You run a company with 20, 30, maybe 40 employees. You want to offer health benefits, but traditional group health insurance feels like overkill. The premiums are high, the renewal increases are unpredictable, and the participation requirements mean you're spending more to keep the plan alive than you'd like.
This is where ICHRA makes sense.
What is ICHRA?
ICHRA stands for Individual Coverage Health Reimbursement Arrangement. It lets you reimburse employees tax-free for individual health insurance premiums and medical expenses, rather than buying a group plan.
Here's how it works: You set a monthly allowance. Employees buy individual health plans that work for them. They submit proof of coverage. You reimburse them for coverage premiums and medical expenses up to the monthly allowance. Done.
No carrier negotiations. No network restrictions. No surprise renewal hikes.
For companies under 50 employees, this is a real advantage. ICHRA allows you to attract and retain talent by offering competitive benefits without the administrative weight of group insurance.
Why ICHRA works for businesses under 50 employees
Small businesses face different challenges than large employers. You're building a team, managing cash flow, and competing for talent without the resources of a Fortune 500 company. ICHRA addresses several of these pain points directly.
You control costs without surprise increases
Group health insurance operates on risk pooling. If your employees have a rough claims year, your renewal premiums spike. With ICHRA, you set the allowance, and that's your cost. If an employee doesn't use their full allowance, you keep the difference. If they opt out entirely, you pay nothing.
According to the Kaiser Family Foundation, the average annual premium for employer-sponsored family coverage reached $25,572 in 2024. Single coverage averaged $8,951.
For a 30-person company, those numbers add up fast. ICHRA lets you decide what you can afford and stick to it.
No participation requirements
Traditional group plans typically include a minimum participation requirement. That means if employees don't enroll, you're scrambling to keep the plan going or paying penalties. With ICHRA, there's no minimum. If an employee is covered through a spouse or already has Medicare, they can opt out. No penalty. No stress.
This is especially useful if you hire a mix of full-time and part-time workers or have employees at different life stages.
Better fit for distributed teams
If your team works across multiple states, group insurance gets complicated. Carriers may not operate in every state, and maintaining a national PPO network drives up costs.
With ICHRA, employees buy plans in their local markets. Someone in Texas can choose a plan that works in Dallas. Someone in Vermont can pick a plan with their preferred doctor in Burlington. You're not stuck trying to find a one-size-fits-all solution that satisfies no one.
How to set up an ICHRA at a small company
Setting up an ICHRA is simpler than you'd think. You're not dealing with carrier contracts or plan designs. You're establishing a reimbursement policy and making sure employees understand how to use it.
Determine your monthly allowance
Start by determining how much you can contribute per employee per month. You can offer a flat amount to everyone or vary it by employee class.
Employee classes let you differentiate between full-time and part-time workers, salaried and hourly staff, or employees in different states. For example, you could offer $500 per month to full-time employees and $3000 per month to part-time employees. You can also adjust allowances based on family size. This flexibility allows you to design a benefits strategy that meets your hiring and retention goals while maximizing your budget.
Choose what to reimburse
You have three options with ICHRA:
Premiums only
Premiums plus qualified medical expenses
Qualified medical expenses only
Most small employers choose premiums only or premiums plus medical expenses. Qualified medical expenses include things like doctor visits, prescriptions, dental care, and vision.
Establish legal plan documents
ICHRAs are subject to ERISA (The Employee Retirement Income Security Act of 1974), which means you need formal plan documents. These include a plan document, summary plan description, and notice to employees. If you're using an HRA administrator like Thatch, we handle this for you.
Communicate the benefit to employees
Your employees need to understand what an ICHRA is and how to use it. This includes explaining the monthly allowance, how to purchase individual coverage, and how to submit reimbursement requests.
Employees will need to buy an individual health plan that qualifies for ICHRA. This means coverage that provides minimum essential coverage under the ACA.
Plans purchased in the individual and family plan market, whether through a healthcare exchange, a broker, or directly from a carrier, and Medicare generally qualify.
Short-term plans, health sharing ministries, and coverage through a spouse's employer do not qualify.
When you offer an ICHRA, employees get a 60-day special enrollment period to purchase coverage. This means they can buy a plan outside of open enrollment.
Partner with an HRA administrator
You can technically administer ICHRA yourself, but it's not advisable. Reimbursements need to be substantiated for tax purposes, which means reviewing receipts and insurance documentation. Medical information is protected health information under HIPAA, and employers handling this directly risk violations.
An administrator handles substantiation, tracks allowances, manages reimbursements, and keeps records for IRS reporting. Small businesses often find that the extra costs of working with an ICHRA administrator is more than offset by the reduced burden on in-house staff.
Common concerns about ICHRA for small employers
ICHRAs are not perfect. There are trade-offs compared to group insurance, and small employers should understand them before making the switch.
Individual plans may have narrower networks
Group plans can offer broader provider networks, especially PPO plans. Individual plans tend toward HMO or EPO networks, which can be more restrictive.
For some employees, this matters. For others, especially younger or healthier workers who rarely see a doctor, it's a non-issue. Also, an ICHRA allows employees to compare networks and choose the plan that matches their needs. This can improve employee satisfaction compared to having no choice of network under an employer-selected group plan.
Premiums can be higher for older employees
Individual health insurance is age-rated. A 60-year-old employee will pay more for coverage than a 25-year-old employee, even for the same plan.
You can address this by varying allowances based on age. ICHRA rules allow you to offer up to three times more to your oldest employee than your youngest. For example, if you give a 25-year-old $200 per month, you could give a 60-year-old $600 per month.
Employees need to shop for coverage
With group insurance, you choose the plan. With ICHRA, employees choose their own plans. This can feel overwhelming, especially for employees who haven't shopped for health insurance before.
Good communication helps. So does working with an administrator that provides shopping support. Thatch helps employees compare plans and find coverage that fits their needs and budget.
Is ICHRA the right choice for your company
ICHRAs work well for small businesses that value cost control, flexibility, and simplicity. It's especially effective if you have a distributed team, a mix of full-time and part-time employees, or workers at different life stages.
It's less ideal if your employees prioritize broad provider networks or if you have a stable, long-term workforce that values continuity with the same group plan year after year.
A few situations where ICHRA makes sense:
You're offering benefits for the first time and want to start with something scalable.
You're frustrated with group plan renewal increases and want predictable costs.
You have employees in multiple states and need coverage that works everywhere.
You have a younger workforce that values choice over carrier relationships.
On the other hand, group insurance might still be better if:
Your employees rely on specific specialists who only accept certain group carriers.
You have a very stable workforce with low turnover and strong attachment to your current group plan.
You operate in a state with limited individual market options.
The best way to evaluate ICHRA is to model it out. Talk to your employees about what matters to them in health coverage. Look at average individual market premiums where your employees live so you can start to envision a competitive benefits budget. Consider how much you and your employees will have to cover at different contribution levels.
Common myths about ICHRA for small businesses
There's some confusion about ICHRA, especially among small employers who haven't explored it yet. Let's clear up a few myths.
Myth: ICHRA is only for large companies
False. ICHRA works for businesses of any size. It's particularly valuable for small businesses that enjoy the flexibility to design a benefit that fits their budget.
Myth: Employees will hate shopping for their own plans
Some employees will. Many won't. The key is communication and support. If you provide clear instructions and access to shopping tools, employees generally adapt quickly. Many prefer the flexibility of choosing their own plan over being stuck with a group option they don't like.
Myth: ICHRA is too complicated to administer
ICHRA administration can be simpler than group insurance administration. You're not managing carrier relationships, census updates, or renewal negotiations. You're setting a budget, reviewing reimbursement requests and issuing payments. With an administrator, this takes minutes per month.
Myth: You can't offer ICHRA if you already have a group plan
You can. Many small employers offer ICHRA to certain employee classes, like part-time workers, while keeping group insurance for other classes of employees. You can also transition entirely from group to ICHRA. The choice depends on your workforce and budget.
What employees need to know
Your employees will have questions about ICHRA. Here's what they need to understand.
They need to buy a qualifying health plan
To use ICHRA, employees must have individual health insurance that provides minimum essential coverage. Plans purchased on an Exchange or the individual and family plan market and Medicare Part A and B or Part C qualify. Short-term plans, health sharing ministries, and spousal group coverage do not.
They get a special enrollment period
When you offer ICHRA, employees have 60 days to purchase qualifying coverage outside of open enrollment. This makes it easy to get started even if you're launching ICHRA mid-year.
They submit proof of coverage for reimbursement
Employees need to show they're enrolled in a qualifying plan. This typically means uploading an insurance card or policy declaration page. After that, they can submit premium receipts or medical expense receipts for reimbursement.
Reimbursements are tax-free
ICHRA reimbursements are not considered taxable income. Employees don't pay income tax or payroll tax on the money they receive. This makes ICHRA more valuable than a salary increase.
How ICHRA compares to other options
Small employers have several options when it comes to health benefits. Here's how ICHRA stacks up.
ICHRA vs. group health insurance
Group insurance offers broader networks and predictable employee premiums, but it comes with participation requirements, renewal risk, and limited flexibility. ICHRA gives you budget control and personalization, but employees face age-rated premiums and narrower networks.
Learn more about switching from traditional group health insurance to ICHRA
If you value cost control and flexibility, ICHRA wins. If your employees prioritize broad networks and you have a stable workforce, group insurance may still make sense.
ICHRA vs. QSEHRA
QSEHRA is another HRA option for small employers. It has annual contribution limits and works with a wider range of coverage types, including spousal group plans. QSEHRAs don’t allow for employee classes like ICHRAs, and can only be used by employers with fewer than 50 full-time employees. ICHRA has no contribution limits, but requires employees to have individual coverage. Employers offering ICHRAs can create specific benefits packages for different classes of employees, and can continue offering ICHRAs as they grow.
If you want to reimburse employees on spousal plans, QSEHRA is better. If you want greater contribution flexibility, ICHRA is better.
Learn more about startup benefit packages to see how these options fit into broader benefits strategies.
ICHRA vs. health stipends
A health stipend is a taxable payment to employees to help with health costs. It's simple to set up and doesn't require plan documents or substantiation. But it's taxable, which makes it less valuable than ICHRA.
ICHRA is more work to administer, but the tax savings make it worthwhile for most employers.
Next steps for small employers
If you're considering ICHRA for your company, start by understanding your current costs and what you can afford. Talk to your team about what matters to them in health coverage. And connect with an HRA administrator who can help you set up and manage the benefit.
ICHRA isn't the right fit for every small business, but for companies that want budget control, flexibility, and competitive benefits that scale with growth, it's worth serious consideration.
