Individual Coverage HRAs (ICHRAs) are designed to give employers more flexibility and employees more choice in how they access health benefits. But not all ICHRAs work the same way. Employers can structure their ICHRA in two primary ways, each determining what expenses the allowance can be used for and how employees can spend leftover funds.
Here’s a clear, quick breakdown to help employers, brokers, and HR teams understand the key differences.
The two types of ICHRA plan designs
Depending on how the employer structures the benefit, an ICHRA can cover either premiums only or premiums plus certain qualified medical expenses.
1. Premium-only ICHRA
A premium-only ICHRA is the simplest and most common design. Under this structure, employees can use their monthly allowance only to pay for their individual health insurance premiums.
If an employee enrolls in a plan that costs less than their allowance, the unused amount does not roll over and cannot be used for additional expenses. The allowance is strictly tied to medical premiums and nothing more.
This design works well for employers who want predictable deductions and straightforward administration.
2. ICHRA with excess allowance (premiums + qualified medical expenses)
An ICHRA with excess allowance gives employees more flexibility in how they use remaining funds.
Here’s how it works: Employees must first use their allowance to pay for their individual health insurance premium. If their premium is lower than the monthly allowance, the leftover amount can be used for other qualified medical expenses.
Eligible expenses typically include dental and vision insurance premiums, copays, prescriptions, and other IRS-approved medical expenses listed in Publication 502. This structure is especially valuable for employees who choose a lower-cost health plan, giving them the ability to stretch their benefits further and leverage excess employer contributions to cover eligible costs.
Which ICHRA design is best?
Most employers choose premium-only designs for simplicity and predictability, but excess-allowance ICHRAs can offer employees a more generous and flexible benefit. The “best” option depends on workforce needs, budget, and overall benefits strategy.
In conclusion
While all ICHRAs give employees the freedom to choose their own health plan, employers can customize how far that benefit goes. Premium-only ICHRAs keep things straightforward, enabling a “set it and forget it” approach; excess-allowance ICHRAs unlock added value for employees who don’t use their full allowance on premiums.
Understanding these two designs helps employers structure an ICHRA that aligns with financial goals and supports a positive employee experience.
