An ICHRA vs. Traditional Group Health Insurance

Healthcare benefits are nonnegotiable for employers who want to attract and retain qualified employees in a competitive labor market. For a long time, traditional group health insurance was the primary option employers had for providing health benefits to employees. However, rising healthcare costs and other factors have necessitated alternatives, such as the Individual Coverage Health Reimbursement Arrangement (ICHRA), in recent years.

The healthcare benefit plan you choose as an employer goes a long way in determining the balance your organization strikes between employee satisfaction and financial sustainability. To help you decide which option works best for you, we have created this detailed guide outlining the crucial details, including the pros and cons of each option.

What Is an ICHRA?

ICHRA is a type of health benefit plan that allows employers to reimburse their eligible employees tax-free for qualified medical expenses and individual health insurance premiums. This Health Reimbursement Arrangement (HRA) was introduced in 2020 to provide more flexibility and accessibility for businesses and their employees. Since its enactment into law, employers across sectors have adopted the ICHRA model, with 18% of small employers and 34% of large employers adopting it in 2024-2025.

Some key features of ICHRA are:

• Tax exemption: Employee reimbursement under an ICHRA is tax-free for the employee and payroll tax-free for the employer.
• Employer-funded: This arrangement is entirely funded by employers, with no employee contribution.
• No contribution limits: There are no fixed minimum or maximum allowance amounts that employers must contribute toward reimbursement — employers can exercise discretion as to how much their budget allows them to contribute. This feature also allows employers to vary allowances according to employee classes or factors such as health needs, family status, and age.
• Individual market health plan access: An ICHRA gives employees the freedom to select individual insurance plans that align with their preferences.
• Medical coverage: In addition to costs incurred by an employee, an ICHRA covers healthcare expenses for the employee's spouse, children 26 or younger at the end of a taxable year, and dependents.

What Is ICHRA Affordability?

While there are no fixed regulatory requirements for the amount an employer can contribute toward reimbursement, the Affordable Care Act (ACA) sets standards for determining the affordability of an ICHRA for an Applicable Large Employer (ALE).

The standards of affordability vary from year to year. For instance, in 2024, an ICHRA could only pass the affordability test if an individual employee didn't pay more than 8.39% of their total household income for the lowest-cost silver health plan on a public exchange after including their healthcare allowance. However, in 2025, the new benchmark is 9.02% of an employee's total household income.

Where an ICHRA doesn't meet the standards and is therefore unaffordable, employees may choose to decline the benefit and opt for subsidized insurance plans if they qualify. Additionally, employers may pay a penalty if their plan doesn't pass the affordability test.

How Does an ICHRA Work?

The ICHRA operates through a straightforward process:

1. Employers designate an allowance amount: Since there are no fixed regulatory limits on the allowance, employers can decide on the amount they wish to allocate for their employees' health benefits. Factors such as location and family size of employees can influence the allowance amount an employer designates per month.
2. Employees purchase their health plans: Depending on personal or family needs, employees can buy the health insurance plan of their choice.
3. Employers reimburse healthcare expenses: After purchasing individual healthcare plans or incurring medical costs out of pocket, employees must submit proof to their employer or a designated third-party administrator to qualify for reimbursement. Upon approval, the employee receives tax-free reimbursement for expenses incurred.

The Pros and Cons of an ICHRA

An ICHRA offers several benefits to employers and employees. However, they also have potential drawbacks. By weighing the pros and cons, you can decide whether it's a good fit for your organization. Let's examine some of them.

Pros of an ICHRA

The pros of an ICHRA for employers include the following:

• No burden of choice: With an ICHRA, employers don't bear the burden of selecting healthcare plans to suit a group, like they would in a group health insurance arrangement.
• Reduced taxes: Employers enjoy reduced taxes with an ICHRA because healthcare allowances are exempt from payroll taxes.
• Improved budgeting: As long as they meet the ACA's affordability standards, employers can select reimbursement allowances that align with their budgets. They can also save more money, which can be used to benefit employees in other areas, such as higher salaries.
• Reduced administrative burden: Employers with an ICHRA bear significantly less administrative burden compared to those with group health insurance.
• No participation requirement: Employers do not need to meet participation requirements under an ICHRA, as they would be in a group health insurance setting.
• Controlled risks: Reimbursement allowances are based on employers' budgets. Consequently, they are not impacted by rising healthcare costs.
• Enhanced talent acquisition and retention: By offering ICHRA enrollment for various employee classes, including part-time and seasonal employees, employers gain a competitive edge in talent acquisition and retention.

For employees, the pros of an ICHRA include:

• Tax savings: Reimbursements from an ICHRA are tax-free, meaning employees enjoy tax savings.
• Freedom of choice: Employees have the freedom to select health coverage in the individual market that best suits their needs and preferences.
• Portability: Since their insurance coverage isn't tied to their employer, employees don't have to find a new healthcare insurance plan if they change jobs.

Potential Downsides of an ICHRA

Some potential drawbacks of an ICHRA for employers include:

• Learning curve: Employers, who may have grown accustomed to the ins and outs of traditional group health insurance, may require training for both themselves and their employees on how an ICHRA works.
• Compliance requirements: For an ICHRA to be valid, employers must adhere to strict regulations, including those under the Employee Retirement Income Security Act (ERISA) and the Consolidated Omnibus Budget Reconciliation Act (COBRA). Businesses that fall under the category of an ALE must also comply with ACA affordability rules.

The downsides of an ICHRA for employees include:

• Ineligibility for premium tax credits: Employees enrolled in an ICHRA that meets affordability benchmarks are not eligible for ACA premium tax credits.
• Out-of-pocket expenditure: When allocated healthcare allowances don't cover medical expenses, employees must cover the excess out of pocket.
• Decision paralysis: Due to the numerous healthcare plans and providers in the individual insurance market, employees may feel overwhelmed when making a decision.

What Is a Traditional Group Health Insurance Plan?

A traditional group health insurance plan is a healthcare structure that requires employers to purchase insurance policies for a group of employees or members and, in many cases, their dependents. This plan allows employers to negotiate lower premiums and provide uniform benefits to eligible employees. This arrangement has been around for a long time, with early adoption dating back to the late 1800s.

Under a group health insurance plan, employers and employees share the cost of premiums, which are often lower than individual premiums because the risk is spread across a larger number of people. Group insurance plans generally require a minimum participation rate of between 70% and 75%.

The key features of traditional group health insurance plans include:

• Employee contributions: Employers and employees share the cost of group health insurance plans.
• Medical coverage: Employees can obtain medical coverage for their family members and dependents at an extra cost.
• Tax advantages: Contributions that employers make toward a group health insurance plan are tax-deductible. Similarly, employee contributions are typically pretax, which lowers their taxable income.

How Does Group Health Insurance Work?

Only companies and organizations can purchase group health insurance plans — individual employees can't. Employers work closely with insurance providers to negotiate policy terms and customize plans employees can choose from, depending on their unique needs. The insurance policy under this plan, otherwise known as a master policy, covers eligible employees who can choose to accept or decline the coverage.

The Pros and Cons of a Group Health Plan

Traditional group health insurance has both advantages and disadvantages for employers and employees. Let's assess some pros and cons.

Pros of a Group Health Insurance Plan

Some advantages of a group health insurance plan for employers include:

• Familiarity: This type of health insurance plan has been the norm for longer than an ICHRA. Since it's familiar to most employers and employees, it typically doesn't require any training.
• Tax deductions: Employers enjoy tax deductions on funds allocated to employee monthly premiums.
• Cost sharing: Unlike in an ICHRA, where the employer is solely responsible for contributing funds, employers and employees share the cost of premiums in a group health insurance plan.
• Employee attraction and retention: A traditional group health insurance plan offers comprehensive health coverage, which can be attractive to top talent.

Some benefits employees enjoy from group health insurance plans include:

• Risk sharing: One of the key features of a group health insurance plan is the sharing of risk among employees, which results in more affordable and budget-friendly premiums.
• Reduced taxable income: The premiums employees pay are exempt from taxation, reducing their taxable income.

Cons of a Group Health Insurance Plan

Traditional group health insurance plans can be disadvantageous for employers for the following reasons:

• Cost fluctuations: The costs employers pay for premiums are not static, but depend on healthcare costs, which are constantly increasing. This lack of certainty makes it challenging for employers to budget effectively.
• Complex administration: Operating a group health insurance plan requires a robust administrative structure to handle essential tasks, including compliance and claims management. Fulfilling this need may require hiring dedicated HR staff, which may be challenging for small businesses.

The drawbacks of a group health insurance plan for employees are as follows:

• Lack of continuity: An employee's insurance coverage discontinues when they leave an organization. Such discontinuation of an insurance plan can leave an employee vulnerable until they find a replacement.
• Lack of control: Employers have more control over group health insurance plans than their employees. As a result, employees may not have the flexibility to tailor the group plan to suit their individual needs.

An ICHRA vs. a Traditional Group Health Insurance Plan: What Is the Difference?

By their designs, ICHRA and traditional group health insurance plans have several distinctive features that set each one apart from the other. Let's examine some key differences between the two types of insurance plans.

Cost Implications

Under a group health insurance plan, an employer is required to contribute a set percentage of the monthly premiums. Due to the rising cost of health insurance, this requirement can place a significant financial strain on small businesses. Furthermore, employers are often unable to accurately predict costs due to fluctuations in rates.

Conversely, an ICHRA doesn't set specific limitations on healthcare allowance amounts. Instead, as an employer, you can determine your budget for healthcare expenses and reimburse employees accordingly. With this arrangement, you can avoid the financial implications of rate hikes. Additionally, you can retain unused allowances at the end of the plan year and when an employee leaves your company.

Funding Source

Group health insurance plans require both employers and employees to share premium costs through payroll deductions. These costs are paid directly to the insurance company, which covers medical claims of eligible members of the organization.

An ICHRA doesn't require any contributions from employees.

Flexibility for Employees

Employers have the flexibility of choice when it comes to group health insurance plans — they choose the insurance company and the health plan options. Although this setup is profitable for reducing costs, it can also limit the available healthcare providers and plans that employees have access to. In some instances, the master policy may not cover specific treatments and health services that some employees need.

With an ICHRA, employees have broader access to the health insurance marketplace, where they can select plans that better suit their unique needs and preferences.

Continuity of Coverage

A group health insurance plan provides coverage for employees only as long as they remain employed with the company. If they lose their job or leave the organization, their insurance coverage ends.

In contrast, an ICHRA offers portability, so if an employee leaves the organization, their individual insurance coverage continues. However, they stop receiving reimbursements from their previous employer.

Administrative Demands

Several administrative tasks are involved in operating a group health insurance plan, including compliance and claims management. The organization bears the burden of these administrative tasks. With an ICHRA, the individual insurance companies are responsible for handling administrative tasks.

Participation Requirements

For a group health insurance policy to be valid, a high percentage of the organization must participate. Otherwise, they risk losing eligibility or paying higher premiums. This requirement can pose a challenge for small businesses and organizations with high employee turnover rates.

There are no participation requirements under an ICHRA. Any number of employees can take part in the arrangement.

An ICHRA vs. Traditional Group Health Insurance: Which Is Right for Your Business?

There are no definitive rules about which type of health insurance plan is best suited for a business. Whether an ICHRA or a traditional group health insurance is right for you will depend on several factors, including:

• Budgeting style: If your business operates on a fixed budget, you may struggle with the cost fluctuations associated with group health insurance plans. An ICHRA will be better for small businesses with limited budgets. However, if your budget is more flexible, you have more freedom to choose between the plans after weighing all the factors.
• Employee's preference: Finding out what your employees' preferences are can help you decide which plan works best for your organization. For instance, if you have more employees with health conditions requiring specialized care, an ICHRA will be more suitable, as it allows them to customize their plans.
• Administrative capacity: Depending on your administrative capacity, you can choose a plan that requires more or fewer administrative tasks.

Enhance Healthcare Accessibility With The Difference Card

Paying attention to your employees' health can improve their well-being and productivity. If you opt for an ICHRA, The Difference Card can help you develop efficient and cost-effective healthcare plans and benefits for your employees. To enjoy a net savings of 18% with an ICHRA, request a proposal today.