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February 10, 2025

Leverage Individual Coverage Health Reimbursement Arrangements (ICHRAs) to empower employees & optimize budget

Summary

  • What is an ICHRA?
  • How ICHRAs manage healthcare spending to fuel business growth
  • A small business solution
  • What employers should consider
  • A viable choice for businesses of all sizes

Employers face the challenge of attracting, developing, and retaining top talent while offering a benefits package that fits their budget. Evolving employee preferences and the rise in healthcare costs have only compounded this challenge.

A possible solution is an Individual Coverage Health Reimbursement Arrangement (ICHRA). This approach allows employers to reimburse employees for a portion or all of their individual health insurance premiums, offering a cost-saving option for companies and a tailored health plan for their staff.

What is ICHRA?

Established in 2020, ICHRA is an IRS-compliant health benefits plan designed to address employers’ rising healthcare costs. This approach allows companies to offer a tax-free stipend or subsidy to employees to help them purchase their own individual health insurance plans on the open market, rather than having the employer be responsible for selecting an insurance carrier, choosing plan designs, and deciding whether to fund the plan on a self-funded or fully insured basis.

How ICHRA manages healthcare spending to fuel business growth

Budgeting for healthcare spending amid increasing costs has become critical for businesses to stay competitive and invest in growth opportunities.

According to KFF, premiums for employer-sponsored health insurance have climbed sharply over the last decade, as we have all experienced. The cost of average annual single-coverage premiums has increased by 20% since 2019, reaching $8,951 in 2024. Family coverage premiums have seen a steeper bump of 24%, rising to $25,572 over that time.

As insurance costs have spiked, so has participation in ICHRAs. Fewer than 50,000 United States workers were covered by either plan in 2020, but by 2024, more than 200,000 workers were enrolled, according to the Health Reimbursement Arrangements (HRA) Council.

Through ICHRA, companies can mitigate costs by:

  • Setting reimbursement allowances to manage costs
  • Insulating themselves from fluctuating insurance premiums
  • Properly budgeting and limiting tax liabilities

Businesses can reinvest potential savings to innovate and offer competitive salaries, improving retention.

A small business solution

ICHRAs have become particularly appealing to small businesses, which make up 84% of the newest adopters, according to data from the HRA Council. Small businesses, defined as companies with fewer than 50 full-time employees, face:

  • Competition from larger corporations
  • Challenges in employee development and retention
  • Economic uncertainty and thin profit margins

Small businesses operating on thin margins must identify cost-saving strategies and a suitable health plan for their employees.

As costs rise, even larger organizations, which have more than 50 full-time employees, have also steadily increased participation in offering ICHRAs, the HRA Council found.

What employers should consider

When employers contemplate a health plan to offer employees, they should evaluate the following factors:

  • Company size, structure, and industry: Review current company size and growth trajectory, as well as industry, so that they can be sure to remain competitive for employee talent with their peers.
  • Employee demographics: Assess employees’ individual demographics, such as age, health status, and income levels, and how that fits into their needs. ICHRAs can be beneficial for employees with unique healthcare needs or those seeking more flexibility in their plan options. 
  • Budgetary constraints: Evaluate company resources and budget to determine an appropriate allocation for healthcare benefits. Realistic reimbursement limits and effective cost-management strategies can set proper expectations for what an ICHRA can do for the company and its employees.
  • Administrative capacity: Gauge the capacity to manage the administrative aspects of an ICHRA plan. While generally less complex than traditional group health plans, ICHRAs still require administrative tasks such as record-keeping and employee communication.
  • Medicare-eligible population: ICHRAs are not available to people with Medicare eligibility, even if they are not actively enrolled in Medicare, so there needs to be communication about options for this population regarding Medicare enrollment paired with supplemental plans.

A viable choice for businesses of all sizes

ICHRAs are a growing option for employers to consider when designing their employee health benefits plans. As businesses become more receptive to finding ways to save costs and improve employee retention, staying informed of the latest trends in health benefits can support strategic decisions and optimize offerings for employees.

Marsh McLennan Agency’s expert team helps companies of all shapes and sizes guide owners through the implementation of ICHRA and determine the best business insurance, employee health and benefits and more for their needs. Connect with a Marsh McLennan Agency representative to explore how we can help your business.
 

Contributor

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Michael Cody

Senior Vice President, Principal