ICHRA, Explained Like You're New to All of This
Health benefits are full of acronyms, and ICHRA (pronounced "ick-rah") may be the most useful one most people have never heard of. This guide explains it in plain English: what an ICHRA is, how it works step by step, what it can pay for, and how employers pair it with Direct Primary Care to give employees genuinely better everyday healthcare.
Quick note: this article is general education, not tax, legal, or benefits advice. Confirm the details for your situation with a licensed benefits advisor.
What does ICHRA stand for?
ICHRA stands for Individual Coverage Health Reimbursement Arrangement. It is a federal benefit, available to employers since 2020, that works like this: instead of buying one group health insurance plan for everyone, the employer gives each employee a set monthly allowance of tax-free money. Employees use that allowance to buy their own individual health insurance plan and to pay for qualified medical expenses.
The easiest analogy is a 401(k), but for health coverage. With a 401(k), the employer doesn't pick your investments — it contributes money, and you choose. An ICHRA applies the same "defined contribution" idea to health benefits: the employer sets the dollar amount, and each employee picks the coverage that fits their life.
How an ICHRA works, step by step
- The employer sets a budget. For example, a fixed dollar amount per employee per month. There is no federal minimum or maximum — the employer decides.
- Employees buy their own individual health plan. Usually on the ACA marketplace or directly from an insurer. Having qualifying individual coverage (or Medicare) is what makes an employee eligible to use the ICHRA.
- Employees submit proof of coverage and expenses. Premiums, and — if the employer allows it — other qualified medical expenses.
- The employer reimburses them tax-free. The money is not taxed as income to the employee, and it is tax-deductible for the business, with no payroll taxes on it.
Who can offer an ICHRA?
Any employer, of any size — from a one-person business to a company with thousands of employees. That is one of the biggest differences between an ICHRA and its small-business cousin, the QSEHRA, which is limited to employers with fewer than 50 full-time-equivalent employees. If you are comparing the two, see our full breakdown: ICHRA vs QSEHRA.
What are "employee classes"?
An ICHRA lets employers divide their workforce into classes — such as full-time, part-time, seasonal, or employees in different locations — and offer different allowance amounts to each class. Federal rules define which classes are permitted (up to 11 class types). What employers cannot do is pick and choose person by person: everyone within a class must be treated the same way.
What can an ICHRA pay for?
- Individual health insurance premiums — the core use.
- Qualified medical expenses — if the employer designs the plan to allow it, the same kinds of expenses that qualify for other tax-advantaged health accounts.
- Direct Primary Care memberships — as of January 1, 2026, DPC membership fees under $150 per month for an individual (or $300 for a family) are qualified medical expenses under the One Big Beautiful Bill Act. That means an ICHRA can reimburse an employee's DPC membership when the employee also carries compatible coverage and the plan allows expense reimbursement.
The one tradeoff to understand: premium tax credits
Employees offered an ICHRA face an either/or: they cannot combine an ICHRA with an ACA marketplace premium tax credit. If the ICHRA offer is "affordable" under IRS rules — for 2026, that means the employee's share of the lowest-cost silver plan premium is no more than 9.96% of household income — the employee is not eligible for marketplace subsidies at all. If the offer is unaffordable, the employee can decline the ICHRA and keep their tax credit instead. Employers with lower-wage teams should model this carefully with a benefits advisor before switching.
ICHRA vs a traditional group plan
| Feature | Traditional group plan | ICHRA |
|---|---|---|
| Who picks the plan | Employer picks one plan for everyone | Each employee picks their own |
| Cost to employer | Premiums, often with surprise annual increases | A fixed allowance the employer controls |
| Company size | Practical mainly for larger groups | Any size, including a team of one |
| Portability | Coverage ends when employment ends | Employee owns their plan and keeps it |
Where Direct Primary Care fits
The most patient-friendly ICHRA setups pair an individual health plan (for hospitalizations and major events) with a Direct Primary Care membership (for everyday care). Across the DPC practices listed on Connectedly Health with published pricing, memberships average about $91 per month, with a median near $80 and some starting around $29 — and members get same- or next-day appointments, longer visits, and direct access to their doctor. Employers can explore the full picture in our ICHRA + DPC employer guide.
Getting started
- Decide your monthly allowance and whether it varies by employee class.
- Pick an ICHRA administrator to handle compliance and reimbursements, or run it manually if your team is very small.
- Help employees choose an individual plan — and consider adding a DPC membership for everyday care.
- Browse and compare DPC practices for your team on the National DPC Pricing Index or by state.
Read the full ICHRA + DPC employer guide | Direct Primary Care for employers