Many employers have faced the same “knot in the stomach” moment during insurance renewal season. We’re all too familiar with the stress of inexplicably rising health care costs, especially when group plan risk pools take an unexpectedly negative turn. Far too many employers are facing this type of risk pool-driven, double-digit cost increase, and it often seems to come completely out of the blue. At best, businesses are seeing health care costs dramatically eat up profitability, and at worst, posing an existential threat. Said another way, when a company’s health care costs are directly vulnerable to unpredictable fluctuations in its risk pool, it can seem nearly impossible to achieve the same level of predictability and budgetary certainty that businesses relied on even a few years ago.
The Individual Coverage Health Reimbursement Arrangement (ICHRA) is reshaping the landscape of employer-sponsored health insurance, particularly for small to medium-sized businesses. As we move further into 2025, the advantages of ICHRA are becoming increasingly clear, indicating a potential shift in how health care is provided and funded in the workplace.
Understanding ICHRA
ICHRA allows employers to reimburse employees for individual health insurance premiums and out-of-pocket expenses. This model stands in contrast to traditional group health insurance plans, offering flexibility and personalization for employees. With the ability to tailor reimbursements to individual needs, ICHRAs can cater to diverse workforces, accommodating varying health care requirements and preferences. However, employers must keep in mind that while ICHRA offers flexibility, the reimbursement limits must be set uniformly within each employee class (e.g., full-time vs. part-time, job type, or location) to comply with IRS non-discrimination rules.
Rising Popularity
Recent reports suggest that by the end of 2025, ICHRAs could cover up to 5 million workers. This surge is driven by the increasing desire for both employers and employees to have more control over their health care choices. For small businesses, which often struggle to provide affordable group plans, ICHRAs present a viable alternative. They can offer competitive benefits without the administrative burden and high costs associated with traditional group health insurance.
Economic Considerations
Financially, ICHRAs can be particularly advantageous for small to medium sized businesses. Employers can set their reimbursement limits, making budgeting more predictable. Additionally, with rising health care costs, ICHRAs provide a way to manage expenses while still offering valuable benefits to employees. Unlike traditional group health plans, ICHRAs also offer reliable, often more stable, annual increases year over year. As health care continues to evolve, this model could prove essential for small businesses looking to attract and retain talent.
Beyond the financial side, ICHRAs can also reduce employee stress around renewal season. Many employees don’t see the behind-the-scenes negotiations that drive insurance decisions, and they only feel the impact of the final outcome. For those living paycheck to paycheck, sudden changes in costs or coverage can be especially disruptive. Traditional group plan renewals can also leave employees uncertain about whether they’ll have the same insurance after the renewal date, making it difficult to schedule procedures or surgeries with confidence. By offering consistent, portable coverage, ICHRAs give employees greater stability and the ability to plan for their health care needs without the added anxiety of potential plan changes.
Key Benefits, In Summary:
The key benefits of ICHRA compared to traditional group health insurance include:
Cost Control:
ICHRA allows employers to set a fixed reimbursement amount, helping them manage and predict their health care expenses more effectively, unlike the often unpredictable costs of group plans.
Flexibility:
Employees can select individual health plans that best fit their needs, which can lead to higher satisfaction and better health outcomes. This customization is not typically available in standard group plans. Employees also have the flexibility to choose different plans for each qualified dependent, allowing for further customization for individual health needs. Should an employee leave the company, ICHRA plans are fully portable, allowing for minimal disruption to their coverage.
Attracting Talent:
Offering ICHRA can make a small business more competitive in attracting job candidates, especially those who value personalized health care options dedicated exclusively to their individual needs.
Reduced Administrative Burden:
ICHRAs generally involve less administrative work for small businesses compared to managing a group health plan, which can require extensive compliance and reporting.
Tax Advantages:
Reimbursements made through ICHRA are tax-deductible for employers, and employees can use pre-tax dollars for their health insurance premiums, providing tax savings for both parties. Additionally, employees enrolled in an ICHRA are still eligible to contribute to a Health Savings Account (HSA), if they are enrolled in a high-deductible health plan. This allows employees to take advantage of HSA benefits, such as tax-free savings for future medical expenses, further enhancing the financial flexibility of the ICHRA plan.
Adaptability to Employee Needs:
As employees’ health care needs change, ICHRA allows for adjustments in coverage without the need to overhaul the entire health plan, providing ongoing adaptability.
No Minimum Participation Requirements:
Unlike traditional group plans, which often require a minimum number of participants, ICHRAs can be offered regardless of employee count, making them accessible for small businesses.
These benefits combined make ICHRA an attractive alternative for businesses looking to provide health benefits in a cost-effective and flexible manner.
The Future of Healthcare?
As the employer-based health insurance model undergoes significant changes, ICHRA is positioned to be at the forefront of this transformation. Businesses, small and large, should seriously evaluate ICHRA as part of their health benefits strategy. The flexibility, cost-effectiveness, and potential for increased employee satisfaction make ICHRA a compelling option for the future of health care. Embracing this innovative approach could well position businesses for success in an evolving and expensive health insurance landscape. Please consult your KJK counsel for recommendations on next steps.
