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For decades, offering health insurance meant choosing a group medical plan, deciding how much the company would contribute, and managing annual renewals.
Today, employers have more options. One that's received increasing attention in recent years is the Individual Coverage Health Reimbursement Arrangement, better known as an ICHRA.
For some businesses, it can provide flexibility and predictable budgeting. For others, a traditional group health plan may still be the better choice.
Understanding the differences is the first step toward making the right decision.
What Is an ICHRA?
An ICHRA allows employers to reimburse employees for the cost of individually purchased health insurance instead of offering a traditional group medical plan.
Rather than selecting one group plan for everyone, the employer sets a monthly reimbursement amount.
Employees then purchase their own qualifying individual health insurance policy and receive reimbursement for eligible premiums and, if the employer chooses, other qualified medical expenses.
The reimbursement is generally tax-free to employees and tax-deductible for employers when IRS requirements are met.
Why Employers Are Considering ICHRAs
For some organizations, an ICHRA offers several advantages.
Predictable Budgeting
- Instead of being surprised by annual renewal increases, employers decide how much they want to contribute toward employee healthcare costs.
More Employee Choice
- Employees can select an individual health plan that best fits their needs instead of choosing from one or two employer-sponsored options.
Multi-State Workforces
- Businesses with employees working remotely across multiple states may find an ICHRA easier to administer than trying to maintain group plans with adequate provider networks everywhere employees live.
Eligibility Flexibility
- Employers can establish different reimbursement amounts for different classes of employees, provided IRS rules are followed.
Potential Challenges
An ICHRA isn't the right solution for every employer.
Before making the switch, employers should consider a few potential drawbacks.
Employees Must Shop for Their Own Coverage
- While many employees appreciate having more choices, others may find purchasing individual health insurance overwhelming without guidance.
Provider Networks May Differ
- Employees may choose different insurance carriers, resulting in different provider networks and benefit designs across the workforce.
Compliance Still Matters
- ICHRAs come with specific notice requirements, reimbursement rules, employee classes, and affordability requirements—particularly for Applicable Large Employers subject to the Affordable Care Act.
- Proper administration is essential.
Is an ICHRA Right for Your Organization?
An ICHRA may be worth exploring if your organization:
- Has employees in multiple states
- Has struggled with rising group health insurance costs
- Wants predictable healthcare budgeting
- Is looking for an alternative to traditional group coverage
- Wants greater flexibility in employee plan choices
However, employers with stable participation, strong group rates, or employees who prefer a traditional group plan may find that group insurance continues to provide the best value.
Every organization is different.
An ICHRA isn't better than traditional group health insurance—and traditional group coverage isn't automatically better than an ICHRA. They're simply different approaches to helping employees access healthcare coverage.
The right solution depends on your workforce, your budget, your long-term goals, and the needs of your employees. Before making a significant change to your benefits strategy, it's worth evaluating all of the available options and understanding the advantages and tradeoffs of each.
Royal Benefits Group helps employers evaluate traditional group health plans, ICHRAs, level-funded options, and other strategies to build a benefits program that aligns with both business goals and employee needs. We don't believe every employer should move to an ICHRA. In fact, many organizations are better served by a traditional group health plan. We typically recommend exploring an ICHRA when a company is struggling with affordability, has employees in multiple states, doesn't meet carrier participation requirements, or simply needs more flexibility than a traditional group plan can provide.
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