By Elizabeth Walker on Apr 9, 2026 10:51:05 AM
If you’re a benefits consultant or an applicable large employer (ALE), you know that offering health benefits isn’t just about ensuring employees are taken care of — it’s also about fulfilling the Affordable Care Act’s (ACA) employer mandate requirements. If you or your client are concerned about budget, you may find yourself weighing two different benefit options: a minimum essential coverage (MEC) plan or an individual coverage health reimbursement arrangement (ICHRA).
While MEC plans are known for being a low-cost option, ICHRAs provide a more flexible and comprehensive approach to health benefits without blowing your budget. This article will compare MEC plans and ICHRA so you can choose a benefits strategy that complies with the employer mandate and gives your or your client’s employees value.
In this blog post, you’ll learn:
- The key differences between MEC plans and ICHRAs for applicable large employers, including how each one works and what they cover.
- How MEC plans and ICHRAs impact ACA employer mandate compliance and potential penalties.
- Why many employers are choosing ICHRAs as a more valuable alternative to MEC plans.
What is an MEC plan?
An MEC plan is a basic health insurance policy designed to meet the ACA’s minimum requirement for coverage. These plans are commonly referred to as “skinny plans” because they primarily support preventive care rather than providing comprehensive health coverage.
MEC plans typically cover services such as annual wellness visits, preventive screenings, and certain immunizations at no cost to your employees. However, they generally don’t cover major medical expenses, such as hospital stays, surgeries, or specialist care. This may make them inadequate for your employees’ needs, especially if they have a family, health risks, or need ongoing treatment for a medical condition.
Employers often choose MEC plans as a low-cost way to offer some level of health coverage to employees. You may even decide to pair them with an ancillary or supplemental plan to make them more appealing. However, their limited coverage means employees may still face significant out-of-pocket expenses if they need more than routine care.
What is an ICHRA?
An ICHRA is a flexible, tax-advantaged health benefit for organizations of any size. Instead of enrolling in a group plan, employers give their W-2 employees a fixed, monthly contribution amount — also called an allowance — and employees choose and purchase their own individual health insurance. Then, they can use your employer contribution to help cover the cost of their premiums.
To participate in the benefit, employees must have a qualified individual health plan that provides at least MEC.
Below are some advantages of the ICHRA:
- There are no minimum or maximum contribution requirements, so employers stay in full control of their budget.
- Defined contributions allow employers to keep costs predictable. When it’s time to renew your benefit, you can update your contribution amounts as you see fit.
- Employers can customize eligibility and contribution amounts using employee classes, as well as adjust allowances based on age or family size.
- Employees can’t exceed their allowance amount once it’s set. Any unused funds stay with you at the end of the plan year or if an employee leaves your company.
- ICHRA contributions are tax-deductible for employers and free of payroll taxes. Allowances are also income tax-free for participating employees.
- Employees choose the health plans that best fit their needs.
- While the ICHRA itself isn’t portable, the individual plans employees choose are. Employees can keep their plans if they leave the organization. They’ll just be responsible for paying their premiums.
Do MEC plans and ICHRAs satisfy the ACA’s employer mandate?
ALEs must fulfill the ACA’s employer mandate requirements. If they don’t, they may face two potential IRS penalties.
Here’s how the penalties work for 2026:
- 4980H(a) penalty: ALEs must pay a monthly penalty of $278.33 (or an annual penalty of $3,340 per employee) if they fail to offer MEC to at least 95% of their full-time workers and their dependent children. However, organizations can exclude the first 30 full-time employees in their calculations.
- This penalty only applies if at least one full-time employee receives a premium tax credit.
- 4980H(b) penalty: ALEs must pay a monthly penalty of $417.50 (or an annual penalty of $5,010 per employee) if they offer health coverage that’s unaffordable or doesn’t provide minimum value.
- You must pay the monthly penalty multiplied by the total number of full-time employees who bought health coverage with a premium tax credit or the amount of the 4980H(a) penalty if that amount is greater than $1. This prevents you from paying both penalties for the same employee in the same month.
MEC plans will typically satisfy the 4980H(a) penalty because they meet the requirements for minimum essential coverage. However, they typically don’t meet minimum value standards, meaning employers can still be subject to the 4980H(b) penalty if employees receive subsidies through the Health Insurance Marketplace or a state-based exchange.
ICHRAs can satisfy both IRS penalties. However, to do so, you must offer an affordable ICHRA allowance to at least 95% of your full-time employees. For your ICHRA to be affordable in 2026, your employees must not pay more than 9.96% of their household income for the lowest-cost silver plan on the Marketplace in their area after accounting for their ICHRA allowance.
MEC plans vs. ICHRA comparison chart
The chart below compares the main differences between MEC health plans and ICHRAs.
|
MEC plan |
ICHRA |
|
|
What is the cost of the plan? |
They typically have a very low fixed cost, with averages ranging for many insurers between $50 and $150 per month for employers1. |
Employers set a defined monthly contribution limit for each employee and only pay out funds when employees incur eligible expenses. Employers can also adjust allowances at the end of the plan year based on their budget and goals. |
|
What is the scope of coverage? |
They’re typically limited to preventive care — such as annual checkups, routine screenings, diagnostic testing, and immunizations — and don’t include major medical coverage. |
It depends on the individual plan type each employee chooses. However, most qualified individual health plans provide comprehensive coverage, including hospital stays, preventive care, prescription drugs, and specialist visits. |
|
Does it satisfy provision 4980H(a) of the employer mandate? |
Yes, as long as employers offer it to at least 95% of their full-time workers and their dependents. |
Yes, as long as employers offer it to at least 95% of their full-time workers and their dependents. |
|
Does it satisfy provision 4980H(b) of the employer mandate? |
No, as it doesn’t usually provide minimum value. |
Yes, if the ICHRA’s allowances meet affordability standards. |
|
What is the level of cost control for employers? |
While these plans have low premiums, they don’t guarantee ACA compliance, meaning any potential penalty may vary. |
Business owners can easily adjust contributions to ensure affordability, avoid employer penalties, and guarantee cost-predictability. |
|
Can employers customize the plan? |
Plans are typically uniform or only allow for slight variations. |
Employers can vary ICHRA contributions by employee classes, family size, or age. |
|
Do employees get to choose their own plan? |
No, the employer selects a single plan for all employees. |
Yes, employees can choose the qualifying individual health insurance coverage that meets their needs and budget. |
|
What is the out-of-pocket financial risk for employees? |
Employees must pay for most non-preventive services out of pocket or enroll in supplemental health coverage, which can make these types of plans cost-prohibitive. |
It depends on the individual health coverage employees choose. However, the ICHRA allows employees to use ICHRA funds on health plan premiums and, sometimes, eligible out-of-pocket costs (depending on plan design), which can help keep costs low. |
Why is an ICHRA a better health benefit option than an MEC plan?
While MEC plans may seem like the right option to keep costs low, they often fail to provide enough value to employees. Because they only cover preventive care services, employees are left paying substantial amounts of money out-of-pocket if they experience a serious health event. This can result in low employee satisfaction and morale, and it may even lead to high turnover due to ineffective health insurance coverage.
ICHRAs, on the other hand, offer greater balance. Employers can control costs with defined contributions, and employees can choose the coverage they need for their health and budget — whether that means they enroll in a bronze plan or a gold plan.
Additionally, ICHRAs offer greater long-term flexibility and bang for your buck. You can customize eligibility and contributions by employee class, and scale your benefit over time as your business grows. Plus, as long as your allowance is affordable, you can avoid both ACA penalties and prevent costly, unpredictable fees.
Conclusion
Choosing between an MEC plan and an ICHRA depends on your long–term goals. MEC plans may help keep your costs down in the short-term, but their limited coverage and potential inability to avoid the 4980H(b) penalty can still put you at financial risk and lower employee satisfaction year after year.
Instead, consider an ICHRA as a comprehensive way to control costs, give your employees more choice, and fulfill your employer mandate responsibilities. If you’re unsure how to get started with implementing an ICHRA, Remodel Health can help! From initial plan design to administrative and compliance support, our team will partner with you every step of the way. Contact us today to get started.
References
1. HSA MEC A Powerful Way to Supercharge Your Health Share Plan
