’ll determine your benefit’s eligibility requirements. With an ICHRA, employers have a significant degree of freedom in structuring eligibility using different employee classes. For example, you could offer the ICHRA only to full-time employees, salaried employees, or those who live in a specific state.
Remember, you can provide both a traditional group health plan and an ICHRA at the same time at your company. But you can’t offer the same class of employees the choice between the two benefits.
There are no minimum class size limitations if you only offer an ICHRA. However, suppose you offer both group health insurance and an ICHRA and structure employee eligibility based on full- or part-time status, salaried or hourly pay, or geographic location. In that case, those classes must adhere to minimum class size standards.
If you’re administering your ICHRA using PeopleKeep’s software solution, only the following classes are available:
If you need more customization using the 11 employee classes, PeopleKeep’s parent company, Remodel Health, can help.
You can also customize which expenses are eligible for reimbursement. You can choose to reimburse employees for individual insurance premiums only or reimburse them for premiums and qualifying out-of-pocket medical expenses.
If you have the budget, it could be more valuable to give your employees the ability to submit reimbursement claims for both premiums and out-of-pocket costs. According to recent data, employees paid an average of $1,142 in out-of-pocket medical expenses in addition to their contribution toward employer-sponsored health coverage in 20241. So, your staff is likely to appreciate their ICHRA more if it covers a wider range of eligible expenses for reimbursement.
The next step is to determine your monthly reimbursement amount, also known as a contribution allowance.
Below are three essential things to keep in mind when choosing your allowance limits:
Both the IRS and the Department of Labor require that you establish a formal plan document, summary plan description (SPD), and summary of benefits and coverage (SBC) when designing any employer-sponsored group health plan, which, under federal law, includes the ICHRA.
ICHRA plan documents can be complex and confusing for employers offering the benefit for the first time.
These documents cover a significant amount of information, including:
Because of this, many employers utilize an ICHRA administration software solution to ensure they’re following all the necessary requirements and aren’t subject to costly tax penalties. We’ll dive into administration software in a later section.
The ICHRA is new to you, but it’s also brand new to your employees. Whether you’re switching to an ICHRA or offering a health benefit for the first time, communicating what’s happening is critical. For many employees, the ICHRA will be their first experience with a reimbursement-based health benefit, and they’ll need guidance.
You generally must notify your eligible employees of their new benefit at least 90 days before the start date. Newly eligible employees, such as new hires, can receive notice up until the first day the employee’s ICHRA coverage begins. But in either case, your ICHRA notice must include some required information.
For instance, your employees must know:
It’s essential to educate your employees promptly, transparently, and regularly. During your initial communication, be clear that by offering an ICHRA, you’re giving employees access to better benefits by allowing them to choose their own individual health insurance plan. If possible, follow up the initial announcement with a series of meetings to review the ICHRA and address any questions and concerns.
All employees participating in the ICHRA must have a qualifying form of individual health insurance. Uninsured employees, individuals with Medi-Share or another healthcare sharing ministry plan, and employees covered under a spouse’s group health insurance policy aren’t eligible to use the benefit.
Shopping for health insurance may be new for many employees. As their employer, you’re a valuable resource and likely the first point of contact they turn to when they need help. Provide your employees with information on where they can compare on- and off-market options and shop for health plan coverage on the individual market, along with contact details if they need further help.
Just remember that the federal government prohibits you from directly advising employees on which policy to choose. You can give them general information and support, but compliance regulations dictate that you can’t influence purchasing decisions or endorse any specific issuer or insurance policy.
If you use PeopleKeep or Remodel Health to administer your ICHRA, your employees can also shop for health coverage right from their accounts. This makes the process much easier for your employees.
While it’s possible to self-administer your ICHRA, experts don’t recommend it.
Offering and administering an ICHRA requires you to:
In addition to being tedious and time-consuming, self-administration comes with compliance regulations. This may put some employers at financial risk of expensive penalties if they make a mistake. Additionally, any mistakes made regarding privacy or compliant administration could violate federal law and employees’ trust.
For these and other reasons, many employers use HRA administration software to manage their ICHRA. An HRA software solution will allow you to administer your ICHRA online, easily record reimbursement amounts, and update plan documents. Most importantly, the software will help you stay compliant with all current laws and regulations.
PeopleKeep’s HRA software offers employers a single-source solution for their ICHRA administration needs. We generate plan documents, assist with plan design, review and store employee documentation, and help employees purchase individual health plans. Additionally, our award-winning support team helps your employees get to know their ICHRA and promptly addresses their questions and concerns, allowing you to focus on your business.
Suppose you have more complex needs and require hands-on support. In that case, Remodel Health’s ICHRA+® administration solution provides advanced support, compliance tools, automated premium payments, and educational materials to help you manage a larger-scale benefit for more diverse workforces.
Employees in today’s workplace want personalized employee benefits. With an ICHRA, you can save money while providing your employees with a customizable and flexible health benefit that can meet all their diverse needs. Although it may be an unfamiliar process initially, setting up an ICHRA doesn’t have to be complicated. By following the seven steps above, you’ll be on your way to offering your new benefit.
An ICHRA can be tremendously valuable for employers and employees. But you must manage it responsibly for it to be truly beneficial. With HRA administration software like PeopleKeep by Remodel Health, you can set up and administer your ICHRA with ease. Ready to get started? Schedule a call with one of our HRA specialists!
This article was originally published on March 26, 2019. It was last updated on October 24, 2025.
1. 2024 Milliman Medical Index