ICHRA vs Traditional Employer-Funded Insurance: What's Best For You?

Choosing the right insurance plan for your employees can be tough. 

The key is to strike the perfect balance between control, flexibility, quality, and costs. 

This brings us to two employee healthcare structures that can fit the bill: traditional employer-funded insurance and Individual Coverage Health Reimbursement Arrangement (ICHRA). 

Broadly speaking, both traditional employer-funded insurance and ICHRA provide companies with more control of their employees’ health plans. However, there are a handful of differences that give ICHRA an advantage in terms of flexibility, coverage quality, and administrative challenges.

In this article, we’ll take a finer look at the differences between the two plans to help you choose what’s best for your employees.

First, a quick introduction. 

What is ICHRA?

ICHRA — short for Individual Coverage Health Reimbursement Arrangement — is an employer-sponsored health reimbursement arrangement where the employer sets a monthly allowance and reimburses employees (after required substantiation) for individual health insurance premiums and, if the plan allows, other IRS-qualified medical expenses. Reimbursements are generally excludable from employees’ income only for months the employee (and any reimbursed family members) are enrolled in qualifying individual health coverage.

Implementing ICHRA can be simplified with the help of a benefits administrator (e.g., a TPA or broker) or an HRA administration platform like SimplyHRA. 

Pros and Cons of ICHRA

Knowing the advantages and disadvantages of ICHRA is the first step towards sharp and effective decision-making when it comes to your employee healthcare plan.

Advantages of ICHRA

• Plan flexibility — Unlike traditional employer-funded or group healthcare plans, employees can customize their coverage to fit their specific needs. 
• Cost control — Employers set a hard cap on reimbursement allowances per employee, ensuring they never go overboard in terms of employee healthcare expenses. 
• No size restriction — Employers of any size can offer an ICHRA. However, applicable large employers (generally 50+ full-time employees including full-time equivalents) should evaluate affordability requirements under the ACA when designing their allowance amounts.
• Portability — Employees may be able to keep their individual insurance policy if they leave the company, but ICHRA reimbursements generally stop when the employee is no longer eligible under the employer’s plan.
• Tax treatment — Properly administered ICHRA reimbursements are generally excludable from employees’ income for eligible months when the employee (and any reimbursed family members) have qualifying individual coverage, and the employer can generally deduct reimbursements as a business expense.
• Easier administration — HRA administration platforms like SimplyHRA can help streamline common tasks such as setting allowance amounts, tracking reimbursements, and organizing required documentation. Employers should still ensure their ICHRA is designed and administered in compliance with applicable federal rules.

Possible disadvantages of ICHRA 

• Learning curve — Employers and employees may need onboarding and clear communications to understand how ICHRA works, including how to enroll in individual coverage and how reimbursements are substantiated.
• Requires employee research — Employees must conduct their own research in terms of choosing between health insurance products and understanding their unique medical needs. 
• Individual coverage variability — Because employees choose their own qualifying individual coverage, premiums, networks, and plan availability can vary by location and household circumstances. Employers should consider how local individual market conditions may affect employees’ experiences.

What is Traditional Employer-Funded Insurance?

With traditional employer-sponsored health coverage, the employer typically offers a group health plan (fully insured or self-funded) and may contribute toward employees’ premiums. Separately, if an employer wants to provide a defined contribution toward employees’ individual coverage, that is generally done through a formal, compliant arrangement (such as an ICHRA or other HRA), not by simply providing taxable cash allowances. The cost of the plan varies depending on the type of insurance and benefits the employers choose.

Employer-sponsored group health plans are commonly structured as either:

• Fully insured — the employer pays premiums to an insurance carrier, and the carrier assumes the claims risk.
• Self-funded (self-insured) — the employer generally pays claims costs (often with stop-loss coverage) and may use a third-party administrator to run the plan.

Pros and Cons of Traditional Employer-Funded Insurance

Here's a quick look at the benefits and downsides of traditional employer-funded insurance:

Advantages of employer-funded insurance

• Coverage differences — Some employer-sponsored group plans may offer broader networks or different cost-sharing structures than some individual plans, but coverage quality and costs vary by employer, carrier, and location. Employers should compare options based on their workforce’s needs and local plan availability.
• Tax treatment — Employer contributions toward group health plan premiums are generally deductible as a business expense. Employees may be able to pay their share of group health premiums on a pre-tax basis if the employer offers a Section 125 cafeteria plan (premium-only plan) and the arrangement meets applicable rules.
• Minimizes admin tasks for employees — Employers and third-party insurance carriers handle almost all of the necessary processes including claims processing, enrollment, and customer support. This has a significant positive impact on employee satisfaction and retention. 
• ACA requirements for larger employers — Applicable large employers (generally 50+ full-time employees including full-time equivalents) may face potential penalties unless they offer health coverage to their full-time employees (and dependents) that meets affordability and minimum value standards under the ACA. Coverage obligations and eligibility rules depend on employee full-time status and other plan terms.

Possible disadvantages of employer-funded insurance 

• Tied to employment — Since the plan is funded by the employer, employees' health benefits and coverage can't be ported over once they leave the company. 
• Limited flexibility — Employers assume full control over the plan (or set of plans) their employees will get. 
• Higher costs — Certain types of employer-funded health insurance, including fully-insured plans, can be too costly for small-medium businesses.

ICHRA vs Traditional Employer-Funded Insurance: Side-By-Side Comparison

Still not sure which health insurance plan to choose? 

Here’s a side-by-side comparison of ICHRA and the traditional employer-funded insurance plans:

1. Cost

Cost is one of the biggest factors to consider when choosing an insurance plan for your business.

Traditional employer-funded insurance can be more expensive than ICHRA depending on the chosen plan and coverage. Group health plan premiums vary widely by carrier, location, plan design, and year. If you include premium statistics, add the specific year and source and clarify whether the figures refer to single vs. family coverage and total premium vs. employee contribution.

ICHRA can provide employers more budget predictability because the employer sets a defined allowance. However, employees’ individual premiums can still change year to year, and employers may need to review allowance amounts over time—especially if they are subject to ACA affordability considerations. 

2. Tax Implications

Both ICHRA and employer-funded insurance come with tax benefits for businesses. 

Both group health coverage and ICHRA can provide favorable tax treatment to employers, and ICHRA reimbursements are generally tax-free to employees when properly administered and tied to qualifying individual coverage for the reimbursed months. Just remember that, with ICHRA, employees must have an individual insurance policy that meets the minimum essential coverage (MEC) to participate in ICHRA.

3. Flexibility

Flexibility is what really sets these two health insurance plans apart. 

Employer-sponsored group plans can range from single-plan offerings to multiple plan options (for example, different tiers or networks), depending on the employer. Compared to ICHRA, the employer typically selects the group plan options offered, while employees choose among those options (if more than one is offered).

In contrast, ICHRA allows employees to choose individual insurance plans that will cater to their specific health needs. ICHRA reimbursement scope depends on the employer’s plan design. Some ICHRAs reimburse premiums only, while others may also reimburse certain IRS-qualified medical expenses as allowed under the plan terms and substantiation rules.

4. Employee Eligibility

Whether it's for ICHRA or any other traditional healthcare plan, employers often determine who is eligible for employment-linked healthcare benefits. 

In traditional employer-funded plans, coverage is generally offered to full-time workers. Their policies may also extend coverage to family members depending on the policy terms.

ICHRA eligibility depends on the employer’s plan design and employee classification rules. In general, ICHRA can be offered to eligible W-2 employees (including, if the employer chooses, certain part-time employees), but it is not typically offered to independent contractors. To receive tax-free reimbursements, the employee (and any reimbursed family members) must be enrolled in qualifying individual coverage for the months being reimbursed.

5. Administrative Overhead

With group health plans, carriers/TPAs typically handle claims administration, while employers handle plan selection, eligibility, enrollment processes, and compliance obligations. With ICHRA, employers (or their administrators) must administer reimbursements, maintain required plan documentation, deliver required notices, and follow substantiation rules for reimbursed expenses.

This is the same for ICHRA plans. However, modern benefits management platforms like SimplyHRA can streamline administrative tasks through a drag-and-drop interface. These platforms also handle time-consuming paperwork and compliance-related tasks. 

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Key Considerations to Remember

Before you finalize your decision between ICHRA and traditional employer-funded insurance, here are five key considerations to ponder:

• Business size — Consider the size of your business when choosing health insurance for your employees. ICHRA doesn’t have size restrictions, making it ideal for small businesses.
• Budget considerations — Your total cost depends on plan design, contribution strategy, and the options available in your local markets. ICHRA can offer cost predictability because you set a defined allowance, while group coverage can be structured in different ways depending on the plans offered and employer/employee premium sharing.
• Employee needs — Take a good, hard look at your workforce's specific health needs. If you're going with ICHRA, make sure they have access to individual plans that can cover the health and safety issues in their line of work.
• Future outlook — Because healthcare costs can rise over time, employers often reassess benefit strategies periodically. ICHRA can provide more predictable budgeting by setting a defined allowance, but employees’ individual premiums can still change, and employers may need to revisit allowance levels and plan design over time.

Conclusion

Healthcare is one of the most important employment benefits that every employer should provide. 

While most businesses and employees are familiar with the traditional employer-funded insurance plans, ICHRA definitely has the capacity to do more — as long as you play your cards right. 

If you’re a business owner who wants to know more about ICHRA plans, SimplyHRA is here for you. 

Not sure which option fits your team? Book a demo and we’ll help you compare ICHRA vs group coverage based on your headcount, budget, and admin capacity.