As individual coverage health reimbursement arrangements (ICHRAs) become more prominent, you might find yourself curious about their advantages and disadvantages.
It’s important to weigh your options when picking the best health insurance option for your employees or clients. ICHRA plans are worth considering. They offer numerous benefits, with only a few drawbacks.
Many people are steering away from traditional group “one-size-fits-all” health insurance, and there’s a reason for that. These days, people expect customization and flexibility, and ICHRAs provide those things, which is why more and more people are switching to ICHRAs. However, all health benefits have pros and cons, and ICHRA is no exception.
In this article, we’ll review the advantages and disadvantages of ICHRA.
In this blog post, you’ll learn:
- How ICHRA compares to group healthcare coverage.
- How ICHRAs contribute to employee satisfaction.
- How Remodel Health can help you offer ICHRA.
Learn more about how the ICHRA benefits employers and brokers.
Overview of ICHRA
Before discussing the pros and cons, it’s essential to understand what an individual coverage HRA (ICHRA) is and how it works. ICHRA is a modern alternative to traditional group health plan coverage. It allows employers to give employees tax-free money for individual health insurance coverage, offering a personalized approach to healthcare benefits.
Introduced in 2020, ICHRAs provide more flexibility and choice than traditional group health plans. They emerged as a response to the need for customization and adaptability in the ever-changing health insurance landscape. ICHRAs can provide health savings since individual insurance premiums are often more affordable compared to group insurance premiums, and employers choose the allowance amounts they want to offer.
Any employer, regardless of size or industry, can establish an ICHRA. The basic setup involves defining employee classes, determining contribution levels, and ensuring compliance with federal regulations. With the help of an ICHRA administrator, it’s a straightforward process that provides businesses with more control over their health benefits strategy.
How ICHRA works
The mechanics of ICHRA are straightforward. Employers begin by deciding how much they want to contribute to employees’ health coverage. These contributions are defined amounts allocated monthly, allowing the employer to control healthcare expenses without the unpredictability of a group health insurance plan.
Employees then use these funds to purchase individual health insurance policies that suit their needs. If an employer offers a monthly allowance of $350 and an employee has a health insurance premium of $350, then the cost of their individual coverage is covered. Conversely, if the employee’s insurance premium is $400, they’ll have to cover the remaining $50 out of their own pocket. Any difference in plan costs and allowances is similar to how employers only pay a percentage of an employee’s group plan premiums.
What about other benefits? You can integrate ICHRA with existing employee benefits, such as dental and vision plans, ensuring comprehensive health coverage while maintaining flexibility. This adaptability makes ICHRA an attractive option for employers seeking alternatives to traditional group health plans.
Below, you’ll find a comprehensive list of ICHRA pros and cons. This list will give you a better idea of whether ICHRAs are the right choice for your employees or clients.
Pros of ICHRA
ICHRA offers numerous advantages for both employers and employees. Let’s review six of them below.
1 . Flexibility
ICHRAs allow employers to differ benefit eligibility and provide different contribution levels based on 11 employee classes. For example, they can offer $350 to their full-time employee class and $200 to their part-time employee class. They can also vary allowances by employee age and family status, such as single or married. This flexibility enables businesses to tailor their health benefits to meet their workforce’s diverse needs.
2. Cost control
Unlike traditional group health insurance plans, employers don’t have to worry about annual rate hikes with ICHRAs. With ICHRA, employers set their own health benefits budgets. With no limit on employer contributions, they can offer as much as they want to their employees. This helps businesses manage their healthcare costs more effectively, as they can adjust allowances for health-related spending as needed.
3. Employee choice
Instead of offering one-size-fits-all group health plan coverage to your employees, they can pick their own individual health plans with ICHRA. When you offer your employees an ICHRA outside of the annual Open Enrollment Period, it triggers a special enrollment period (SEP). They can shop for individual health insurance policies on the public Health Insurance Marketplace or private exchanges based on their unique needs and preferences. This empowers employees to select the health coverage that best suits them, leading to higher satisfaction and retention.
4. Tax advantages
Employers can claim a tax deduction for the contributions they make through ICHRAs, providing tax savings for the business. Additionally, employees can use tax-free funds to pay for their health insurance premiums, reducing their taxable income.
5. Portability
Unlike traditional group health insurance plans, individual health plans through the ICHRA are portable. While employees will lose access to their ICHRA, they can take their health insurance with them if they change jobs. This can be a significant advantage for employees who value continuity of coverage.
6. Meets the employer mandate for ALEs
Employers of all sizes can offer ICHRA, but this benefit is particularly helpful for applicable large employers (ALEs) that need to meet the employer mandate. Under the Affordable Care Act (ACA), ALEs must provide affordable health coverage that meets minimum essential coverage (MEC) and minimum value (MV) standards. As long as you design your ICHRA with an affordable allowance, you won’t have to pay any penalties. That’s because employees need qualifying individual coverage to participate, which takes care of the MEC and MV requirements. Working with an ICHRA administrator like Remodel Health ensures you’re offering an affordable allowance to your employees.
Cons of ICHRA
The advantages outweigh the disadvantages of ICHRA, but it’s still important to consider the cons. Let’s look at four of them so you can make the best decision about benefits for your business or clients.
1. Administrative burden
Implementing and managing an ICHRA can be complex and time-consuming. Employers and consultants must establish and maintain detailed reimbursement records and keep documentation. This administrative burden can be challenging for small businesses with limited resources. It can also be quite the learning curve for large employers that are used to group plans. Luckily, Remodel Health is here to help you manage your ICHRA. We educate employers and broker consultants while handling the heavy lifting to make the administration process a breeze.
2. Coverage options are limited in some locations
While ICHRAs give employees the freedom to choose their own coverage, they may have limited coverage options depending on the individual market where they live. While most urban areas have many plans available, employees residing in regions with a small number of health providers may face restricted choices.
3. Strict compliance rules
Much like other group plans, ICHRAs are subject to strict rules, such as ERISA compliance. They also have to follow MEC and affordability standards. Failure to comply with these rules could result in penalties for employers. By working with an ICHRA administrator like Remodel Health, you can navigate your compliance obligations with ease.
4. Dependency on the individual market
ICHRAs’ effectiveness depends on the stability and availability of the individual health insurance market. Changes in the market, such as premium increases or carriers pulling out, could impact their viability. The future of ICHRAs is promising, and so is the expected expansion of the individual marketplace.
Offering ICHRA through Remodel Health
Don’t let the administrative complexities of ICHRA deter you from leveraging its advantages. You can navigate these challenges with ease when you team up with Remodel Health. We provide expert insight and white-glove service to ensure your ICHRA’s success.
When you use our ICHRA+ platform, we take care of:
- Plan design
- Legal plan documents
- AutoPay for employee individual health insurance premiums
- Required ICHRA plan notices
- Providing necessary data for compliance filings
Plus, employees can shop for coverage directly through Remodel Health instead of trying to figure out the ACA marketplace on their own. They’ll have access to benefits advisors for enrollment support, including Medicare.
The ICHRA may not be the perfect fit for every organization. We’ll conduct a thorough review of your needs or your clients’ needs, plan availability, cost, and more to determine if the ICHRA makes sense.
Conclusion
The individual coverage health reimbursement arrangement (ICHRA) offers employers a cost-effective healthcare benefits solution. It’s a flexible alternative to traditional group health insurance coverage. However, ICRHAs come with administrative challenges and potential drawbacks that you need to carefully consider. By weighing the pros and cons of ICHRA, businesses can determine whether it’s the right choice for providing health benefits to their employees.
This blog article was originally published on April 1, 2024. It was last updated on July 15, 2025.
What’s the average ICHRA allowance? Find out in our 2024 ICHRA Report.