Level-Funded Plans vs. ICHRA

Many employers are continuing to seek alternatives to traditional group health insurance to keep their budget in check. Two options that may come up in your research are level-funded health plans and individual coverage health reimbursement arrangements (ICHRAs). While both offer more flexibility than fully-insured group plans, they have some notable differences.

In this article, we’ll compare level-funded plans and ICHRAs so you can determine which health benefit is a better fit for your organization.

In this blog post, you’ll learn:

• How level-funded health plans and ICHRAs work and how they differ from traditional group plans.
  
• The primary differences between the two health benefit options.
  
• When an ICHRA may be a better choice than a level-funded plan.

What is a level-funded health plan?

A level-funded health plan is a type of employer-sponsored health coverage that blends certain aspects of traditional fully-insured plans with self-funded insurance. Employers pay a fixed monthly amount to an insurer that covers estimated medical claims, administrative costs, and stop-loss insurance.

With a level-funded plan, the employer assumes some financial responsibility for their employees’ health claims. The monthly payment covers expected claims for the year, while stop-loss insurance protects the employer from claims exceeding a certain threshold.

Here are some key features of level-funded health policies:

• Employers pay a fixed monthly amount that includes estimated claims funding, administrative fees, and stop-loss insurance.
• Employers share responsibility for claims costs, while their stop-loss coverage limits their exposure to unexpectedly high claims.
• If total claims for the year are lower than expected, employers may receive a portion of the unused claims funds back at the end of the plan year.
• Employees typically still enroll in a single employer-selected group health plan.
• Employers often receive more detailed claims data and healthcare spending reports compared to traditional fully-insured plans.
• Insurance carriers can review employees' health histories when pricing a level-funded plan, which can affect renewal costs.
• If health claims are higher than expected, employers may face higher rates or adjustments when the plan renews.

What is an ICHRA?

An ICHRA is an employer-funded health benefit for companies of any size. Employers choose a set tax-free monthly contribution amount for their staff. Then, employees select and buy their own individual health plan that best fits their personal needs and budget, and use the employer’s contribution to help pay their premiums. As long as they enroll in a qualified individual plan that provides minimum essential coverage (MEC), they can opt into the benefit.

Here are some key features of ICHRAs:

• Any business owner with at least one W-2 worker can offer an ICHRA, making it an attractive alternative to group coverage or self-funded health insurance plans.
• There are no contribution limits or minimum participation requirements.
• Because employers set their contribution amount, they guarantee predictable costs and maintain control over their total healthcare spending.
• Employees can’t exceed their set contribution limit, and any unused funds remain with the employer if they leave their job or don’t use the full amount.
• Employer contributions are tax-deductible and free of payroll taxes. Additionally, ICHRA funds are income-tax-free for employees.
• Employers can vary allowances and eligibility requirements by employee classes. You can also vary contributions by employee age or family size for greater flexibility, including within each class.
• Applicable large employers (ALEs) can use an ICHRA to meet the Affordable Care Act’s employer mandate if their contribution amounts meet affordability rules.
• Employees always own their chosen individual policy, even if they leave their company.

Level-funded plans vs. ICHRA comparison chart

The chart below compares the main differences between level-funded plans and ICHRAs.

When is an ICHRA a better health benefit option than a level-funded plan?

While both level-funded plans and ICHRAs can be a good alternative to traditional fully-insured coverage, an ICHRA may be the better option for organizations seeking greater cost control, predictability, and flexibility.

An ICHRA uses a defined contribution model, meaning employers decide exactly how much to contribute toward employees' healthcare costs. This eliminates the financial burden of surprise medical claims and spikes in monthly premium payments during renewal time that can occur with level-funded plans.

Below are a few other situations where an ICHRA may be a better fit than level-funded coverage:

1. An employer wants more predictable healthcare costs. Level-funded plans rely on estimated claims, which means future pricing can change depending on how much employees seek medical care. With an ICHRA, employers set a contribution limit for each employee and never pay more than that amount. This gives organizations complete control over their budget.
2. An organization wants to reduce financial risk. Even though level-funded plans include stop-loss insurance, employers still take on some risk related to employee medical claims. With an ICHRA, that risk disappears. The employer’s responsibility is limited to the reimbursement allowances they offer. Plus, individual plans are community rated, meaning that premium increases reflect the cost of insuring the entire community, not an employer’s specific employee group. This makes rate increases less disruptive to employees accustomed to them, given the high claims with group coverage.
3. A workforce has unique healthcare needs. A single group plan doesn’t work well for a diverse workforce. Employees may have different provider networks, prescription medications, or budgets, or may live in different states. With an ICHRA, employees can choose their preferred individual health plan.
4. A company wants a more flexible plan design. ICHRAs allow employers to customize allowances based on employee class, age, or family size. This makes it easier to design a benefit that aligns with their workforce, budget, and goals. Level-funded plans have fewer customization options as they are a type of group plan.
5. An employer wants an easy-to-manage benefit. Level-funded plans can require administrative complexity, renewal negotiations, and claims management. An ICHRA gives employees control over plan selection, while employers focus on setting contributions and managing the benefit with the help of an HRA administrator, like Remodel Health.

How Remodel Health supports employers and employees through their ICHRA journey

Implementing an ICHRA doesn’t have to be complicated. Remodel Health helps employers navigate every stage of the process, from initial plan design to ongoing administration, so you can offer a compliant benefit without unnecessary stress.

During setup, our team works with you to design a customized ICHRA that aligns with your budget, workforce structure, and overall benefits strategy. This includes setting contribution amounts, structuring employee classes, and ensuring your plan meets all applicable compliance requirements.

Once your ICHRA is set up, we provide year-round hands-on support. Our platform streamlines reimbursement management, verifies employee coverage, and helps ensure your plan stays compliant with IRS and ACA guidelines. Employees even receive personalized guidance to help them shop for and enroll in individual health insurance that fits their needs.

With expert support and intuitive technology, Remodel Health makes it easy for employers to smoothly transition to an ICHRA so employees get the most value out of their benefits.

Conclusion

Both level-funded plans and ICHRAs are viable benefit solutions, but that doesn’t make them the same. Level-funded plans combine the traditional group plan structure with elements of self-funding, which can result in cost savings but also come with greater financial risk. In contrast, ICHRAs are defined contribution benefits that give employers predictable costs and allow employees to choose their own health insurance policies.

Remodel Health can help you determine if ICHRA is a better choice than a level-funded health plan for your organization or client. Book a call with us today to learn more about how we can improve your health benefits package!