Background Nepal has made remarkable efforts towards social health protection over the past several years. In 2016, the Government of Nepal introduced a National Health Insurance Program (NHIP) with an aim to ensure equitable and universal access to healthcare by all Nepalese citizens. Following the first year of operation, the scheme has covered 5 percent of its target population. There are wider concerns regarding the capacity of NHIP to achieve adequate population coverage and remain viable. In this context, this study aimed to identify the factors associated with enrolment of households in the NHIP. Methods A cross-sectional household survey using face to face interview was carried out in 2 Palikas (municipalities) of Ilam district. 570 households were studied by recruiting equal number of NHIP enrolled and non-enrolled households. We used Pearson’s chi-square test and binary logistic regression to identify the factors associated with household’s enrolment in NHIP. All statistical analyses were performed using IBM SPSS version 23 software. Results Enrolment of households in NHIP was found to be associated with ethnicity, socio-economic status, past experience of acute illness in family and presence of chronic illness. The households that belonged to higher socio-economic status were about 4 times more likely to enrol in the scheme. It was also observed that households from privileged ethnic groups such as Brahmin, Chhetri, Gurung, and Newar were 1.7 times more likely to enrol in NHIP compared to those from underprivileged ethnic groups such as janajatis (indigenous people) and dalits (the oppressed). The households with illness experience in 3 months preceding the survey were about 1.5 times more likely to enrol in NHIP compared to households that did not have such experience. Similarly, households in which at least one of the members was chronically ill were 1.8 times more likely to enrol compared to households with no chronic illness. Conclusion Belonging to the privileged ethnic group, having a higher socio-economic status, experiencing an acute illness and presence of chronically ill member in the family are the factors associated with enrolment of households in NHIP. This study revealed gaps in enrolment between rich-poor households and privileged-underprivileged ethnic groups. Extension of health insurance coverage to poor and marginalized households is therefore needed to increase equity and accelerate the pace towards achieving universal health coverage.