Funding Arrangement · ICHRA

ICHRA:
defined contribution beats defined benefit — for the right employer.

An ICHRA (Individual Coverage Health Reimbursement Arrangement) lets you set a fixed monthly allowance per employee — they go buy their own individual health plan, you reimburse up to the allowance amount tax-free. For multi-state, distributed, or W-2/1099-mixed workforces, ICHRA often beats traditional group plans on cost, flexibility, and employee satisfaction.

This page is the long version. If you'd rather just model your numbers: jump to the Health Funding Projector →

Best fitAny sizeDistributed, multi-state, mixed workforce
Typical savings10–25%vs. group plan, depending on geography
Employee classes allowed11FT, PT, salaried, hourly, geo, etc.
Compliance burdenReducedEach employee individually insured

The defined-contribution question ICHRA answers: "why am I trying to find one health plan that fits 80 different lives across 14 states when I could give them a fixed amount and let them shop their own market?"

How ichra actually works

You set a monthly allowance per employee (typically $400-$1,200 per individual, more for families). Employees go to their state's individual marketplace (Healthcare.gov or state exchange) and pick a plan that fits their needs. You reimburse them up to the allowance amount on a tax-advantaged basis — the dollars never count as taxable income to the employee, and they're a deductible business expense for you.

ICHRA allows 11 IRS-defined employee classes — full-time, part-time, salaried, hourly, geography, seasonal, collective bargaining, waiting period, salaried-hourly combo, and others. You can offer different allowance amounts to different classes (e.g., $800/mo for full-time HQ staff, $500/mo for part-time field workers). You cannot discriminate within a class.

ACA affordability still applies: the allowance has to be at least 91.04% of the lowest-cost silver plan for an employee aged 21 in their geographic area (the 'affordability floor' for 2026 is 9.96% of household income — same as group plans). If your allowance is below this floor, employees aren't required to accept it, and the employer-mandate penalty triggers for groups with 50+ FTEs. ICHRA's flexibility is real, but the affordability math is unforgiving.

What you control vs. what you don't

The defining frame for any funding decision: who owns the risk, who owns the data, who owns the surplus, who owns the compliance burden. Level-funded sits in the middle of the spectrum — more control than fully-insured, less than self-funded.

Dimension Fully-Insured Level-Funded Self-Funded
Risk on bad yearCarrier (you pay fixed)Capped at 110-125% expectedYou bear it all to stop-loss
Surplus on good yearCarrier keeps it50/50 split or 100% return100% yours
Claims data accessLimited, delayedMonthly, full detailReal-time
Plan design flexibilityCarrier templatesCustomizable within carrier frameworkFully customizable
ERISA compliance burdenCarrier owns itShared (you're the plan sponsor)Fully on you
Cash flow predictabilityFixed monthlyFixed monthlyVariable claims-as-paid
Renewal volatility5-15% typical, up to 50%Smooths over multi-yearDriven by your data

What this looks like over five years for a 75-employee group

ICHRA's cost trajectory is much flatter than group plans because allowances escalate at general inflation (3-5%) rather than medical trend (8-12%). The longer the time horizon, the bigger the gap.

$22k $20k $18k $16k $14k Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Fully-Insured Level-Funded Self-Funded

By year 5, ICHRA is typically 18-24% below the group-plan trajectory because medical inflation compounds while allowances scale to general inflation. The trade: employees absorb plan-design changes year-over-year, where group plans hide that variability inside the carrier renewal.

Where BENEFITRA actually adds value on a ichra plan

Anyone can sell you ichra. Here's what we do that most brokers don't:

Worked example · 47-EE distributed software company

What ICHRA looks like for a multi-state remote workforce

Software company headquartered in CA, 47 enrolled employees across 14 states (mostly remote), prior group plan was a single-carrier PPO that had network gaps in 6 of the 14 states.

Prior group plan annual cost
$823,000
Year-1 ICHRA allowances paid
$648,000
Employee satisfaction (post-enrollment survey)
+47 NPS
Year-1 savings + better network coverage
$175,000 (21%)

Every employee got access to their state's individual marketplace, which usually meant better in-network specialist coverage than the prior single-carrier group plan provided. Six employees bought platinum-tier plans (using their own money to top up the allowance); twelve employees pocketed the difference between allowance and plan cost (allowance was treated as use-it-or-lose-it within the year). The CFO's primary win wasn't the cost — it was eliminating annual carrier-renewal anxiety entirely.

Model your own numbers

The Health Funding Projector compares fully-insured, level-funded, self-funded, and captive across a 5-year horizon based on your group's size, location, and claims history.

Run your projection

Takes about 4 minutes. No email required for the basic projection.

Open the Health Funding Projector →

How ichra stacks against the other six

ICHRA is one of seven funding paths Benefitra works with. Each has a sweet spot and an exit ramp. Pick the page that matters most for your situation:

Fully-Insured Level-Funded Self-Funded Self-Funded Captive PEO-Integrated Taft-Hartley Compare all seven

Frequently asked questions about ICHRA

Can I offer ICHRA to some employee classes and a group plan to others?
Yes — this is one of ICHRA's most useful features. The 11 IRS-approved employee classes are: full-time, part-time, seasonal, collective-bargaining, waiting-period probationary, non-resident, salaried, hourly, geographic, and combinations of those. You can offer ICHRA to one class and a traditional group plan to another (e.g., ICHRA for distributed remote employees, group plan for HQ-based employees in one geography). You cannot split treatment within the same class — every full-time HQ employee in California has to be offered the same arrangement. The class definitions need to be made before the plan year and documented in your written ICHRA plan document. The 'salaried vs. hourly' distinction is one of the most-used class structures because it cleanly separates white-collar and field workforces.
How does ICHRA affordability work under ACA — what's the 9.96% threshold?
For 2026, an employer's coverage offer is considered 'affordable' if the employee's required contribution to the lowest-cost silver plan available to them does not exceed 9.96% of their household income (the 'affordability percentage' for 2026, adjusted annually). For ICHRA, this means the allowance has to be high enough that, after the allowance is applied, the employee can still afford the lowest-cost silver plan in their area for under 9.96% of household income. The math: monthly required contribution = (lowest-cost silver premium in their county) − (monthly ICHRA allowance). If that contribution exceeds 9.96% × (employee's monthly household income), the offer is unaffordable, the employee can decline ICHRA without penalty, and your ACA employer-mandate exposure (for groups 50+ FTEs) triggers. Most employers underestimate this — what looks like a generous allowance in one geography can fail affordability in another.
What happens to my ACA reporting (1094-C / 1095-C) when I switch to ICHRA?
Your ACA reporting becomes both simpler in some ways and more complex in others. Simpler: you no longer have to report the carrier and plan-level data the group plan generated, since each employee is on their own individual policy. More complex: you have to report the ICHRA allowance offered, the class structure, the employee's age/geography (which determines the lowest-cost silver benchmark), and the affordability calculation outcome on Form 1095-C. The IRS introduced specific ICHRA codes (1L, 1M, 1N, 1O, 1P, 1Q, 1R, 1S, 1T) covering different allowance-and-class scenarios. Most employers underestimate the reporting workload in Year-1 and get hit with reporting errors that trigger Letter 226-J two years later. Plan to outsource the ICHRA reporting to a specialized ICHRA admin (Take Command, Gravie, PeopleKeep) rather than handling internally.
Is ICHRA cheaper than a group plan for a 75-employee company?
Often yes, but it depends on three factors: workforce geography, group plan loss ratio, and tolerance for benefit variability. Geographic factor: in states with healthy individual marketplaces (FL, AZ, NC, TX), ICHRA usually beats group plans by 10-25%. In states with thin individual markets (NY, CA, MA), the gap shrinks or reverses. Loss ratio factor: if your group plan has been running expensive (high claims relative to premium), ICHRA's defined-contribution structure caps your exposure where group plans don't. Variability factor: ICHRA shifts plan choice to employees, which means your benefits experience varies across employees — some will be thrilled with their flexibility, some will feel they got less coverage than the group plan provided. For 75 EE specifically: model county-level allowances, compare to your current group plan total cost, and if ICHRA is within 5% of group plan cost, the operational and recruiting benefits often justify the switch.
What if my employees can't find an individual plan they like in their county?
This is the single biggest ICHRA failure mode and the question to investigate before committing. In most US counties, employees have 3-8 individual marketplace plans to choose from across 2-4 carriers. In rural counties or specific markets (parts of WV, OK, AZ), choices can be limited to 1-2 plans from a single carrier. Run a county-level network adequacy check before offering ICHRA: pull the actual plans available in each employee's ZIP code (Healthcare.gov has this data), confirm major hospital systems are in-network, confirm the employee's existing PCP is in at least one available plan. If 5%+ of your employees are in counties with poor individual-market options, ICHRA isn't right for them — you'd need to offer a group plan to that class while running ICHRA for the rest, which is allowed under the class structure rules.
Can employees use ICHRA dollars for premium AND out-of-pocket costs?
Yes, but it depends on how you structure the ICHRA. There are two main configurations. A 'premium-only' ICHRA reimburses only the monthly insurance premium — out-of-pocket costs (deductibles, copays, prescriptions) come out of the employee's pocket. A 'premium-plus-medical' ICHRA reimburses premium AND qualified out-of-pocket medical expenses up to the allowance amount. Premium-plus is more flexible for employees but creates more administrative overhead (you're processing receipts and verifying medical expenses). Most ICHRA admins support both structures, and the choice is made at plan inception in the written plan document. Premium-plus is typically chosen by employers with higher allowance budgets ($1,000+/mo); premium-only is more common at $400-$700/mo allowance levels.
Does ICHRA work for 1099 contractors or only W-2 employees?
ICHRA is technically only for W-2 employees — 1099 contractors aren't 'employees' under the IRS rules that govern ICHRA. However, employers with mixed W-2/1099 workforces have a few options. First: offer ICHRA to W-2 employees only (the 11-class structure handles this cleanly). Second: provide 1099 contractors with a non-tax-advantaged stipend for health coverage (treated as taxable income to the contractor). Third: structure the worker classification carefully — if 1099 contractors are actually being treated like employees (set hours, supervised work, no independent business), they may be misclassified, which is a separate compliance issue. ICHRA is most powerful for fully W-2 workforces; W-2/1099-blended workforces typically use ICHRA for one segment and a separate stipend or no benefit for the other.

Want an ICHRA model that maps to your county-level workforce?

Send us your employee roster (de-identified) by county, and we'll model the ICHRA allowance, affordability calculation, and county-level plan availability — confirming whether ICHRA is operationally viable before you commit.

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