What are the tax implications for employers and employees?

One of the key advantages of an ICHRA is its favorable tax treatment for both employers and employees. When set up and administered correctly, ICHRAs provide tax benefits similar to traditional group health plans.

For Employers

Tax-deductible business expense: ICHRA contributions are deductible as a business expense, just like premiums paid toward a traditional group health plan. This reduces the employer's taxable income.

No payroll taxes: Employer ICHRA contributions are not subject to FICA taxes (Social Security and Medicare), FUTA (federal unemployment tax), or state unemployment taxes. This creates additional savings beyond the income tax deduction.

For Employees

Tax-free reimbursements: Reimbursements received through an ICHRA are not considered taxable income to the employee. Employees receive the full reimbursement amount without federal income tax, Social Security, or Medicare taxes being withheld.

Premiums paid with reimbursed funds: Since the reimbursement itself is tax-free, employees effectively pay their individual health insurance premiums with pre-tax dollars—achieving a similar tax benefit to employer-sponsored group coverage where premiums are deducted from payroll on a pre-tax basis.

Important considerations

Premium tax credits: Employees who are offered an affordable ICHRA are not eligible for premium tax credits on the ACA marketplace, even if they waive the ICHRA. Employees who are offered an ICHRA that is deemed unaffordable—or who are not offered an ICHRA—may still qualify for premium tax credits, but they cannot receive both premium tax credits and ICHRA reimbursements. For more details, see: How does an ICHRA interact with ACA requirements and the employer mandate?

State tax treatment: While ICHRAs receive favorable federal tax treatment, state tax rules can vary. In most states, ICHRA reimbursements are also excluded from state income tax, but employers and employees should verify the rules in their specific state.

Pre-tax vs. post-tax premium payments: Employees typically pay their individual health insurance premiums with after-tax dollars and then receive tax-free reimbursement through the ICHRA. The end result is similar to pre-tax payroll deductions, but the mechanics are different—employees pay first, then get reimbursed.