If you run a small business and have been looking for a way to offer health benefits without the burden of a traditional group plan, you may have come across the term ICHRA. It stands for Individual Coverage Health Reimbursement Arrangement — and yes, small businesses with under 50 employees can offer one.
Here’s what that means for your business, your budget, and your team.
What Is an ICHRA?
An ICHRA is an employer-funded health benefit. You set a monthly reimbursement allowance for each eligible employee. Your employees then shop for their own health insurance on the ACA marketplace or through a private individual market plan. When they submit proof of coverage and eligible expenses, you reimburse them — and that reimbursement is excluded from the employee’s taxable wages.
The IRS established ICHRA rules in June 2019 (effective January 2020), creating a modern alternative to traditional group health coverage. Since then, employer adoption has grown as businesses look for cost-predictable ways to offer meaningful health benefits.
For the employer, reimbursements are deductible as an ordinary business expense and are exempt from FICA and federal unemployment taxes — unlike a taxable wage increase. For the employee, the reimbursement is excluded from gross income under IRC Section 106.
Do I Need to Offer a Traditional Group Plan Too?
No. An ICHRA can stand on its own. You do not need to offer a traditional group health plan alongside it. In fact, the whole point of the ICHRA is to give employees the freedom to choose a plan that fits their individual needs — whether that is a marketplace plan, a private individual plan, or Medicare (for eligible employees).
However, there is one important rule: you cannot offer the same employee both a traditional group health plan and an ICHRA. You can offer one or the other, or you can offer different arrangements to different employee classes (more on that below).
What Employee Classes Can I Create?
One of the key advantages of an ICHRA is its flexibility in how you structure benefit offerings. Under ICHRA rules, employers can create up to nine defined employee classes, including:
- Full-time employees
- Part-time employees
- Salaried employees
- Hourly employees
- Employees in different geographic locations
- Employees covered by a collective bargaining agreement
- Seasonal employees
- Temporary employees (through staffing firms)
- Foreign employees working outside the U.S.
This class-based structure means you can offer different reimbursement amounts to different groups — for example, a higher allowance for full-time staff and a different amount for part-time team members — as long as each class is offered the same terms within its group.
Why ICHRA Works Well for Small Businesses Under 50
For businesses with fewer than 50 employees, the ICHRA model can solve several common pain points:
No minimum participation requirement. Unlike many group plans, an ICHRA does not require a minimum percentage of employees to enroll. You can offer it to as few or as many eligible employees as you choose.
No community rating risk. Group health plans are subject to community rating — meaning premiums are based on the overall health of your group, not individual health status. With an ICHRA, you set a fixed allowance, and employees find coverage on their own. This eliminates the unpredictability of group renewal rates.
Budget control. You decide the monthly allowance for each employee class. There are no surprise premium increases at renewal, and you are not locked into a multi-year contract with an insurance carrier.
Employee choice. Employees select the plan that works best for their situation — whether that is a low-premium bronze plan, a comprehensive gold plan, or a plan with a specific network or provider access. This is especially valuable when your team has diverse needs.
Administrative simplicity. You are not administering a group health plan. You are reimbursing employees for coverage they purchase on their own. This can reduce the administrative overhead that comes with managing a traditional group policy.
How Does an ICHRA Work in Practice?
Here is a straightforward example:
- You are a small business owner with 12 employees.
- You decide to offer an ICHRA with a $400 monthly allowance per full-time employee.
- Each eligible employee takes that $400 and uses it toward an individual health plan of their choice — either through the ACA marketplace or a private plan.
- Employees submit proof of coverage and eligible expenses to you (or your administrator).
- You reimburse them up to the allowance amount. The reimbursement is not taxable income for the employee, and it is a deductible business expense for you.
The process can be as simple or as structured as you need it to be. Some employers use a third-party administrator to manage reimbursements and compliance; others handle it internally with straightforward recordkeeping.
Is an ICHRA Right for Your Business?
An ICHRA may be a strong option if:
- You want to offer health benefits but the cost or complexity of a traditional group plan is a barrier.
- You have employees with different coverage needs (some may already have coverage through a spouse, for example).
- You want predictable, fixed costs for your benefits budget.
- You value giving employees the freedom to choose a plan that fits their life.
It may not be the right fit if your workforce strongly prefers a group plan with a single carrier and network, or if you are in a very small market where individual plan options are limited.
The best way to determine fit is to talk through your situation with a licensed agent who understands both the ICHRA structure and your local market options.
How Trek Insurance Solutions Can Help
At Trek Insurance Solutions, we work with small businesses across 19 states to design employee benefit solutions that make sense for both the employer and the team. We can walk you through the ICHRA structure, help you define eligible employee classes, and connect your employees with individual plan options that meet their needs.
Have questions? Contact a licensed Trek agent at 888-960-0442 or visit trekis.net to learn more.
Licensed in 19 states: NE, SD, IA, IL, WI, TX, TN, AZ, AR, IN, OH, MI, VA, KS, MO, NM, SC, GA, FL.