Are ICHRA Plans Good for Small Businesses?

With rising healthcare costs, small business owners are looking to provide competitive health benefits while managing tight budgets. The Individual Coverage Health Reimbursement Arrangement (ICHRA) is one innovative solution gaining popularity for its flexibility and the cost control it affords to employers. This guide lays out the pros and cons of ICHRA solutions so you can make an informed decision about whether to offer this healthcare option.

What Is an ICHRA?

An ICHRA is an employer-funded health benefit that lets businesses reimburse employees, tax-free, for their individual health insurance premiums and qualified medical expenses. Unlike traditional group health plans, where employers choose one plan for everyone, ICHRA plans empower employees to choose their own coverage from the individual market while employers control how much to contribute. Reimbursements from compliant ICHRA plans are tax-free for employees and tax-deductible for employers.

This lets employers offer personalized benefits that adapt to each employee's unique needs. Employees enjoy maximum autonomy while employers provide tax-advantaged support for their terms. Employees pay their own premiums and out-of-pocket costs, and employers reimburse them up to their allowance amount.

The Top Benefits of an ICHRA for Small Businesses

Many small businesses are gravitating toward ICHRA plans because of their significant benefits. Here are five of the top advantages of using an ICHRA.

Predictable Costs

ICHRA plans let employers set and maintain predictable healthcare budgets. Traditional group plans have unpredictable annual rate increases that sometimes leave employers searching for a new plan if their current plan stretches out of budget. ICHRA plans keep cost control in the employer's hands because they can set fixed contribution amounts that are unaffected by premium hikes. If they want to increase contributions, they can do so on their terms and timetable based on factors like business performance and employee expectations.

ICHRA plans are good for small businesses with tight margins. They deliver the confidence of knowing each year's healthcare expenses in advance. This level of control can also help employers save by limiting annual healthcare expenditures.

Flexible Benefits

ICHRA plans create a win-win scenario by giving both employers and employees flexibility. Employers can:

• Design different allowance amounts based on full-time or part-time status, geographic location, and other legitimate employment factors.
• Offer benefits to groups like seasonal workers who miss out on traditional group plans.
• Adjust contributions while maintaining the same plan structure.

Meanwhile, employees enjoy the freedom to make healthcare choices based on their personal priorities, age, family status, and health conditions. Employees can:

• Choose plans that match their health needs and budget.
• Select providers and networks they prefer.
• Keep their coverage if they change jobs — they only lose the employer's reimbursements.

Tax Advantages

ICHRA plans have tax benefits that can provide substantial savings for both employers and employees. For employers:

• Reimbursements are 100% tax-deductible as business expenses.
• There are no FICA payroll taxes on reimbursements.
• Some states, like Indiana and Texas, offer state tax credits applicable to ICHRA plans.

ICHRA plans also offer tax benefits for employees:

• Tax-free money back for medical expenses — reimbursements received are not counted as taxable income.
• Compensation in the form of an ICHRA allowance that is not subject to income tax.
• Ability to combine ICHRA benefits with a Health Savings Account (HSA) when eligible.

These tax advantages can reduce the overall cost of providing small business health benefits while increasing the value employees receive from their compensation package.

Simplified Administration

Compared to traditional group health plans, ICHRA plans are easy to administer, thanks to:

• No group plan onboarding: Employees choose and join plans in their own time — no need for the employer to find plans and negotiate with carriers.
• Flexible enrollment periods: Employees can join plans at any time of year without waiting for group open enrollment periods.
• Digital administration tools: Many ICHRA administrators provide user-friendly platforms that streamline reimbursements, compliance, documentation, and employee support.

No Minimum Participation Requirements

Traditional group health insurance often requires a minimum employee participation rate, typically around 70%, which can be challenging for small businesses to achieve while serving employee needs. ICHRA plans eliminate this barrier since there are no minimum enrollment thresholds or penalties for low participation. This means small businesses can use ICHRA plans without the pressure to group employees with diverse needs and preferences into the same plan.

No participation requirement is a major advantage for businesses with part-time employees, seasonal workers, or teams with varying benefit needs. Businesses also have the agility to scale their workforces up or down without affecting eligibility.

What Are the Cons of an ICHRA?

While ICHRA plans offer many advantages, they have limitations that businesses should consider.

Employee Education Challenges

Employees accustomed to having their employer handle insurance plan selection may find choosing their own plan challenging. This can lead to decision paralysis when faced with multiple plan options, and potential dissatisfaction if employees feel burdened by the selection process.

Compliance Responsibilities

While simpler to administer than traditional group plans, ICHRA plans still require compliance with several regulations, including:

• Affordability testing to ensure offers meet Affordable Care Act (ACA) requirements.
• Proper employee classification and notification procedures.
• Documentation and recordkeeping for reimbursements.
• Annual reporting requirements for applicable large employers.

ICHRA administrators can help businesses handle these compliance requirements.

Potential for Higher Employee Costs

In some cases, employees may pay more for individual coverage than they would under a group plan, especially if:

• The employer contribution is lower than their premium costs.
• Employees have preexisting conditions that increase individual plan rates.
• They want to cover dependents — family coverage costs are significantly higher in the individual market.

Employees receiving reimbursements from an ICHRA that meets ACA affordability standards also lose their eligibility to claim a premium tax credit. Employers can help employees save money with an ICHRA through careful plan design and adequate contributions.

ICHRA vs. the Alternatives

Curious how ICHRA plans stack up against alternatives? Here are the head-to-head comparisons.

ICHRA vs. Traditional Group Health Insurance

The choice between ICHRA and traditional group insurance depends on your business priorities.

Traditional group insurance may suit employers who prefer to manage the entire benefits selection process by shopping for plans and have a workforce with similar needs. These plans also sometimes cost less per member if the company can meet minimum participation requirements.

An ICHRA is good for small businesses that value predictable costs, flexibility, and the freedom to offer tailored benefits to diverse employees.

ICHRA vs. QSEHRA

Both ICHRA plans and Qualified Small Employer HRA (QSEHRA) plans allow tax-free reimbursement of health insurance premiums, but they differ in several ways.

Businesses with under 50 employees that want simplicity and uniform contributions across all employees may appreciate a QSEHRA. Companies of any size needing flexible benefits and pricing control should consider an ICHRA instead.

ICHRA vs. MERP

While both ICHRA and Medical Expense Reimbursement Plan (MERP) products provide tax-advantaged healthcare benefits, they have different purposes and requirements.

MERP products are ideal for employers who want to supplement a high-deductible health plan (HDHP) with out-of-pocket expense coverage or provide basic benefits without requiring employees to maintain insurance. These work well for businesses prioritizing simplicity and flexibility.

ICHRA plans suit employers who want to provide comprehensive benefits with predictable costs, employee choice of coverage, and different benefit levels between employee classes, while meeting ACA requirements.

Who Is Eligible for an ICHRA?

Most employees are eligible for ICHRA participation, with some exceptions depending on the business structure.

C Corporations

C corporations and Limited Liability Companies (LLC) taxed as C corps have the most straightforward ICHRA eligibility:

• All employees receiving a W-2 tax form are eligible, regardless of shareholder percentage.
• Business owners can participate if they work in the company as W-2 employees.
• Shareholders who are bona fide employees can participate.
• Tax treatment is clear and allows fully deductible reimbursements.

C corps benefit from the most favorable ICHRA rules, making this structure ideal for businesses planning to offer this benefit. Eligibility becomes more complex with pass-through entities.

S Corporations

Non-owner W-2 employees are fully eligible, but shareholders who own more than 2% of the company cannot participate in the ICHRA. Similarly, owners must seek alternative health insurance solutions.

Partnerships

Non-partner employees can participate if they receive W-2s, but partners are not considered employees for ICHRA purposes.

Sole Proprietors

Sole proprietors are not eligible for ICHRA participation since they have no W-2 employment relationship with their own business. Instead, they must use other options, like self-employed health insurance deductions.

Can Employees Use an ICHRA for Medicare Premiums?

Yes, employers can reimburse employees for their Medicare premiums using an ICHRA.

Small businesses often have multigenerational workforces, with recent graduates working alongside experienced employees aged 65 and older who are Medicare eligible. Over 50% of small business owners are 55 or older, and many employ workers in this demographic. However, traditional group plans can become expensive for older employees due to age-rated premiums. ICHRA plans provide a solution by letting employers:

• Create different allowance amounts based on legitimate employment criteria, like full-time versus part-time status and work location.
• Tailor support to match different healthcare requirements across your workforce, so each employee can choose a plan that makes sense for them.
• Control costs while providing meaningful benefits to employees of all ages.

This flexibility is valuable for businesses looking to retain experienced workers. Rather than facing the rising costs of age-rated group premiums, employers can set predictable contributions that suit their workforce.

How to Set up an ICHRA

If you decide an ICHRA is right for your business, you can set one up in three simple phases.

1. Design Your ICHRA Plan

Work with an experienced ICHRA administrator to:

• Create employee classes based on legitimate business criteria.
• Set allowance amounts for each employee class.
• Define eligible expenses — premiums only or including contributions toward other qualified medical expenses based on IRS Publication 502.
• Ensure proper plan design that meets compliance requirements.
• Establish reimbursement procedures and documentation requirements.

Many businesses work with benefits consultants or ICHRA administrators to ensure the plan meets both business objectives and compliance requirements.

2. Create Required Documentation

ICHRA plans require legal documentation, including:

• Formal plan documents outlining all terms and conditions.
• A Summary Plan Description for employee communication.
• Employee notices provided at least 90 days before the plan year.
• Model notices from the Department of Labor and the Centers for Medicare and Medicaid Services.

These documents ensure compliance with the Employee Retirement Income Security Act (ERISA), ACA, and other federal regulations governing health reimbursement arrangements. An ICHRA administrator can handle all this paperwork on behalf of your business.

3. Implement and Communicate

For successful ICHRA implementation:

• Educate employees about how ICHRA plans work and their benefits.
• Provide resources for plan selection and enrollment.
• Establish clear processes for reimbursement requests.
• Offer ongoing support for questions and issues.

Many employers find that working with an ICHRA administrator simplifies implementation and administration thanks to dedicated support teams and educational materials.

See the Savings With The Difference Card

Whether a small business implements an ICHRA or an alternative healthcare solution, partnering with an experienced, innovative administrator creates a streamlined experience. For flexible healthcare solutions designed to maximize savings, choose The Difference Card.

At The Difference Card, we offer MERP products, ICHRA options, and other innovative healthcare solutions designed for flexible benefits, simple implementation, and industry-leading savings. Since 2001, we have provided health insurance savings to our clients, with an average net savings of 18%. We help create customized healthcare solutions for small businesses, tailored to budgets and workforce needs.

If you're a producer, The Difference Card can help your clients build the most cost-effective healthcare plan while delivering meaningful coverage. If you're an employer, you can work with us directly to improve the healthcare benefits you can offer your employees.

Request a proposal today to discover how you can save your clients or your business money with The Difference Card.