Steps To Replace Group Health Plan With ICHRA: 2026 Guide

Thinking about moving away from a traditional group health plan? You’re not alone. Many businesses are exploring more flexible and budget friendly options like Health Reimbursement Arrangements (HRAs). To successfully make the switch, the essential steps to replace group health plan coverage involve evaluating HRA options, designing your plan, handling the legal setup, coordinating the transition timeline, communicating clearly with employees, and managing the new benefit.

This guide will walk you through the process, from initial evaluation to ongoing management, ensuring a smooth transition for you and your team.

Step 1: Evaluate Your Options and Choose the Right HRA

Before you cancel anything, the first of your steps to replace group health plan coverage is to understand the landscape. Your goal is to find a benefits model that fits your company’s size, budget, and workforce needs.

Is an ICHRA Right for You?

An Individual Coverage HRA is a modern approach to health benefits. Instead of providing a one size fits all group plan, you offer employees a monthly tax free allowance. They then use that money to buy their own individual health insurance plan from the marketplace, one that perfectly suits their needs.

This model, available since January 1, 2020, offers significant advantages:

• Budget Control: You set the allowance amounts, eliminating unpredictable premium hikes.
• Employee Choice: Your team gets to pick their own carrier and plan type.
• Flexibility: It works for companies of any size and for remote or distributed teams.

ICHRA vs. QSEHRA: What’s the Difference?

You’ll encounter two main types of HRAs designed for purchasing individual coverage.

• ICHRA (Individual Coverage HRA): This is the most flexible option. It’s for employers of any size, has no government mandated contribution limits, and allows you to offer different allowance amounts to different types of employees (called employee classes).
• QSEHRA (Qualified Small Employer HRA): This is specifically for small businesses with fewer than 50 full time equivalent employees. It has annual contribution caps set by the IRS. For 2026, the maximums are projected to be $6,450 for self only coverage and $13,100 for family coverage.

For most businesses looking for a scalable and customizable group plan alternative, see how ICHRA vs. group health plans compare; for many, the ICHRA is the preferred path.

Step 2: Design Your New HRA Plan

Once you’ve decided an ICHRA is the right fit, you need to design the plan. This involves making a few key decisions that will define how your new benefit works. These are critical steps to replace group health plan infrastructure with your own custom solution.

Define Employee Eligibility Classes

With an ICHRA, you don’t have to offer the same benefit to everyone. You can segment your workforce into “permitted classes” and offer different allowance amounts to each. There are 11 official classes, including:

• Full time employees
• Part time employees
• Salaried employees
• Non salaried employees
• Employees in a specific geographic rating area

A crucial rule to remember is that you cannot offer a traditional group plan and an ICHRA to the same class of employees.

Set the Monthly Allowance Amount

Your next task is to decide how much tax free money you will offer each employee class per month. If you are an Applicable Large Employer (ALE), meaning you have 50 or more full time equivalent employees, you must ensure your ICHRA offer is considered “affordable” to avoid ACA penalties.

For 2026, the affordability threshold is 9.96% of an employee’s household income. This means your monthly allowance must be large enough that the employee’s contribution for the lowest cost silver plan in their area does not exceed that percentage. Fortunately, the IRS provides several affordability safe harbors to make this calculation easier.

Decide on a Covered Expense Policy

You have two main options for what your ICHRA can reimburse:

1. Premium Only: The HRA only reimburses employees for their individual health insurance premiums. This is the simplest approach.
2. Premium Plus Medical Expenses: The HRA reimburses for premiums and other qualified out of pocket medical expenses defined under Section 213(d) of the tax code. This can include things like copays, deductibles, and prescriptions.

Choosing a premium only plan can simplify administration while still providing a core health benefit.

Step 3: Manage the Legal and Administrative Setup

With your plan design in place, it’s time to handle the backend logistics. Proper setup is a foundational part of the steps to replace group health plan coverage correctly and stay compliant.

Partner with an HRA Administrator

Managing an HRA involves compliance with ERISA, HIPAA, and the IRS. This includes creating legal plan documents, substantiating every expense, and ensuring reimbursements are handled correctly. Most businesses partner with a third party administrator (TPA) or a software platform to handle these complex tasks.

When selecting a vendor, you should perform due diligence on their security practices, as benefit plans are a target for cyberattacks. A platform like SimplyHRA can automate compliance, provide audit ready reporting, and integrate with your payroll systems to reduce your administrative burden.

Ready to see how an administrator can simplify your benefits? Get a 15 minute suitability check with SimplyHRA.

Prepare ERISA Plan Documents

Under federal law (ERISA), an ICHRA is a group health plan that requires formal legal documents. You’ll need a written plan document and a Summary Plan Description (SPD). The SPD is a plain language guide to the plan that must be given to employees within 90 days of their enrollment. You’ll also likely need to provide a Summary of Benefits and Coverage (SBC).

Step 4: Execute the Transition Timeline

Timing is everything. Coordinating the end of your old plan with the start of your new one prevents gaps in coverage for your employees. These coordination steps to replace group health plan coverage are critical for a seamless employee experience.

Set Your Cancellation and Start Dates

The best practice is to end your group health plan on the last day of a month and start your ICHRA on the first day of the following month. This aligns perfectly with how individual health plan enrollment works. When an employee loses group coverage, they are granted a 60 day Special Enrollment Period (SEP) to purchase a new plan on the marketplace. Marketplace plans chosen during a SEP almost always begin on the first of the month after they enroll.

For a January 1 start date, employees on the federal HealthCare.gov exchange typically need to select their plan by December 15 of the previous year.

Send a Formal Carrier Notice

You must formally notify your group health insurance carrier that you are terminating your policy. Your contract will specify how much notice you need to provide, so be sure to review it carefully and send a written termination notice to meet their deadline.

Step 5: Communicate the Change to Your Team

How you communicate this transition will determine its success. Your employees need to understand what’s changing, why it’s changing, and what they need to do. Clear communication is one of the most important steps to replace group health plan coverage without causing confusion or anxiety.

Provide the Required 90 Day ICHRA Notice

Legally, you must provide eligible employees with a written notice about the ICHRA at least 90 days before the plan year begins. This notice must detail the terms of the HRA, the monthly allowance amount, and explain how the offer impacts their eligibility for premium tax credits on the marketplace.

Develop a Clear Communication Plan

Go beyond the legal notice. Host meetings, create guides, and offer one on one support. Explain the benefits of choice and flexibility. Provide clear instructions and deadlines for enrolling in an individual plan. This is a chance to show your team you’re investing in a better, more personalized benefits system.

Guide Employees Through Individual Plan Enrollment

Many employees have never shopped for their own health insurance before. Point them to resources like HealthCare.gov or their state’s official marketplace. An HRA administrator like SimplyHRA can also provide dedicated enrollment support to help your employees compare plans and make confident choices.

Need a compliance ready ICHRA with built in employee support? Start here with SimplyHRA.

Step 6: Launch and Manage Your New HRA

You’ve completed the primary steps to replace group health plan coverage. Now it’s time to manage the new system day to day and ensure it runs smoothly.

Set Up Reimbursements and Payroll Integration

Your HRA administrator will manage the reimbursement process. Employees will submit proof of their premium payments or medical expenses, and the administrator will substantiate them before issuing a tax free reimbursement. Platforms like SimplyHRA can even provide prefunded debit cards for employees to pay premiums directly, simplifying the process for everyone. Since HRA reimbursements are tax free, they are excluded from gross income and are not subject to payroll taxes.

Verify Minimum Essential Coverage (MEC)

For an employee to receive tax free reimbursements, they must be enrolled in a health plan that qualifies as Minimum Essential Coverage (MEC). This includes most individual major medical plans but excludes things like short term plans or vision only coverage. Your HRA administrator will collect an attestation from employees confirming they have MEC each month before processing reimbursements.

Conduct Ongoing Monitoring and Adjustments

Once your plan is live, you’ll need to monitor its performance. For ALEs, this means annually verifying that your allowances still meet affordability requirements as local health plan premiums change. You should also review your plan design each year before renewal to make any adjustments to classes or allowance amounts.

Following these steps to replace group health plan coverage with an ICHRA can transform your company’s benefits, offering a win for your budget and for your employees’ healthcare freedom.

Frequently Asked Questions About the Steps to Replace a Group Health Plan

Why would a company replace its group health plan?

Companies often make the switch to gain control over their budget, escape annual double digit premium increases, and offer more personalized benefits to a diverse or remote workforce. An ICHRA provides predictable costs for the employer and greater choice for the employee.

What is the biggest challenge in the steps to replace a group health plan?

The biggest challenges are typically communication and timing. You must give employees enough notice (at least 90 days for an ICHRA) and support to navigate the individual market. Coordinating the cancellation of the old plan with the start of the new HRA is crucial to prevent any gaps in coverage.

Can I offer an ICHRA to some employees and a group plan to others?

Yes, this is a key feature of the ICHRA. You can offer a traditional group health plan to one class of employees (e.g., full time staff) and an ICHRA to another class (e.g., part time staff), but you cannot offer both options to the same class.

How long does it take to switch from a group plan to an ICHRA?

Because of the 90 day employee notice requirement for ICHRAs, you should plan for the entire process to take at least three to four months. This provides ample time for plan design, selecting an administrator, communicating the change, and helping employees enroll in their new plans.

What happens if an employee doesn’t buy a health plan with their ICHRA?

An employee must be enrolled in a qualifying individual health plan (MEC) to receive tax free reimbursements from their ICHRA. If they do not enroll in a plan, they cannot access their HRA funds.