A practical guide to employer contributions, health insurance costs, eligibility requirements, and setting up an ICHRA for a small business.
Providing health insurance is an important decision for small business owners. It can help attract employees, support retention, and make a compensation package more competitive. But traditional group health insurance can also introduce financial uncertainty, especially when premiums increase at renewal.
For employers with fewer than 50 employees, there is another option: an Individual Coverage Health Reimbursement Arrangement (ICHRA), which CMS currently refers to as a CHOICE Arrangement.
Instead of purchasing one group health insurance policy for employees, a business establishes an employer-funded health benefit and allows eligible employees to obtain qualifying individual health insurance coverage. The employer determines its contribution according to the arrangement's terms, while employees can choose from available individual insurance plans that fit their circumstances.
But how much does an ICHRA cost? Are businesses with fewer than 50 employees required to offer health insurance? What rules apply, and how should an employer prepare for implementation?
Understanding these questions can help small business owners determine whether an ICHRA is appropriate for their workforce and budget.
Yes. Employers of nearly any size can establish an ICHRA, including businesses with 5, 10, 20, or 40 employees, provided they meet the relevant requirements. There is no minimum workforce size of 50 employees to offer an ICHRA.
A business does not need to become an Applicable Large Employer (ALE) under the Affordable Care Act to make this benefit available. However, the ACA's employer mandate is a separate consideration.
Generally, businesses with fewer than 50 full-time employees, including full-time equivalent employees, are not subject to the ACA employer shared responsibility requirements.
For this purpose, the IRS determines ALE status using the employer's average workforce during the preceding calendar year. Related companies may also need to combine their employee counts under the employer aggregation rules.
This means a business with 35 employees may not be required to offer health insurance under the federal employer mandate, but it can voluntarily establish an ICHRA to help employees pay for qualifying individual coverage.
The key distinction is that an employer does not have to be legally required to provide health insurance to choose to offer an ICHRA.
One of the most important features of an ICHRA is that employers establish a defined contribution rather than committing to pay a fixed percentage of a traditional group insurance premium.
For example, a business might decide to make $300, $400, or $500 per month available to eligible employees.
Federal ICHRA rules do not establish a general annual dollar contribution limit. Employers have flexibility to design their contribution amounts, subject to employee-class, age, family-size, and nondiscrimination requirements.
Employer-funded reimbursements under a properly established and administered ICHRA are generally deductible business expenses and excluded from eligible employees' taxable wages, including for federal payroll tax purposes. Different tax rules apply to certain business owners, including shareholders who own more than 2% of an S corporation. Business owners should review their eligibility and tax treatment before participating in an employer-sponsored arrangement.
The employer should also account for the costs of administering the arrangement and coordinating employee coverage.
Consider a company with 20 employees.
Monthly allowance per employee | Monthly employer allowance budget | Annual employer allowance budget |
$300 | $6,000 | $72,000 |
$400 | $8,000 | $96,000 |
$500 | $10,000 | $120,000 |
These figures are illustrative and assume all 20 employees are eligible and receive the full allowance for all 12 months. They exclude administration costs and other employer expenses. Actual reimbursed amounts depend on eligible expenses, substantiation, participation, and the arrangement's terms.
The important benefit for budgeting is visibility into the employer's maximum defined contribution under the chosen design.
However, the company budget is only one input when setting the allowance. Employers should also consider local insurance premiums, employee ages, family coverage needs, and the level of support they want the benefit to provide.
A contribution that makes individual coverage reasonably accessible in one area may cover a much smaller portion of the premium in another.
No. An ICHRA can cover all or part of an eligible employee's individual health insurance premium, depending on the available allowance and the cost of the selected policy.
Suppose a business offers a $400 monthly allowance. An eligible employee selects qualifying individual health insurance costing $575 per month.
The financial breakdown would be:
Monthly Amount | Cost |
Employee's insurance premium | $575 |
Available employer ICHRA allowance | $400 |
Employee's remaining premium responsibility | $175 |
In this example, the employee is responsible for the remaining $175.
Another employee might select a plan costing $450 and have a remaining responsibility of $50. The employer's allowance can remain the same even though employees choose policies with different premiums, assuming the same allowance applies under the arrangement's terms.
For employers, this provides a way to establish a benefits budget while allowing employees to select qualifying individual coverage. For employees, the amount they ultimately pay depends on the available allowance and the insurance policy they choose.
An ICHRA does not necessarily require every employee in a business to receive the same dollar amount.
Employers may establish different benefit designs for certain permitted employee classes, subject to federal rules.
Examples of permitted classes include full-time employees, part-time employees, salaried employees, hourly employees, seasonal employees, and employees in different geographic rating areas.
Within a class, the ICHRA must generally be offered on the same terms, subject to permitted variations based on age and family size. That means an employer cannot arbitrarily offer one employee a larger allowance simply because that individual negotiated a better benefits package.
An employer might establish one contribution structure for a permitted full-time employee class and another for a permitted part-time class, assuming all relevant requirements are met.
Special restrictions also apply when an employer offers a traditional group health plan to one class of employees and an ICHRA to another. For example, an employer generally cannot offer employees within the same class a choice between a traditional group health plan and an ICHRA.
Minimum class-size rules apply in certain situations when an employer offers a traditional group health plan to some employee classes and an ICHRA to others. These requirements can affect classes based on employment status, compensation type, or geographic rating area. For employers with fewer than 100 employees, the applicable minimum is generally 10 employees in a class offered the ICHRA, subject to the specific regulatory exceptions. A business offering only an ICHRA is not subject to the minimum class-size requirement.
Small businesses should carefully review their employee classifications before establishing contribution amounts or combining ICHRA with other health benefits.
Employees participating in an ICHRA must have qualifying individual health insurance coverage or eligible Medicare coverage, as appropriate.
Unlike a traditional group insurance policy, individual coverage is issued to the employee rather than through a single employer-sponsored group policy. Employees may obtain qualifying coverage through the Health Insurance Marketplace or directly through insurance carriers and other available off-Exchange enrollment channels.
Available plans vary by location, carrier, and eligibility.
The employee's enrollment choice can also affect the financial arrangements available for paying the remaining premium.
For example, an eligible employee who purchases qualifying individual insurance outside the Marketplace may be able to pay the remaining premium through a properly established Section 125 cafeteria plan on a pre-tax basis. Individual Marketplace premiums, by contrast, cannot be paid through Section 125 salary reductions.
Employers should also explain the interaction between an ICHRA and Marketplace premium tax credits.
When an ICHRA is considered affordable under federal rules, an employee generally cannot receive a Marketplace premium tax credit for the relevant period, even if the employee opts out of the ICHRA.
If the ICHRA is considered unaffordable, the employee may be able to opt out and qualify for premium tax credits, provided the other eligibility requirements are satisfied.
This makes employee education an important part of implementing an ICHRA.
An ICHRA is an employer-sponsored group health plan and must be established and administered in accordance with federal requirements.
The employer should have appropriate written plan documentation describing the arrangement's terms. Depending on the business and plan structure, the documentation and administrative process generally involve:
1. Written Plan Document: Establishes the arrangement, eligibility rules, covered expenses, contribution structure, and administrative procedures.
2. Summary Plan Description (SPD): Communicates required information about the plan to participants, consistent with ERISA requirements.
3. ICHRA Employee Notice: Explains important aspects of the arrangement, including its relationship with individual coverage and Marketplace financial assistance.
4. Employee Eligibility Records: Identifies who is eligible under the employer's established rules and when participation may begin.
5. Coverage Substantiation: Supports verification that employees and covered dependents have the qualifying coverage required for ICHRA participation and reimbursement.
6. Reimbursement and Payment Records: Documents eligible expenses, employer contributions, and related payment activity.
7. Ongoing Administrative Procedures: Addresses enrollment changes, employee terminations, coverage updates, recordkeeping, and other operational responsibilities.
The ICHRA notice generally must be provided at least 90 days before the beginning of the plan year for employees already eligible at that time. Different notice timing applies to employees who become eligible later, including new hires.
Establishing the arrangement requires formal plan terms, employee communications, and administrative procedures. The employer must adopt and operate the benefit according to its governing terms and the law.
Yes. A small business can establish an ICHRA as an alternative to offering a traditional group health insurance plan.
With traditional group coverage, the employer generally selects one or more group policies and determines how the premiums will be shared with employees. Under an ICHRA, the employer instead establishes a reimbursement allowance, and employees obtain their own qualifying individual coverage.
Neither approach is automatically better for every business.
A traditional group plan may provide advantages when a business has access to favorable group rates, values a particular provider network, or wants employees to participate in a more standardized benefits arrangement.
An ICHRA may be attractive when employees have different coverage preferences, live in different areas, or when the employer wants a defined contribution structure.
There is also an important small-business tax consideration: employers seeking the federal Small Business Health Care Tax Credit should evaluate the SHOP-related eligibility requirements, because an ICHRA does not itself qualify an employer for that credit.
The right decision depends on the employer's workforce, budget, local insurance market, and benefits objectives.
Small employers researching health reimbursement arrangements may encounter another option called a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA).
Both ICHRA and QSEHRA can help employees pay eligible healthcare expenses, but they operate under different rules.
QSEHRA is generally available only to eligible small employers that are not applicable large employers and do not offer a group health plan. Unlike ICHRA, QSEHRA has statutory annual contribution limits that are adjusted over time.
ICHRA does not have the same general annual contribution cap and offers different options for structuring benefits among permitted employee classes. However, ICHRA is also subject to its own integration, substantiation, notice, and plan-design requirements.
A business evaluating these arrangements should compare contribution flexibility, employee eligibility, administrative responsibilities, tax considerations, and how each option interacts with employees' individual insurance coverage.
The employer should choose the arrangement that fits its circumstances rather than assuming the two programs are interchangeable.
A small business considering ICHRA can approach implementation through a series of practical steps.
Start by identifying employee counts, employment classifications, work locations, and expected hiring activity. Employers should understand which employees they intend to make eligible and whether any existing health benefits must be considered.
Review the individual health insurance market in the geographic areas where employees live.
Premiums, carriers, provider networks, and available coverage options can differ substantially between locations. This helps the employer understand what its proposed allowance may realistically cover.
Determine the amount the business is prepared to make available and evaluate the potential annual commitment.
For example, a company with 25 eligible employees offering $400 per month would have a maximum illustrated annual allowance budget of $120,000 if every employee received the full amount for 12 months.
The employer should account for any permitted allowance variations and additional administrative expenses.
Establish the permitted employee classes, contribution structure, plan year, covered expenses, and other plan terms. The employer should ensure its chosen structure follows ICHRA requirements.
Adopt the necessary plan documents and prepare employee communications. Notice timing and enrollment coordination should be addressed before the arrangement takes effect.
Employees need information about their benefit, enrollment opportunities, and how to obtain qualifying individual coverage.
A newly eligible employee may qualify for a Special Enrollment Period outside the usual annual Marketplace Open Enrollment Period.
Once coverage begins, the arrangement must follow appropriate substantiation and reimbursement procedures. Employers should maintain accurate records of eligibility, allowances, coverage status, and premium-related activity throughout the year.
That work continues every month the arrangement is in place.
Small employers can reduce administrative problems by addressing several issues before launch.
Setting an allowance without reviewing local premiums. A contribution may look affordable in the company budget but provide limited support for employees living in higher-cost insurance markets.
Applying different allowances without a compliant class structure. Employee classifications and permitted variations must follow the ICHRA rules.
Failing to provide proper employee notices. Employees need timely information about the arrangement and how it interacts with individual health insurance and Marketplace subsidies.
Assuming enrollment automatically verifies coverage. The employer's arrangement must follow reasonable coverage substantiation procedures.
Ignoring mid-year employment and coverage changes. New hires, terminations, dependent changes, and policy changes can affect eligibility and reimbursement activity.
Overlooking ongoing administration costs. The allowance is only one component of the employer's total benefits expense.
Planning for these issues early can help small businesses launch and maintain a more reliable ICHRA program.
Yes. An employer with 10 employees can generally establish an ICHRA if it meets the relevant requirements. There is no rule requiring a business to have at least 50 employees.
Not under the federal employer mandate, provided they are not classified as Applicable Large Employers (ALEs). No employer of any size is specifically required to offer an ICHRA.
However, state requirements may differ. Hawaii, for example, has its own employer health coverage law. Businesses operating there should verify their obligations and should not assume that offering an ICHRA alone satisfies those requirements.
Federal ICHRA rules do not establish a general minimum monthly dollar contribution. Employers must nevertheless comply with the arrangement's plan-design and nondiscrimination requirements.
Generally, yes. Employees can select qualifying individual health insurance from available carriers, subject to the coverage and enrollment rules.
Yes. The employer can establish an allowance that covers part of an eligible premium, leaving the employee responsible for the difference.
Unlike QSEHRA, ICHRA does not have a general statutory annual dollar contribution cap. Employer contributions must still follow ICHRA rules and plan terms.
Generally, yes. An employer may establish an ICHRA with a mid-year effective date, provided the arrangement meets the notice, plan-design, and enrollment requirements. Employees newly gaining access to an ICHRA may qualify for a Special Enrollment Period.
An ICHRA gives small businesses a way to provide employee health benefits through a defined employer contribution.
For companies with fewer than 50 employees, it can offer an alternative to traditional group insurance without requiring the employer to purchase a single group policy for the workforce.
The most important decisions happen before enrollment begins: determining an appropriate contribution budget, reviewing individual insurance options, defining employee eligibility, preparing compliant plan documentation, and establishing ongoing administrative procedures.
For small employers, the goal is not simply to offer health insurance. It is to create a benefits program that is financially manageable, clearly communicated, and practical for employees to use.
Talk to an expert about ICHRA costs, contribution options, and administration requirements for your business.
