How an Individual Coverage Health Reimbursement Arrangement (ICHRA) Works in California
13 August 2026
For California employers facing another difficult health plan renewal, an Individual Coverage Health Reimbursement Arrangement (ICHRA) can offer a different way to fund employee health benefits. Instead of purchasing one group health plan for the workforce, an employer establishes a defined reimbursement allowance and employees obtain qualifying individual health coverage.
While the concept is relatively simple, the decision is not.
An ICHRA that looks financially attractive at the employer level can produce very different results for employees depending on where they live, their age, available carrier networks, family coverage needs, and eligibility for financial assistance through Covered California. For employers with employees spread across the state, those differences should be modeled before replacing a
traditional group plan.
What Is an ICHRA?
An ICHRA is an employer-funded health reimbursement arrangement that reimburses employees for qualifying individual health insurance premiums and, depending on the plan design, other eligible medical expenses.
It is important to distinguish the reimbursement arrangement from the insurance itself. An ICHRA is not a health insurance policy. Employees generally purchase qualifying individual coverage, while the employer determines how much money is available for reimbursement.
Unlike a taxable health stipend, properly structured ICHRA reimbursements can generally be provided tax-free to employees and deducted as a business expense by the employer.
For employers, this creates a defined-contribution approach to health benefits: rather than absorbing whatever renewal increase a group carrier imposes, the organization can establish a planned contribution strategy.
How Does an ICHRA Work? (4 Steps)
Step 1: Employers Set a Monthly Allowance
The employer determines how much it will make available for reimbursement each month.
Employers may also create permitted employee classes and vary contributions under ICHRA rules. Allowance design should not be treated as a simple budgeting exercise, however. The amount needs to be evaluated against the cost of individual coverage available to the employees receiving it.
Step 2: Employees Choose Their Own Individual Plan
Eligible employees purchase qualifying individual health insurance rather than enrolling in a single employer-sponsored group policy.
In California, that may include individual coverage available through Covered California or directly from an insurance carrier. Employees can choose among available plans based on factors such as premium, deductible, provider network, prescription coverage, and out-of-pocket exposure.
While that flexibility can be valuable, employees must understand and compare their options. Otherwise, more choice can create confusion rather than a better benefits experience.
Step 3: Employees Submit Proof of Coverage and Expenses
Employees must substantiate that they maintain qualifying individual coverage before receiving ICHRA reimbursements.
If the employer's plan also reimburses eligible medical expenses, employees may need to provide documentation showing that those expenses qualify under the plan.
A well-designed administrative process matters here. Without clear systems and employee communication, reimbursement requirements can become a recurring source of confusion for both HR teams and employees.
Step 4: Employers Reimburse Tax-Free
Once coverage and eligible expenses are properly substantiated, the employer reimburses the employee up to the available ICHRA allowance.
Unused amounts are handled according to the employer's plan design. The reimbursement is not simply unrestricted cash that employees can use for any purpose.
How ICHRA Affordability Works With Covered California
Affordability is one of the most consequential (and frequently misunderstood) parts of ICHRA planning.
An employee offered an ICHRA may also appear eligible for individual coverage through Covered California. However, that does not necessarily mean the employee can receive both the employer's ICHRA contribution and a Covered California premium tax credit.
Under federal rules, an employee generally cannot claim a premium tax credit for Marketplace coverage when the employer's ICHRA offer is considered affordable.
For 2026, the applicable ACA affordability percentage is 9.96%. ICHRA affordability is determined using a federal calculation that considers factors including the employer's required contribution toward the lowest-cost applicable Silver plan.
Employers should also ask:
- Will the allowance produce an affordable offer for the employees receiving it?
- How does affordability vary by employee age and location?
- Could employees lose access to premium tax credits they currently receive?
- How does the employee's net cost compare with the existing group plan?
Those questions can materially change whether an ICHRA is attractive for a particular workforce.
What Happens If an ICHRA Isn't Considered Affordable
If an ICHRA is considered unaffordable under the applicable federal rules, an eligible employee may generally decline the ICHRA and potentially qualify for premium tax credits through Covered California, assuming the employee otherwise meets Marketplace eligibility requirements.
That choice should be communicated carefully. Accepting or declining an ICHRA can affect an employee's eligibility for financial assistance, so employees need more than a basic enrollment notice to understand the financial consequences.
Setting ICHRA Allowances Across California's Regions
California employers should be especially cautious about using a one-size-fits-all allowance without first analyzing where employees are located.
Covered California divides the state into 19 rating regions, with individual-market premiums, carrier availability, and provider networks varying by location. As a result, an allowance that covers a meaningful share of premiums for an employee in Santa Clara County may have a different impact for an employee in San Diego, Sacramento, or a rural Northern California county. These regional differences can also affect employees’ access to preferred physicians, hospitals, and other providers.
Employers evaluating an ICHRA should model allowances based on relevant workforce factors, including geography, age distribution, dependent needs, available carriers and networks, and current employer contributions.
This is particularly important for companies with remote or geographically distributed employees. Predictable employer spending is valuable, but the resulting benefit must also remain competitive and meaningful across the locations where employees live and work to support recruiting, retention, and employee well-being.
ICHRA Eligible Expenses and Coverage Options
At a minimum, ICHRA arrangements can reimburse qualifying individual health insurance premiums. Depending on how the employer designs the arrangement, reimbursement may also extend to qualified medical expenses permitted under federal tax rules.
Potential eligible expenses can include:
- Individual health insurance premiums
- Medicare premiums for eligible participants
- Deductibles and copayments
- Prescription medications
- Certain dental and vision expenses
- Other qualifying medical expenses permitted under the plan
Employers do not necessarily need to reimburse every category available under federal rules. The plan document should clearly define what the organization will reimburse.
Coverage selection also deserves careful attention. Employees should evaluate more than the monthly premium. A lower-cost plan may come with a narrower provider network, different prescription formulary, higher deductible, or greater maximum out-of-pocket exposure.
For employees with established physicians, specialists, or recurring prescriptions, those details can matter more than the headline premium.
What ICHRA Funds Cannot Be Used For
ICHRA funds are not an unrestricted employee allowance.
Reimbursements must comply with the employer's plan terms and applicable federal requirements. Expenses that do not qualify under the plan cannot be reimbursed tax-free, and employees cannot simply receive unused ICHRA dollars as additional taxable compensation through the arrangement.
Employees also must maintain qualifying coverage to participate. Coverage that does not satisfy ICHRA requirements cannot be used merely because it appears to be a less expensive alternative.
Why California Employers Work With an ICHRA Broker
Searching for an ICHRA broker often begins with plan shopping, but employers typically need broader strategic support than a quote alone can provide.
Before implementing an ICHRA, an experienced benefits consultant should evaluate the current health plan against multiple ICHRA scenarios, including:
- Employer contribution requirements
- ACA affordability
- Employee locations and ages
- Covered California market conditions
- Carrier and network availability
- Employee out-of-pocket costs
- Reimbursement administration
- Employee communication and enrollment support
- Compliance and plan documentation
- Recruiting and retention implications
This is where the distinction between a transactional broker and a
strategic benefits consultant matters.
KBI Benefits works with growing businesses to evaluate benefits financing strategies in the context of overall cost, workforce needs, and long-term business objectives. Rather than treating ICHRA as automatically better or worse than group coverage, the goal is to determine whether the structure can genuinely improve health benefits ROI while maintaining a competitive employee experience.
Get ICHRA Guidance for Your California Business
An ICHRA can give California employers greater control over health benefit spending, but the strongest plan is not necessarily the one with the lowest employer contribution.
The right strategy should account for affordability, regional premiums, employee demographics, provider access, administration, and the financial impact on employees before a transition is made.
KBI Benefits helps employers analyze those variables, compare
alternative funding strategies, and design benefits programs that support sustainable cost control without losing sight of employee value.
Contact us today to schedule your free strategy call and determine whether an ICHRA is a practical fit for your California workforce.
