What Is an ICHRA?
An Individual Coverage HRA (ICHRA) lets employers reimburse employees tax-free for individual health insurance premiums instead of offering a traditional group plan. The employer sets a monthly allowance, and employees buy their own coverage on the ACA marketplace or directly from a carrier.
ICHRAs became available in January 2020 after the IRS and DOL finalized rules expanding how employers could use Health Reimbursement Arrangements. Since then, adoption has grown steadily, especially among small and mid-size businesses looking for predictable health benefits costs.
How Traditional Group Health Works
With a traditional group plan, the employer contracts with a carrier (Blue Cross, Aetna, UnitedHealthcare, etc.) and offers one or more plan options to all eligible employees. The employer typically pays 50-80% of the premium and the employee covers the rest through payroll deductions.
Group plans come with annual renewals, and premium increases of 5-12% per year are common. A single high-cost claim can spike your renewal rate, and you have limited ability to control that.
Cost Comparison
The biggest difference comes down to budget predictability. With a group plan, you commit to a premium rate for the year but face unpredictable renewal increases. With ICHRA, you set an exact dollar amount per employee class and that number only changes when you decide to change it.
For a 25-employee company, here’s how the math might look. On a group plan paying $600 per employee per month, you’re spending $180,000 a year and hoping your renewal stays reasonable. With an ICHRA offering $500 per employee per month, you’re at $150,000 with zero chance of a surprise increase.
The tradeoff is that employees might face higher individual market premiums in some regions. In states with competitive ACA marketplaces, individual plans can actually be cheaper than group rates. In less competitive markets, the math might not work as well.
Employee Experience
This is where opinions split. Some employees love ICHRA because they get to pick exactly the plan they want. A 28-year-old might choose a high-deductible plan with an HSA, while a 45-year-old with kids might want a PPO with lower copays. Everyone gets coverage that actually matches their situation.
Other employees prefer the simplicity of a group plan. Open enrollment takes 15 minutes, the employer handles most of the paperwork, and there’s less decision-making involved. For employees who find insurance shopping stressful, a group plan removes that burden.
When ICHRA Makes More Sense
ICHRA tends to be a strong fit in a few specific scenarios. Companies with employees spread across multiple states benefit because there’s no need to find a carrier with a national network. Instead, each employee shops their local market. Businesses with a wide range of employee ages and family situations benefit because everyone can pick coverage that fits. And employers who want budget certainty appreciate the fixed-cost structure.
ICHRA also works well for companies that are too small to get competitive group rates. If you have fewer than 10 employees, you might find that individual market plans are actually more affordable than what carriers will quote you for a group plan.
When Group Plans Make More Sense
Group plans still win in some situations. If you have a young, healthy workforce concentrated in one location, a group plan might offer better rates than the individual market. Large employers (100+ employees) often have enough bargaining power to negotiate competitive group rates that are hard to beat.
Group plans also make sense if your employees strongly prefer a hands-off benefits experience. Some workforces, particularly in industries with high turnover or lower benefits literacy, do better with the simplicity of one or two plan options to choose from.
Compliance Considerations
Both options satisfy the Affordable Care Act’s employer mandate for Applicable Large Employers (50+ full-time equivalents). An ICHRA counts as an offer of affordable coverage as long as the monthly allowance meets the affordability threshold, which is 9.02% of the employee’s household income for 2026.
One important rule: you can’t offer ICHRA and a traditional group plan to the same class of employees. You have to pick one or the other for each defined employee class (full-time, part-time, salaried, hourly, etc.).
Making the Switch
If you’re considering moving from group to ICHRA, the transition doesn’t have to happen all at once. Many employers start by offering ICHRA to one employee class, like part-time workers or a satellite office, while keeping the group plan for others. This lets you test the waters before a full switch.
To understand how ICHRA compares with other HRA options, see our QSEHRA vs. ICHRA vs. HRA guide.
The key is giving employees enough lead time and support to shop for individual coverage. Partner with a benefits advisor or ICHRA administration platform that can walk your team through the process. The first enrollment cycle takes the most effort, but it gets smoother from there.
Bottom Line
There’s no universal right answer here. ICHRA gives you more cost control and your employees more choice. Group plans give you simplicity and a benefits experience most employees already understand. The best move depends on your team size, location, budget, and how much flexibility your employees actually want. To see how ICHRA fits into the broader HRA landscape, compare it with QSEHRA and traditional HRA options.
If you’re not sure where you land, start by running the numbers both ways. Compare what you’re paying for group coverage today against what an equivalent ICHRA allowance would cost, and ask your employees whether they’d value more choice or more simplicity.
