How Mid-Size Employers Are Using ICHRA to Give Employees Flexible Health Coverage Options in 2026

Every year, a growing number of mid-size employers walk into open enrollment season with the same frustration: the group health plan they set up three years ago no longer fits the workforce they have today. Some employees want lower monthly costs. Others want to keep seeing specific doctors outside any network the company can offer. Remote workers scattered across four states need plans tied to their own zip codes, not corporate headquarters. And the employer is paying the same fixed premium for everyone, regardless of how different their needs are.

There is a funding mechanism that directly addresses this mismatch, and most benefits advisors never bring it up in the annual renewal conversation. It is called an Individual Coverage Health Reimbursement Arrangement, or ICHRA. Since federal rules opened it up for employers of all sizes in 2020, thousands of mid-size employers have quietly switched from the one-size-fits-all group plan model to an approach where the company sets a fixed monthly budget, and each employee uses that budget to purchase their own coverage on the individual market.

Whether ICHRA fits your organization depends on your workforce composition, your state's individual market quality, and your employee demographics. This guide explains how ICHRA works, who it is best suited for, what the tradeoffs are, and how to evaluate it alongside your current group plan options before your next renewal.

What ICHRA Actually Is and Why It Is Different from Older HRA Rules

The Problem ICHRA Was Designed to Solve

Group health plans require critical mass to work well. A carrier prices a group based on the combined risk profile of all enrolled members. If your 35-person workforce happens to include several high-cost health situations, your entire group premium goes up at renewal. If you have 35 healthy 20-somethings, the carrier still prices in a margin you will likely never use. Either way, the pricing mechanism is opaque, and every employee pays a share of the same pooled structure whether their needs align with it or not.

Before 2020, federal rules created legal risk for most employers who tried to reimburse employees directly for individual market premiums. The Affordable Care Act's employer mandate rules, as originally interpreted, made it difficult to run a reimbursement arrangement alongside any individual market coverage without triggering penalties. The 2020 final rule from the Departments of Treasury, Labor, and Health and Human Services resolved this by creating ICHRA as a formal, penalty-safe mechanism for employers to fund individual coverage at the employee level.

How ICHRA Differs from the Older QSEHRA and Group HRA Models

Before ICHRA, the only HRA option for small employers was the Qualified Small Employer HRA (QSEHRA), which was capped at specific IRS dollar amounts per employee and was only available to employers with fewer than 50 full-time equivalent employees. ICHRA has no size limit: small or large employers can use it, there is no contribution cap, and employers can vary allowance amounts across different categories of employees.

The older integration HRA model required employees to be enrolled in the employer's group plan. ICHRA removes that requirement. The employee buys their own qualifying individual market plan, then submits premiums or eligible medical expenses for reimbursement from the employer's designated ICHRA account. The employer never touches a carrier relationship at the individual level. They set a budget, fund an account, and employees use it.

How ICHRA Works for Mid-Size Employers in Practice

Setting the Monthly Allowance

The employer decides how much to contribute per month per employee, by class. Classes are defined in the ICHRA regulations and can include full-time employees, part-time employees, seasonal employees, employees under a collective bargaining agreement, employees who have not completed a waiting period, and employees in different geographic rating areas. The geographic class is particularly valuable for multistate employers because it allows setting higher allowances in states where individual market premiums are more expensive.

Within each class, the employer can also vary the allowance amount based on the employee's age or the number of dependents being covered, following the same age-based rating bands that individual market carriers use. This prevents a situation where a $500 per month allowance covers 80% of a young employee's premium but only 30% of an older employee's premium for comparable coverage.

The Employee Experience

From the employee's perspective, they receive a notice explaining the ICHRA offering before their initial enrollment period. They shop for their own qualifying individual market plan, either through healthcare.gov (the ACA exchange), a state-based exchange, or directly through a carrier. They enroll in a plan that fits their needs and their local market.

Once enrolled, they submit proof of their premium payment to the employer's ICHRA administrator, which is typically a third-party platform that handles substantiation and reimbursement. The employer's ICHRA contribution reimburses the employee's out-of-pocket premium up to the monthly allowance, tax-free. The employee keeps any difference if their chosen plan costs less than the allowance, and pays any difference out of pocket if the plan costs more.

ACA Employer Mandate Interaction for Larger Employers

For employers with 50 or more full-time equivalents who are subject to the ACA employer mandate, ICHRA satisfies the requirement to offer minimum essential coverage if the allowance is large enough to make at least one silver-level plan on the exchange affordable under the ACA's affordability test. For 2026, affordability is calculated based on the employee-only premium of the lowest-cost silver plan available on the local exchange relative to the employee's household income, using safe harbor methods.

This is a meaningful difference from a group plan, where affordability is measured against the employee-only premium of the plan offered. With ICHRA, affordability depends on the local exchange market and the employee's specific geography. In high-cost markets, the employer may need to set higher allowances to satisfy the mandate affordability threshold. The Benefits Savings Strategy Builder can help you model what allowance amounts would be required to meet affordability thresholds at different income levels and geographies.

When ICHRA for Mid-Size Employers Makes the Most Sense

The Multistate Workforce Scenario

If your company has employees in five states, finding a single group carrier that covers all five with competitive network access is genuinely difficult. Most group plans are priced and structured around a primary service area. Employees outside that area may be on national network products that cost more and have worse local provider access than what the same premium dollar buys on their local exchange.

ICHRA solves this directly. An employee in Texas shops Texas exchange plans. An employee in Massachusetts shops Massachusetts exchange plans. The employer sets geographically adjusted allowances and each employee buys into their local market. There is no need to find a carrier that works everywhere. For employers with employees spread across three or more states, this geographic flexibility alone is often worth the administrative tradeoff.

The High Turnover Workforce Scenario

Group plans typically require a minimum participation rate of 50 to 75% of eligible employees to remain active. In industries with high turnover, reaching and maintaining that participation threshold can be a constant administrative burden. When too many employees waive the group plan, the entire arrangement can become ineligible for renewal at favorable rates.

ICHRA does not have a participation rate requirement. Every employee who wants coverage can get it independently. Employees who choose not to participate simply do not use their allowance. The employer's cost is exactly the number of employees who actively submit for reimbursement, not a committed per-head premium for every eligible employee whether they enroll or not.

The Budget Certainty Scenario

One of the central appeals of ICHRA is that the employer's maximum annual benefits spend is completely known in advance. If you set a $500 per month ICHRA allowance for 40 full-time employees, your maximum annual cost is $240,000. You will not get a 9% renewal increase in November. You will not absorb an unexpected carrier rate adjustment mid-year. You set the budget, and the budget is the budget.

Compare this to a fully insured group plan, where your actual cost is determined by the carrier at each renewal based on your claims history blended with pool-wide experience. According to the Kaiser Family Foundation's 2024 Employer Health Benefits Survey, employer costs for family coverage increased 7% in 2024 alone and have grown 24% over five years. Budget certainty is not a feature of the traditional fully insured renewal cycle.

The Tradeoffs That Matter for Mid-Size Employers

Individual Market Quality Varies Widely by State

ICHRA's effectiveness depends heavily on the quality of your state's individual market. States with strong exchange competition such as California, New York, and Colorado have robust plan options at multiple price points, and employees can often find plans with broad networks at reasonable premiums. States with thinner exchange markets may have only one or two carriers, narrow networks, and limited plan options. An employee in a rural area of a low-competition state may find that the exchange offers significantly less value than a group plan would at the same employer contribution level.

Before switching to ICHRA, it is worth researching the plan options and average premium costs in the markets where most of your employees live. The healthcare.gov plan finder gives a preview without requiring account creation. If your employees are concentrated in markets with strong exchange competition, ICHRA is more likely to deliver a positive employee experience. If they are spread across rural areas with limited plan options, the employee experience may be uneven.

The Premium Tax Credit Issue for Lower-Wage Employees

Employees who are offered an ICHRA that meets the ACA affordability standard are not eligible for premium tax credits on the exchange, even if the allowance does not fully cover their premium. This is the same mechanism that applies to group plan eligibility: an employee offered affordable employer-sponsored coverage cannot simultaneously receive exchange subsidies.

The tax credit issue matters most for lower-wage employees who might otherwise qualify for significant subsidies on the exchange. If an employee would have received a $400 per month premium tax credit but you are only offering a $250 per month ICHRA allowance, they are effectively $150 per month worse off than they would have been if you had offered nothing. For employers considering ICHRA for lower-wage workforces, the allowance amounts need to be high enough to genuinely replace the subsidies those employees would lose.

Administrative Complexity Is Higher than a Traditional Group Plan

With a group plan, enrollment is straightforward. The carrier provides enrollment materials, employees choose from two or three plan options, and premiums are deducted from payroll. Substantiation and payment tracking happen automatically. With ICHRA, the employer needs an HRA administration platform to handle enrollment tracking, premium substantiation, reimbursement processing, and plan year reconciliation. The administrative overhead is real, and it falls on HR teams who already have full plates during open enrollment season.

Most third-party ICHRA platforms charge between $5 and $20 per employee per month for administration, which erodes some of the cost-predictability benefit. When comparing ICHRA to a group plan, the comparison should include ICHRA allowance amounts plus administration fees on one side, and total group premiums plus broker fees on the other. The Benefits Savings Strategy Builder includes all cost components in its comparison output, which gives you a cleaner model than most spreadsheet approaches.

How to Compare ICHRA to Your Current Group Plan

The Four Numbers That Drive the Decision

Before evaluating ICHRA, gather these four numbers from your current group plan or your renewal proposal:

• Current employer premium contribution per employee per month (what you pay the carrier, before the employee's portion)
• Average exchange premium for a benchmark silver plan in your employees' primary zip codes
• Estimated ICHRA administration cost from two or three platform quotes
• Whether any employees would lose significant subsidy eligibility under the ICHRA affordability rules (requires knowing employee incomes relative to the federal poverty line)

If your current employer contribution is already above the benchmark silver plan cost in your employees' markets, ICHRA may let you set an equivalent allowance and reduce the gap. If the exchange has limited options in your markets, the administrative complexity may not be worth the tradeoff.

Running the Side-by-Side

The most useful comparison is a per-employee annual cost model that puts group plan total cost (employer premium plus admin plus broker fee) next to ICHRA total cost (allowance plus administration) for the same headcount. Do this for your most common employee types: full-time, part-time, employees with dependents, employees without.

The Benefits Savings Strategy Builder generates this comparison automatically, including level-funded, self-funded, and multiemployer trust alternatives alongside ICHRA. For employers evaluating multiple funding options at once, this gives you a complete picture of where your dollar goes in each scenario rather than separate quotes that are hard to reconcile. You can also look at the Employee Benefits Benchmarking guide to understand what comparable employers in your industry are contributing, which helps you set an allowance that stays competitive for recruiting.

The IRS Safe Harbors That Simplify ACA Compliance

For employers subject to the ACA employer mandate, the IRS provides three safe harbors for demonstrating that your ICHRA offer is affordable without doing individual income calculations for each employee: the W-2 safe harbor, the rate of pay safe harbor, and the federal poverty line (FPL) safe harbor. The FPL safe harbor is the simplest. If your ICHRA allowance for an employee class is set so that the employee would pay no more than the ACA's affordability percentage (9.02% for 2026) of the FPL for 2025, you are compliant for all employees in that class, regardless of their actual income.

This makes compliance manageable even without knowing every employee's income. The IRS updates the FPL amounts annually, so review them each plan year when setting allowance levels. For 2026 renewals, the relevant FPL figure is the 2025 FPL published by Health and Human Services.¹

Setting Up ICHRA for Mid-Size Employers the Right Way

The 90-Day Notice Requirement

Employees must receive written notice of the ICHRA offering at least 90 days before the start of the plan year. For a January 1, 2027 ICHRA plan year, that means notices must go out no later than October 3, 2026. This is earlier than most employers expect, especially if they are evaluating ICHRA as a renewal alternative. Build the evaluation timeline backward from your January 1 date to make sure you have enough time to make the decision, select an administrator, and get notices out on time.

Choosing the Right ICHRA Administration Platform

Several dedicated ICHRA platforms have emerged since 2020, including Take Command Health, PeopleKeep, and Remodel Health. Each handles the core functions of notice delivery, enrollment tracking, premium substantiation, reimbursement payments, and annual reporting. Key factors to evaluate include per-employee monthly cost, reimbursement turnaround time, employee-facing UX quality (especially the plan shopping experience), and integrations with your payroll provider for W-2 reporting of ICHRA benefits.

Many benefits advisors who work with mid-size employers now have preferred ICHRA platforms they can introduce with negotiated rates. If your advisor has never mentioned ICHRA as an option, that conversation is worth initiating before your next renewal cycle.

What Happens to Current Group Plan Enrollees During the Transition

Switching from a group plan to ICHRA triggers a special enrollment period for all employees covered under the outgoing group plan. They have a window of 60 days from when the group plan ends to enroll in qualifying individual market coverage. Most ICHRA administrators build this enrollment facilitation into their platform, but it is worth confirming during the sales process. Employees who miss the special enrollment window will be uninsured until the next open enrollment period, which is a meaningful employee relations risk if the transition is not communicated clearly and early.

Frequently Asked Questions

Can a mid-size employer offer both a group plan and an ICHRA at the same time?

Yes, but with important limitations. You cannot offer the same employee class both a group plan and an ICHRA. You can offer different classes different structures. For example, you might offer full-time employees a traditional group plan and part-time employees an ICHRA, provided the classes are defined consistently and the offer does not discriminate based on health status. The class definitions must be set before the plan year starts and cannot be changed mid-year.

Does ICHRA satisfy the ACA employer mandate for companies with 50 or more employees?

Yes, if the ICHRA offer meets the affordability standard. An ICHRA is considered affordable if, after subtracting the employer's monthly ICHRA allowance, the employee's cost for the lowest-cost silver plan in their area is no more than 9.02% of their income (for 2026, using IRS safe harbor methods). If the affordability test is met, the employer avoids employer shared responsibility penalties under ACA Section 4980H. If it is not met, the penalty exposure is the same as if no coverage had been offered. Running the affordability calculation before finalizing allowance amounts is not optional for companies with 50 or more full-time equivalents.

What happens if an employee cannot find a plan they like on the exchange?

Employees who find the individual market options inadequate can waive the ICHRA and opt to purchase coverage through other channels, but they will forego the employer's tax-free contribution if they do so with non-qualifying coverage. The more practical concern is market quality: in states with strong exchange competition, this rarely becomes an issue. In states where the exchange has limited options, some employees may find the individual market plans less satisfying than the group plan they left. Surveying employee zip codes and previewing exchange options before the transition is the best way to anticipate this friction.

Are ICHRA contributions subject to payroll taxes?

No. ICHRA contributions are excluded from the employee's gross income and are not subject to FICA payroll taxes for either the employer or the employee, provided the employee is enrolled in qualifying individual market coverage and the ICHRA is structured correctly. This is one of the key tax advantages: the employer does not pay FICA on ICHRA contributions, which represents a 7.65% savings compared to paying the same dollar amount as taxable wages. The employee also receives the benefit tax-free, rather than having to net out income taxes before the coverage dollar reaches them.

Can ICHRA dollars be used for dental and vision coverage?

ICHRA dollars can reimburse premiums for any qualifying coverage that qualifies as minimum essential coverage, which includes individual market medical plans. Stand-alone dental and vision plans do not qualify as minimum essential coverage under the ACA, so they cannot be reimbursed from an ICHRA on a tax-free basis. However, employers who want to supplement the ICHRA with dental and vision reimbursement can do so through a separate HRA or through a voluntary benefit arrangement outside the ICHRA structure. Many mid-size employers who switch to ICHRA for medical continue to offer employer-paid dental and vision on a group basis alongside it.

How do we evaluate whether ICHRA will work for our workforce before committing?

The best first step is to map your employees' zip codes and look up the cost of the benchmark silver plan in each area on healthcare.gov or your state exchange. Compare that cost to what you are currently contributing per employee per month. If the exchange silver plan costs are lower than your current contribution in most markets, ICHRA has a straightforward economic case. If they are higher, you would need to set allowances above your current contribution levels to maintain equivalent coverage quality, which narrows the cost benefit. The Benefits Savings Strategy Builder walks through this analysis automatically once you enter your employee count, current contribution level, and primary operating states.

References

1. U.S. Departments of Health and Human Services, Labor, and Treasury. "Health Reimbursement Arrangements and Other Account-Based Group Health Plans; Final Rule." Federal Register. June 2019. federalregister.gov/documents/2019/06/20/2019-12571
2. Kaiser Family Foundation. "2024 Employer Health Benefits Survey." October 2024. kff.org/health-costs/report/2024-employer-health-benefits-survey/
3. IRS. "Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act." irs.gov/affordable-care-act/employers/questions-and-answers-on-employer-shared-responsibility-provisions-under-the-affordable-care-act
4. SHRM. "Health Reimbursement Arrangements: What HR Needs to Know." shrm.org/topics-tools/tools/toolkits/health-reimbursement-arrangements
5. Centers for Medicare and Medicaid Services. "Individual Coverage HRA." cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Market-Reforms/Individual-Coverage-HRA
6. Internal Revenue Service. "Rev. Proc. 2025-19: Affordability Percentage for 2026 Plan Years." irs.gov

This article is for educational purposes only and does not constitute legal, tax, or benefits advice. Consult a qualified benefits advisor and legal counsel for guidance specific to your organization.