Health insurance is one of the biggest challenges small businesses and startups face today. With rising premiums and limited options, many founders feel stuck between offering costly group coverage or leaving their team uninsured. This is where Individual Coverage Health Reimbursement Arrangements (ICHRAs) come in.
An ICHRA is a modern health benefit that allows employers to reimburse employees for their own health insurance premiums and medical expenses, all on a tax-free basis. Instead of being locked into one group plan, employees get the flexibility to choose the plan that fits their needs, while employers set predictable budgets.
For startups and growing businesses, this approach can be a game-changer. It makes offering health benefits affordable, scalable, and compliant with the Affordable Care Act (ACA). And best of all, setting up an ICHRA doesn’t have to be complicated when you have the right health insurance marketplace partner like AHiX, which helps small businesses compare plans, stay compliant, and support employees throughout the process.
In this blog, we’ll break down how to set up an ICHRA step by step, explain the compliance rules you need to know, and show why this model is becoming the go-to choice for startups. But before we dive into the setup process, let’s make sure we fully understand what an ICHRA is and why it matters for businesses like yours.
What is an ICHRA and Why It Matters
Before we get into the details of how to set up an ICHRA, it’s important to understand what this benefit really is and why it’s so valuable for small businesses and startups.
An Individual Coverage Health Reimbursement Arrangement (ICHRA) is a health benefit that lets employers give employees a set amount of money each month to spend on their own health insurance. Instead of the company buying a one-size-fits-all group policy, employees can shop for coverage that works best for them, whether that’s an Affordable Care Act (ACA) marketplace plan, a family plan, or even specialized coverage like dental or vision (depending on how the employer designs the benefit).
For employers, ICHRAs are attractive because they:
- Control costs by setting a fixed monthly budget.
- Eliminate the complexity of managing a traditional group insurance plan.
- Provide tax-free reimbursements, which means savings for both employer and employee.
- Scale easily as the team grows, making them a strong fit for startups.
- For employees, ICHRAs provide freedom and personalization:
- They choose the plan that fits their health needs and family situation.
- They can keep the same coverage even if they change jobs later.
- They get the same tax-free advantage as with traditional employer-sponsored insurance.
This combination of flexibility, cost savings, and compliance is why more small businesses are switching to ICHRAs. It allows startups to compete with larger employers when it comes to offering health benefits without draining resources or breaking the budget.
Now that you know why ICHRAs are becoming such an important option for small businesses, let’s walk through the exact steps of how to set up an ICHRA for your team.
How to Set Up an ICHRA: Step-by-Step Guide
If you’re ready to provide flexible, affordable health benefits to your employees, setting up an ICHRA doesn’t have to be overwhelming. By following a clear process, you can launch a compliant program that works for both your business and your team. Here’s the step-by-step guide on how to set up an ICHRA for your small business or startup.
Step 1: Decide on Eligibility and Employee Classes
The first step is to decide which employees will be eligible. With ICHRAs, you can divide employees into different “classes.” For example, you might offer benefits to full-time employees but not part-time, or you could provide different reimbursement levels for remote staff, salaried workers, or seasonal employees.
This flexibility makes ICHRAs ideal for startups where workforces often include a mix of roles. Just remember that the rules require you to treat all employees within a class the same way.
Once eligibility is clear, you can move on to the financial side, setting your reimbursement budget.
Step 2: Determine Budget and Reimbursement Amounts
One of the biggest advantages of ICHRAs is cost control. Instead of paying unpredictable premiums for group insurance, you choose a fixed monthly allowance for each employee. For example, you could offer $400 per month for single employees and $800 per month for families.
This money is provided tax-free, which means your employees get the full value, and you stay in control of expenses. At AHiX, you’ll find tools that make it easy to calculate affordable allowances based on your budget and workforce size.
With your budget set, the next step is making sure your plan meets federal compliance rules.
Step 3: Ensure Compliance with ACA Rules
ICHRAs must follow the Affordable Care Act (ACA) requirements to avoid penalties. This includes two key standards:
- Affordability – The reimbursement amount should make health insurance reasonably priced for employees.
- Minimum Essential Coverage (MEC) – Employees must buy ACA-compliant plans if they want to take advantage of tax-free reimbursements.
AHiX simplifies this process by helping you evaluate plans, ensuring they meet ACA standards, and guiding you through the required documentation.
Once compliance is handled, the focus shifts to getting employees on board.
Step 4: Communicate the Plan to Employees
Even the best health benefit won’t succeed if employees don’t understand it. That’s why communication is critical. Employers should clearly explain:
- How much money will employees receive each month?
- Which types of expenses are eligible for reimbursement?
- How can employees shop for plans? (with AHiX as a trusted marketplace)
- What paperwork or receipts are required?
At AHiX, we help small businesses educate employees so they feel confident choosing their own plan. This creates trust and ensures high participation.
Once employees know how it works, the last step is putting an efficient administration system in place.
Step 5: Set Up Administration and Reimbursement Process
The final step is setting up a system for reimbursements. Employees typically submit proof of their insurance premium payments or qualified expenses, and employers reimburse them up to the set allowance.
You can manage this process manually, but it’s much easier with a partner like AHiX. Our marketplace not only connects employees to plans but also helps with ongoing administration, ensuring reimbursements are smooth and compliant.
By following these five steps, small businesses can successfully launch an ICHRA that balances affordability, compliance, and employee satisfaction. Now that you know the setup process, let’s look more closely at the compliance and legal considerations every employer should keep in mind.
Compliance and Legal Considerations For Setting Up An ICHRA
While setting up an ICHRA is straightforward, employers must follow certain legal rules to stay compliant. These requirements exist to protect both businesses and employees, and ignoring them can lead to costly penalties.
Here are the key areas every small business or startup should understand:
IRS and ACA Regulations
- ICHRAs must follow IRS guidelines on tax-free reimbursements.
- Employers must ensure that contributions are set up fairly and consistently for each employee class.
- Under the Affordable Care Act (ACA), ICHRAs can only reimburse employees for qualified health plans that meet Minimum Essential Coverage (MEC).
Employee Notifications
- Employers are required to provide written notice about the ICHRA at least 90 days before the plan year begins (or when a new employee becomes eligible).
- This notice should explain how much allowance is available, how reimbursements work, and how employees can find coverage.
Recordkeeping and Documentation
- Employers must keep accurate records of reimbursements, employee submissions, and eligibility documents.
- While employees need to submit proof of insurance or medical expenses, employers don’t need to see sensitive health records, only proof that the expense is valid.
Affordability Testing
- To stay ACA-compliant, businesses must ensure the allowance is “affordable.” This means the employee’s share of insurance costs should not exceed a certain percentage of their income.
- Platforms like AHiX help employers run these affordability checks so there are no surprises during compliance reviews.
Common Mistakes to Avoid
- Offering reimbursements for expenses not allowed by the IRS (such as cosmetic procedures).
- Not treating all employees in the same class equally.
- Forgetting to provide required notices or documentation.
With the right partner, staying compliant doesn’t have to be difficult. AHiX provides the tools and guidance businesses need to set up an ICHRA that follows every legal requirement, so you can focus on supporting your employees instead of worrying about regulations.
Understood the compliance side? Let’s compare ICHRAs to other benefit options to see why they often come out ahead.
ICHRA vs Other Options for Small Businesses
When exploring health benefits, small businesses often wonder whether an ICHRA is the right choice compared to other health insurance available options. To make the decision easier, let’s break down how ICHRAs stack up against QSEHRAs (Qualified Small Employer HRAs) and traditional group health insurance.
ICHRA vs QSEHRA
- Who can offer it:
• QSEHRA is limited to businesses with fewer than 50 full-time employees.
• ICHRA can be used by employers of any size, from startups to growing companies. - Flexibility:
• QSEHRA has strict annual reimbursement limits.
• ICHRA has no federal cap on reimbursement amounts, giving employers more freedom. - Employee classes:
• QSEHRA doesn’t allow dividing employees into different groups.
• ICHRA allows employers to design different benefits for different classes of workers (full-time, part-time, remote, etc.).
Verdict: If your team is very small and your budget is tight, QSEHRA can work. But if you expect growth, ICHRA provides more flexibility and scalability.
ICHRA vs Traditional Group Insurance
- Cost control:
• Group plans have rising, unpredictable premiums each year.
• ICHRA lets you set a predictable monthly budget. - Employee choice:
• Group insurance forces everyone into the same plan.
• ICHRA empowers employees to pick the coverage that fits their own needs and families. - Administration:
• Group insurance can be complex to manage with renewals and paperwork.
• ICHRA is simpler, especially with a marketplace like AHiX handling compliance and reimbursements.
Verdict: Group health insurance may work for large companies with big HR teams, but for startups and small businesses, ICHRA is often the smarter, leaner choice.
Why Does ICHRA Stands Out?
When you compare these options side by side, ICHRA clearly offers the most balance between affordability, flexibility, and compliance. That’s why ICHRA is becoming the go-to choice for small businesses that want to provide real value without overwhelming costs.
Curious? Let’s explore how AHiX can help your small business or startup make the same move with confidence and ease.
How AHiX Helps Small Businesses Set Up an ICHRA
AHiX simplifies every step:
- Guided setup to define classes and budgets.
- Compliance support to meet ACA and IRS rules.
- Employee marketplace access to compare and enroll in plans.
- Streamlined administration for reimbursements.
- Scalability as your business grows.
Why Choose AHiX?
Because AHiX combines marketplace access, compliance tools, and employee support, it gives small businesses a one-stop solution for health benefits. For startups, this means offering competitive perks without the cost and complexity of traditional group insurance.
Conclusion: Start Your ICHRA Journey with Confidence
For small businesses and startups, health insurance no longer has to feel like an impossible expense. By setting up an ICHRA, you can give employees real choice, keep your costs under control, and stay fully compliant with ACA rules.
And when it comes to making the process seamless, AHiX is here to help. With our marketplace tools, compliance support, and employee-friendly enrollment options, we make ICHRA setup easy from start to finish.
Take the Next Step
Visit AHiX.com today to explore your options and get started with setting up your ICHRA.
FAQs
1. How long does it actually take to set up an ICHRA for my small business?
Most employers can set up an ICHRA in about 30 days or less. The process includes defining employee classes, deciding on reimbursement amounts, preparing compliance documents, and notifying employees. With AHiX, this timeline can be even faster because we guide you through each step and provide ready-to-use compliance resources.
2. Can a very small business or startup with fewer than 5 employees still offer an ICHRA?
Yes. Even if your team is very small, you can still set up an ICHRA. Unlike QSEHRAs, which are limited to employers under 50 employees, ICHRAs work for businesses of any size including startups with just a handful of workers. That makes ICHRAs one of the most flexible health benefit solutions available.
3. Do employees have to buy their own health insurance if I set up an ICHRA?
Yes, employees use the reimbursement allowance to purchase their own individual health insurance plans. This could include ACA marketplace plans, off-exchange plans, or even dental and vision coverage depending on how you design the ICHRA. With AHiX, employees get access to a trusted marketplace to compare options and choose the plan that fits their needs best.
4. Are ICHRA reimbursements really tax-free for both the employer and the employee?
Yes. As long as the employee buys a qualified health insurance plan that meets Minimum Essential Coverage (MEC), the reimbursements you provide through an ICHRA are tax-free. That means you save on payroll taxes, and employees don’t pay income tax on the benefit, making it one of the most cost-efficient ways to offer health coverage.
5. What is the difference between an ICHRA and a traditional group health insurance plan?
The biggest difference is flexibility and cost control. With group insurance, every employee is locked into the same plan, and employers face unpredictable annual premium increases. With an ICHRA, you set a fixed monthly budget and employees choose their own coverage. This model is especially useful for startups and small businesses that want affordable benefits without sacrificing compliance.
6. Can employees use ICHRA funds to cover dental or vision insurance in addition to health insurance?
Yes, if the employer chooses to include dental and vision as eligible expenses. One of the advantages of an ICHRA is customization. You can decide whether employees can use their allowance for medical premiums only or for additional coverage like dental, vision, or even certain out-of-pocket expenses.
7. How do I make sure my ICHRA plan stays compliant with ACA and IRS rules?
To stay compliant, employers must provide required employee notices, set affordable contribution amounts, and only reimburse qualified expenses. Doing this on your own can feel complicated, but AHiX simplifies compliance by offering built-in tools, affordability checks, and documentation support, so you never have to guess whether you’re following the rules correctly.
