The allowance is the heart of an ICHRA. It's the maximum your employer will reimburse each month for your individual health coverage. Here's how it's typically set and what you can do with it.
Your employer picks the amount — within some rules
There's generally no minimum or maximum on what an employer can offer. What the rules do require is fairness within a group. Employers sort employees into classes — for example, full-time, part-time, salaried, hourly, seasonal, or by state — and everyone in the same class gets the same offer.
Why your allowance may differ from a coworker's
Within a class, the amount can typically vary in two ways only:
- Age — because individual plans cost more as you get older, employers can give older employees a larger allowance. The rules generally cap this at 3× the amount offered to the youngest employees in that class.
- Family size — someone covering a spouse and children can typically be offered more than someone covering only themselves.
What it generally can't vary on: your health, your salary, your tenure, or your job title (unless that title is its own legitimate class).
Example
A company might set the "employee only" allowance at $400 for ages 21–30, stepping up each decade to $900 for ages 60+, and add $300 for a spouse and $150 per child. Every full-time employee gets the same formula.
What the allowance can typically pay for
- Premiums for an individual plan (on or off the Marketplace).
- Medicare premiums — Part B, Part D, Medicare Advantage, and Medigap — if you're enrolled.
- Other medical expenses — only if your employer set it up that way. Some ICHRAs are premium-only; others also reimburse deductibles, copays, prescriptions, and other IRS-qualified expenses. Your notice or plan document will say which.
What happens to what you don't use
If your premium is less than your allowance, the difference doesn't show up in your paycheck. Generally:
- It stays with the employer, or
- It rolls forward month to month within the plan year (some employers allow this), or
- It can be used for other eligible medical costs, if your ICHRA reimburses those.
Two things it typically can't do: be paid out as cash, or follow you when you leave. That's why it's worth choosing a plan that actually uses the allowance well rather than the cheapest thing on the shelf.
It's tax-free in both directions
Reimbursements aren't income to you, and the employer doesn't pay payroll tax on them. Compared to a raise of the same amount, an ICHRA allowance is generally worth meaningfully more after taxes.
Watch-out
Your allowance is a
maximum, not a guarantee. If you don't enroll in qualifying coverage, don't submit proof, or miss your employer's deadlines, reimbursements typically can't be made — and unused months usually can't be recovered later.