Health Reimbursement Arrangements let employers fund employee health coverage without running a traditional group plan. For the right employer, it's a genuinely better model. For the wrong one, the compliance complexity can create real problems. Here's what Arizona employers and employees need to know.
ICHRA setup has meaningful compliance requirements. A licensed Arizona broker walks you through the design, affordability calculation, and employee communication requirements at no cost.
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Two Perspectives
ICHRA affects employers and employees differently. Select your perspective for the most relevant explanation.
Traditional group health insurance forces employers to pick one plan — or a small set of plans — and offer it to all eligible employees. That works reasonably well when your workforce is homogeneous and local. It breaks down when employees are geographically dispersed, have different coverage needs, or when the group market in your area is expensive or limited in carrier options.
ICHRA flips the model: instead of buying a group plan, the employer sets a monthly dollar amount — the HRA allowance — and each employee shops for their own individual ACA marketplace plan. The employer reimburses the employee tax-free for their actual premium up to the allowance. The employer controls the cost. The employee controls the plan.
Cost predictability is the primary appeal. With a traditional group plan, premiums can increase 8–15% annually and you have limited ability to control them. With ICHRA, you set the allowance at a level that fits your budget and it doesn't change unless you choose to increase it. If costs rise, employees absorb the difference — or shop for a more affordable plan.
Administrative simplicity is the second benefit. No plan selection, no carrier negotiation, no annual renewal, no COBRA administration for the group plan itself. The employer's obligation is to design the ICHRA, calculate affordability, provide required notices, and reimburse submitted premiums. Several HRA administration platforms have reduced this to a lightweight monthly process.
ICHRA is not a casual benefit decision. The IRS and DOL have specific design requirements: the plan must be formally adopted with a written plan document, required notices must be provided to employees at specific intervals, employee classes must be defined correctly and consistently applied, and the affordability calculation must be run each year to determine subsidy impact on employees. Errors in any of these areas can result in the HRA being disallowed — meaning the reimbursements become taxable income to employees.
This is why broker involvement is strongly recommended for ICHRA setup, not just as a formality but as a genuine compliance safeguard.
No federal minimum or maximum. Common structures:
Self-only: $300–$600/month
Employee + spouse: $550–$900/month
Family: $700–$1,200/month
Allowances may vary by employee class (e.g., full-time vs. part-time) but must be uniform within each class.
If your employer is offering an ICHRA, they are giving you a fixed monthly dollar amount to spend on individual health insurance rather than enrolling you in a company group plan. You use that allowance to purchase your own ACA marketplace plan — or in some cases, another qualifying individual plan — and submit your premium receipts to your employer or their HRA administrator for reimbursement up to the allowance amount.
The reimbursements are tax-free to you, which is the key financial advantage. If your employer gives you $500/month and your plan costs $450/month, you receive $450 in tax-free reimbursement. The allowance is not taxable income as long as you're enrolled in qualifying individual coverage.
This is where ICHRA gets complicated for employees. If your employer's ICHRA allowance is deemed "affordable" under IRS rules, you are not eligible for ACA premium tax credits — even if your income would otherwise qualify you for a subsidy. The ICHRA allowance and the ACA subsidy cannot both apply to the same coverage.
Whether the ICHRA is "affordable" is a specific calculation based on your income, the lowest-cost Silver plan available in your area, and the allowance amount. If the allowance covers enough of the Silver plan premium that your remaining contribution would be below a certain percentage of your household income, the ICHRA is affordable and you lose subsidy eligibility. A broker can run this calculation for your specific situation before you decide whether to opt out.
You can opt out of your employer's ICHRA. If you opt out and the ICHRA would have been deemed affordable, you still cannot claim a marketplace subsidy — the affordability calculation applies whether or not you actually use the HRA. But if the ICHRA is not affordable, opting out restores your subsidy eligibility. Understanding whether opting out makes financial sense requires running the actual numbers for your income and county.
Before accepting or opting out of an ICHRA: estimate your marketplace subsidy eligibility at your income level, compare the net cost of the marketplace plan with subsidy vs. the net cost using the employer's ICHRA allowance, and confirm whether the allowance meets the IRS affordability threshold. A licensed broker can model both scenarios for you at no cost.
How It Works
Four steps from plan design to employee reimbursement.
Employer adopts a written plan document defining the allowance amounts by employee class, eligible expenses, plan year, and required notice procedures. A broker or HRA administrator typically facilitates this. Must be done at least 90 days before the plan year starts.
Employees receive the required ICHRA notice explaining the allowance, affordability status, and their right to a Special Enrollment Period. Employees shop the ACA marketplace during their SEP and select any qualifying individual plan available in their county.
Each month, employees submit proof of their premium payment to the HRA administrator (employer or third-party platform). The submission confirms they are enrolled in qualifying individual coverage — the prerequisite for receiving tax-free reimbursement.
Employer reimburses the employee up to the monthly allowance, tax-free to both parties. The reimbursement is not subject to payroll taxes, is deductible by the employer as a business expense, and is not included in the employee's W-2 taxable income provided the employee is enrolled in qualifying coverage.
ICHRA vs. QSEHRA
Both ICHRA and QSEHRA allow employers to reimburse employees for individual health insurance premiums tax-free. The key differences matter significantly for small employers under 50 employees.
Affordability Rules
The intersection of ICHRA and ACA subsidies is the most consequential — and most frequently misunderstood — aspect of ICHRA design. Employers and employees both need to understand it.
An employee offered an affordable ICHRA cannot claim ACA premium tax credits for the same months they are eligible for the ICHRA — whether or not they actually use it. "Affordable" is a specific IRS calculation, not a general judgment. Getting this wrong costs employees real money and creates employer compliance exposure.
An ICHRA is considered affordable for an employee if the employee's required contribution for the lowest-cost Silver plan available in their area — after the ICHRA allowance is applied — does not exceed a set percentage of their household income.
The percentage threshold adjusts annually. The calculation is performed separately for each employee class — employees in different classes may have different affordability outcomes even with the same allowance amount, because the benchmark Silver plan premium varies by age and county.
Because employers typically don't know employees' household incomes, the IRS provides three safe harbors that employers can use to determine the affordability standard:
W-2 Safe Harbor: Affordability is based on the employee's prior year W-2 Box 1 wages. Most commonly used for salaried employees with predictable income.
Rate of Pay Safe Harbor: For hourly employees, uses 130 hours × hourly rate. For salaried, uses monthly salary. More predictable for employers to calculate.
Federal Poverty Level Safe Harbor: Uses the FPL for a household of one regardless of the employee's actual family size or income. Simplest to administer — most conservative for employer compliance risk.
If the IRS affordability test determines the ICHRA is not affordable for a given employee, that employee retains ACA subsidy eligibility. They can opt out of the ICHRA, enroll in a marketplace plan, and claim whatever premium tax credit their income qualifies them for.
For lower-income employees in counties with expensive Silver plans, this situation is common — the ICHRA allowance may cover a meaningful portion of the premium but still fall short of the affordability threshold. These employees may be better served by opting out and using their subsidy eligibility.
QSEHRA works differently from ICHRA with respect to subsidies. Rather than a binary "affordable or not" determination, QSEHRA allowances reduce the employee's ACA subsidy dollar-for-dollar.
An employee eligible for a $400/month marketplace subsidy who also receives a $250/month QSEHRA allowance receives a net subsidy of $150/month. Both benefits apply simultaneously — they are additive in opposite directions.
This means employees must report their QSEHRA allowance amount when applying for ACA coverage at healthcare.gov — failure to do so can result in subsidy overpayment and a tax liability at reconciliation.
Employee Classes
ICHRA allows employers to offer different allowance amounts to different classes of employees — a significant advantage over traditional group plans where coverage must generally be uniform. However, the class definitions must follow IRS rules precisely. Employers cannot create arbitrary classes to favor certain employees — classes must be based on bona fide employment distinctions.
Employees working 30 or more hours per week. The most common primary class. Allowance amounts for full-time employees can differ from part-time employees of the same employer.
Employees working fewer than 30 hours per week. Can receive a different — including lower or zero — ICHRA allowance than full-time employees. Hours threshold must be applied consistently.
Employees hired for a season or fixed period. Common in Arizona's hospitality, construction, and agriculture sectors. Can be treated as a separate class with a distinct allowance or excluded entirely.
Employees in different geographic rating areas can receive different allowances — and often should, since the benchmark Silver plan premium varies significantly by county. This is particularly relevant for Arizona employers with staff in both metro Phoenix and rural counties.
Salaried and hourly employees can be defined as separate classes. Common in industries where a mix of professional and trades workers creates meaningfully different compensation and benefits expectations.
Employees covered by a collective bargaining agreement where health benefits were a subject of good-faith bargaining can be treated as a separate class. Typically used when a union contract covers part of the workforce.
Non-resident alien employees with no U.S.-source income may be classified separately. Relevant for employers in border or international business contexts — less commonly applicable in standard Arizona employer situations.
Employers can combine any of the above — for example, "full-time employees in Maricopa County" vs. "full-time employees outside Maricopa County" as separate classes with different allowances reflecting different benchmark premiums.
If an employer offers a traditional group plan to some employees and ICHRA to others, minimum class size rules apply to prevent employers from using class definitions to steer less healthy employees toward individual coverage. Generally requires at least 10 employees in any class if a group plan is offered concurrently.
Arizona-Specific
Arizona's marketplace geography, carrier landscape, and small employer environment create specific ICHRA considerations that don't apply in every state.
Arizona's ACA marketplace has significant premium variation between counties. The benchmark Silver plan premium in Maricopa County differs meaningfully from Pima, Cochise, or rural northern Arizona counties. Employers with geographically dispersed employees should define geographic classes and calculate affordability by county — a single statewide allowance may be affordable in one county and not in another, creating inconsistent subsidy outcomes across the workforce.
Not all Arizona carriers offer plans in every county. Banner Health, Blue Cross Blue Shield of Arizona, Ambetter, Molina, and Health Choice have varying footprints. Employees in rural Arizona counties may have fewer individual plan options than those in Phoenix or Tucson metro areas. This is actually an argument for ICHRA in some cases — employees can select the plan that works for their specific county rather than being constrained by a group carrier with limited network in their area.
Arizona's small group insurance market can be expensive for employers with 2–20 employees, particularly those with older or mixed-health workforces where community rating rules still allow age-based pricing. ICHRA can be a meaningful alternative for these employers — allowing younger, healthier employees to buy inexpensive individual coverage while older employees still receive the allowance to apply to a plan that fits their needs, without the employer bearing the full cost of a high-premium group plan driven by a few high-risk employees.
Arizona does not impose additional state-level HRA requirements beyond federal IRS and DOL rules. The Arizona Department of Insurance and Financial Institutions regulates the individual plans employees purchase, but ICHRA itself is governed entirely by federal law. Arizona employers implementing ICHRA need to comply with IRS Revenue Procedure 2022-24, DOL Notice 2018-88, and applicable ACA employer mandate provisions — not Arizona-specific HRA regulations.
Arizona's active construction and trades sector has a high concentration of seasonal workers, variable-hours employees, and union-adjacent workforces where ICHRA class structures are particularly relevant. Seasonal class definitions allow construction employers to offer a benefit during active project seasons without committing to year-round group coverage. Geographic class definitions allow multi-site contractors to calibrate allowances for employees working in different counties with different benchmark premiums.
A common misconception: sole proprietors and self-employed individuals without W-2 employees cannot use ICHRA for themselves. ICHRA requires an employer-employee relationship — the HRA must be offered to W-2 employees. Self-employed Arizonans should instead look at the self-employed health insurance deduction, HSA strategy, and ACA marketplace plans as their primary coverage tools. The self-employed hub page covers these strategies in detail.
Honest Assessment
ICHRA is a genuinely useful tool in the right situation. It's also a tool that creates real compliance exposure and employee relations complications when it's not the right fit or isn't set up carefully.
Common Questions
A licensed Arizona broker walks through ICHRA or QSEHRA design, affordability calculations, employee class structure, and HRA administrator selection at no cost. Getting the setup right protects both employer and employee.
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