ICHRA Pros and Cons: What Every Small Business Needs to Know

In a nutshell, Individual Coverage Health Reimbursement Arrangement (ICHRA) is an employer-funded health benefit (a Health Reimbursement Arrangement) that reimburses employees—tax-free when rules are met—for individual health insurance premiums and, if the employer allows, other eligible medical expenses.

Used properly, it allows businesses to tighten cost control while granting employees the freedom to choose their own healthcare. Many employers use ICHRA as an alternative to traditional group health insurance by setting an employer budget while allowing employees to choose their own individual coverage.

Today, ICHRA is on pace to become a staple alternative to traditional employer-sponsored healthcare plans in the U.S. According to the 2024 ICHRA Report by Remodel Health, ICHRA adoption among U.S. employers grew by 29% from 2023 to 2024. 

This begs the question:

Should your small business jump on the bandwagon and offer ICHRA? 

To answer this question, let's take a close and objective look at the pros and cons of ICHRA. 

Let's dive right in.

Understanding ICHRA

The best way to fully understand ICHRA is to investigate its similarities and differences with other HRA models. 

For starters, Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is widely regarded as its closest twin. 

Similar to ICHRA, QSEHRA follows a system in which: 

• The employer sets a monthly allowance, and employees can be reimbursed for eligible expenses (as defined by the plan) after submitting required documentation and substantiation.
• Employees buy their own insurance health and pay for medical expenses out of pocket. This gives them the autonomy to choose which healthcare products best serve their needs. 
• Employers reimburse employees upon submission of proof of payment. Reimbursements have a monthly cap set by the employer, which may or may not roll over from year to year. 
• Both ICHRA and QSEHRA can be tax-advantaged, but tax-free reimbursement depends on employees meeting coverage requirements and the employer properly substantiating claims. At the same time, employer contributions to the fund are considered tax deductibles. 

Despite these similarities, ICHRA is designed to be a more flexible alternative to QSEHRA.  

QSEHRA is generally available to employers that aren’t ACA applicable large employers (ALEs) and that don’t offer a group health plan to employees. ICHRA doesn't have restrictions based on employee count. ICHRA also isn't subject to annual contribution caps, unlike QSEHRA which has annually-adjusted limits for individuals and families. 

Below is a quick rundown of the other differences between ICHRA and QSEHRA: 

• Exclusivity — Employers offering a QSEHRA generally can’t also offer a group health plan. ICHRA can be offered alongside a traditional group health plan, but it must be offered to different employee classes—employees generally can’t be given a choice between the two within the same class.
• Customizability — Employers can tailor ICHRA plans to accommodate different employee groups or classes. QSEHRA, on the other hand, should follow the same terms for all eligible employees. 
• Implementation — Lastly, businesses can implement ICHRA at any time. QSEHRA can be started mid-year, but employers must follow notice and proration rules when coverage begins partway through the year. This means means employees will need to plan ahead when it comes to their health insurance decisions.

ICHRA Pros

Now that you're completely familiar with ICHRA, it's time to talk about its pros and cons. 

Let's start with the upsides of using ICHRA for your business:

1. Simple and Streamlined Process

Employers have the option to partner with a third-party insurer or invest in a software solution to manage their ICHRA.

SimplyHRA, for example, is an easy-to-use solution that lets you manage enrollments, budgets, employee groups, and reimbursements — all in one place. It features a drag-and-drop interface that requires little to no technical skills to use.

2. Tax Benefits

There are four ways ICHRA benefits employers and employees when it comes to their taxes:

• ICHRA contributions as tax deductibles — Employers can write off ICHRA contributions as business expenses.
• Reduced payroll taxes — ICHRA contributions aren't subject to payroll taxes.
• Tax-free reimbursements — When requirements are met, reimbursements generally aren’t treated as taxable wages to employees, which can improve their net take-home value.

3. Customizability for Employees

One of the highlights of ICHRA is the plan's expanded customizability for employees. They are free to choose the health insurance products that best suit their needs. 

ICHRA also has provisions for a list of eligible medical expenses, which can be reimbursed through the plan. This includes prescriptions, dental care, mental health services, and hospital stays. 

An ICHRA offer can trigger a Special Enrollment Period, but employees generally must enroll in individual coverage within a limited window around the ICHRA start date.

To participate on a tax-free basis, employees (and any covered family members, if applicable) must have qualifying individual health insurance coverage—this can include Marketplace/off-Marketplace individual plans or Medicare (Part A & B or Medicare Advantage), if eligible.

4. Budget Control for Different Employee Groups

Employers can vary allowance amounts by permitted employee classes (for example, full-time vs. part-time, salaried vs. hourly, geographic location, or other allowed classifications) as long as the plan applies uniform terms within each class.

This enables employers to create cost-effective but reasonable reimbursement allowances tailored to the diverse needs of their employees. 

For example, if you go with job-based criteria, employees who do physically laborious or potentially hazardous work may require a higher reimbursement allowance than those who perform their duties in the office.

Again, these adjustments can be easily conducted through a visual interface — like SimplyHRA's dashboard.

5. Flexibility 

Finally, here's a quick recap of ICHRA's advantages in terms of flexibility:

• No employee size restrictions.
• No yearly contribution limits.
• No minimum contribution requirements.
• Year-round enrollment period.

It's also worth noting that, since employees under ICHRA purchase individual health insurance in their name, their coverage can be ported over should they leave the company. 

ICHRA Cons

Of course, nothing is perfect in the complicated healthcare landscape. 

While ICHRA solves a number of known challenges in employer-sponsored healthcare, it still comes with a handful of downsides. 

The most notable ones are:

• Spouse group coverage doesn’t generally meet ICHRA’s qualifying coverage requirement—so employees on a spouse’s group plan may need to opt out of ICHRA or enroll in qualifying individual coverage (or Medicare, if eligible) to participate tax-free.
• Health care sharing ministry arrangements don’t satisfy ICHRA’s qualifying coverage requirement. Employees relying on those arrangements generally can’t use them to meet ICHRA’s coverage requirement for tax-free participation.
• Ineligibility for Premium Tax Credits (PTC) — The IRS outlined that if an employee is offered an ICHRA, they generally can’t claim Marketplace premium tax credits unless the ICHRA is unaffordable and they opt out of the ICHRA for that period.

Additional Considerations When Implementing ICHRA

Considering ICHRA for your small business? 

Before you make a decision, here are three additional considerations to think:

Employee Communication and Education 

Remember that, when implementing ICHRA, it's your responsibility to inform and educate employees on how the plan works. Ideally, you need to offer accessible learning resources, including one-on-one consultations, webinars, and orientations (at the very least covering how to pick the right health insurance plan for them). 

The good news is, employers can count on platforms like SimplyHRA to provide high-quality learning materials to help their employees understand ICHRA. This includes informative articles, tools, FAQs, and an AI chat assistant that can provide instant answers to all HRA-related questions.

Administrative Set-Up and Support

When implementing ICHRA, your first major decision is between working with a third-party insurer or operating through a benefits platform like SimplyHRA. 

Going with the first option will, of course, lessen the administrative work you have to do. However, this would typically come with higher costs and less overall control.

Investing in a benefits solution, on the other hand, will give you more control — not to mention it involves lower upfront costs. However, you need to be more involved when it comes to managing your ICHRA plan, which can get more demanding as your organization grows and takes on more employee participants. 

Analysis of Market Trends

Although ICHRA is steadily growing in popularity, employers need due diligence when choosing a healthcare plan for their organization. 

A high-priority consideration is to observe the latest trends and changes in healthcare laws and regulations. Before you choose ICHRA, you must know the ins and outs of the system in terms of healthcare compliance. 

It's also important to do extensive research on the available healthcare providers. 

A bulletproof approach is to create and evaluate a list of healthcare providers and insurance carriers. You can also use a solution with a generous supply of self-learning resources (e.g., 24/7 AI chatbot, sample dashboards, or a frequently-updated blog) to give your ICHRA plans some traction.

With SimplyHRA, you'll have access to all of these resources and more. Some are available for free, including the HRA Glossary and FAQ page. 

How to Manage Your ICHRA Plan with SimplyHRA

ICHRA is a great way to ensure customizable and affordable healthcare for your employees.

But you'll need the right partner or platform to do it. 

With SimplyHRA, you'll be able to create, manage, and analyze your ICHRA plan through a visual, no-code interface. Just focus on tracking your budgets and reimbursements while we handle the not-so-sexy aspects of ICHRA — from compliance to claim submissions. 

Schedule a demo to see whether ICHRA fits your team—and how SimplyHRA helps you set allowances, organize employee classes, and track reimbursements.