ICHRA Pros and Cons: What Small Business Owners Should Weigh
An ICHRA gives your team more choice and gives you a monthly cost you set in advance, but it is not the right fit for every business. Here is an honest look at both sides before you decide.
The Short Version
An ICHRA is a way to help your employees pay for health insurance they buy on their own, without running a group plan. The case for it is simple: you decide the monthly amount, and your employees choose coverage that fits their lives. The case against it is just as simple: it asks more of your employees, and some businesses are better served by one shared plan. If the term is new to you, our guide to how an ICHRA works covers the basics.
The rules shape the trade-offs, so it helps to know three of them up front. Your employees need to be enrolled in individual health coverage to receive the reimbursement. You generally cannot offer an ICHRA and a traditional group plan to the same class of employees. And you need to give employees written notice at least 90 days before the plan year starts, so timing matters.
In one sentence
An ICHRA trades a shared plan for a set budget and personal choice, and whether that is a good trade depends on your team.
What an ICHRA Does Well
These are the reasons owners most often look at an ICHRA, and where it tends to outperform a traditional group plan.
A cost you set in advance
You choose the reimbursement amount, so your monthly spend is the number you picked. If premiums on your employees' individual plans change, the amount you set does not change with them.
Plans that fit each person
Employees choose individual coverage that matches their doctors, their budget, and their family, instead of enrolling in the one or two plans you would pick for the whole group.
A fit for teams in different places
The rules let you set different amounts for different groups of employees, such as full-time and part-time, or people who work in different areas. That can suit a team that is spread across locations.
Room to grow
An ICHRA is open to employers of any size. When you hire, the new person picks their own plan and you set up their reimbursement, rather than rebuilding a group plan around a bigger team.
Each of these strengths has a flip side. The next section lays them next to the trade-offs so you can see both at once.
The Trade-Offs, Side by Side
Almost every strength of an ICHRA has a matching question to weigh. Here they are in one place.
| In your favor | Worth weighing | |
|---|---|---|
| Monthly cost | You choose the amount, so your spend is a number you set in advance. | Employees pay anything above that amount, so a modest allowance may leave fewer plans within reach. |
| Plan choice | Each employee picks the plan, doctors, and coverage level that fit their life. | There is no single shared plan or network for the whole team. |
| Employee effort | Employees shop with a clear budget in hand. | They have to shop for and enroll in individual coverage, and they need to be enrolled to receive the reimbursement. |
| Your admin work | There is no group plan renewal to manage with a carrier. | You still need a way to confirm employees are enrolled and to reimburse them. |
| Mixing with group coverage | You can set different arrangements for different classes of employees. | You generally cannot offer an ICHRA and a traditional group plan to the same class. |
| Notice and timing | Employees get clear information about the benefit before the year begins. | The written notice has to go out at least 90 days before the plan year starts. |
| Premium tax credits | If an employee's ICHRA does not meet the IRS affordability test, they can opt out and waive it to claim the credit instead. | An employee offered an ICHRA that does meet the test generally cannot also claim the premium tax credit. |
Want to see how it compares with a traditional plan? Read ICHRA vs. Group Health Insurance for the full side-by-side.
Questions to Ask Before You Decide
If you can answer these four questions, you will know a lot about whether an ICHRA fits your business.
Question 1
How different are your employees' needs?
When people live in different places, see different doctors, or have very different family situations, personal choice tends to matter more. When most of your team would be happy with the same plan, a group plan may be simpler for everyone.
Question 2
Does the timing work?
The written notice has to reach employees at least 90 days before the plan year starts, and employees need time after that to shop and enroll. Work backward from the date you want the benefit to begin.
Question 3
Who will help employees choose?
Shopping for individual coverage is new to many people. Decide who will answer questions about plans, enrollment, and reimbursement, whether that is you, an administration partner, or an advisor.
Question 4
Who will keep it compliant?
The rules ask for the same terms within each class of employees, written notice, and a way to confirm each employee is enrolled in individual coverage. Decide who tracks those pieces and how reimbursements are documented.
If a question is hard to answer, that is useful to know too. An advisor can help you work through it before you commit.
Common Questions About ICHRA Pros and Cons
Is an ICHRA a good fit for a small business?
It can be, depending on your team. An ICHRA tends to work well when you want a cost you set in advance and your employees would benefit from choosing their own coverage. It tends to work less well when most of your team would be happy with one shared plan, or when no one is available to help employees shop. The sections above walk through both sides.
Do employees have to buy their own plan to receive the reimbursement?
Yes. An employee has to be enrolled in individual health insurance coverage to receive the reimbursement, and the arrangement needs a reasonable way to confirm that coverage. Employees also have the right to opt out of the ICHRA.
Can I offer an ICHRA to some employees and a group plan to others?
Yes, by class. The rules let you divide employees into classes, such as full-time, part-time, salaried, hourly, or employees in the same rating area, and offer each class a different arrangement. You generally cannot offer the same class both a traditional group plan and an ICHRA, and everyone in a class has to receive the same terms. Because the rules include conditions on how classes are defined, confirm the details before you set it up.
When does the written notice have to go out?
At least 90 calendar days before the start of the plan year. The notice explains the arrangement to your employees, so it is worth planning the timeline backward from the date you want the benefit to start.
Can an employee get a premium tax credit if they are offered an ICHRA?
An employee offered an ICHRA that meets the IRS affordability test generally cannot also claim the premium tax credit. If the ICHRA does not meet the test, the employee can opt out and waive it in order to claim the credit. The IRS sets how affordability is measured, and an advisor can help you check it before you set your amount.
What happens if an employee does not enroll in coverage?
They do not receive the reimbursement for that period, because the arrangement is tied to enrollment in individual coverage. Employees who decline can opt out and waive the ICHRA, and that can matter for their eligibility for a tax credit.
Does an ICHRA work for a very small team?
It can. An ICHRA is open to employers of any size, and many small employers consider it for the cost certainty and choice it offers. Employers with 50 or more full-time employees, including full-time equivalents, are subject to additional ACA employer rules, so check which side of that line you are on.
This FAQ is general information about how these arrangements work, not tax or legal advice. Rules can change and every situation is different, so check with a qualified tax or benefits advisor before you set up a plan.
Not Sure Which Way to Lean?
Tell us about your team and your current coverage, and we will help you weigh an ICHRA against your other options with your real numbers in front of you.
Compliance & References
Federal Guidance and Regulations
The rules discussed in this guide come from these federal sources:
Key Requirements at a Glance
This content is provided for informational purposes only and does not constitute legal or tax advice. Please consult your legal or tax advisor about your specific situation.
Disclosures
We are compensated by the insurance carriers for policies you choose through us. There is no direct cost to you. Compensation may vary by carrier and product. Information on this page is for educational purposes and does not constitute legal, tax, or accounting advice. Please consult your professional advisors about your specific situation. Tax treatment of ICHRA reimbursements can vary by employer and employee. We are licensed to advise clients in Pennsylvania, New Jersey, and Delaware. Contact us to confirm availability in other states.
