Individual Coverage Health Reimbursement Arrangements (ICHRAs) have fundamentally changed how small businesses approach employee health benefits. As an advisor working with micro and small employers, understanding ICHRA mechanics and positioning this strategy appropriately is essential. This guide provides the talking points and practical insights you need to have confident conversations with your small business clients.

What Is an ICHRA and Why Does It Matter for Small Employers?

An ICHRA is an employer-funded health reimbursement arrangement that allows employees to purchase their own individual health insurance policies while receiving tax-free reimbursements from their employer. The IRS finalized ICHRA regulations in 2020, creating a legitimate third path for small employers between fully-insured group plans and self-funding.

For advisors, the significance lies in this simple truth: ICHRAs solve a real problem for small employers—the rising cost of group health insurance and the administrative burden that comes with it.

When speaking with small business owners about ICHRAs, lead with the problems they’re already experiencing: - Escalating renewal rates (often 8-12% annually) - Limited plan design flexibility with traditional group coverage - Compliance complexity and fiduciary responsibility - Difficulty attracting talent when health benefits feel inadequate

An ICHRA addresses these pain points while maintaining the tax advantages employees expect.

Qualifying Criteria: When ICHRA Makes Sense

Not every small employer is a good ICHRA candidate. Before recommending this strategy, ensure your client meets the foundational requirements.

Employer Eligibility

Employee Count: There’s no minimum or maximum employee count for ICHRA eligibility. However, the strategy typically works best for employers with fewer than 50 full-time equivalent (FTE) employees. Beyond that threshold, traditional group plans often become more cost-effective and administratively simpler.

Coverage Requirements: This is critical—employers cannot offer ICHRA to employees while maintaining a group health plan. This is an either/or decision. The employer must completely exit group coverage, or segment employees by job classification, work location, or employment status (full-time vs. part-time).

State Compliance: Some states impose restrictions on ICHRA usage. Always verify your state’s position before implementation. States like Connecticut and New York have historically been more restrictive, while others remain neutral or supportive.

Employee Considerations

Before presenting ICHRA to a client, assess the employee population:

Geographic Distribution: Employees in every state must have access to individual marketplace plans. Out-of-state remote workers are fine, but confirm marketplace access.
Healthcare Needs: Employees with significant ongoing medical needs may find limited networks in individual plans, particularly in rural areas.
Age and Health Status: Younger, healthier employee populations adapt more easily to individual plans. Older employees or those with chronic conditions may face higher premiums.
Plan Participation: Will all eligible employees participate? Low participation rates reduce the strategy’s effectiveness.

Plan Design Considerations

Once you’ve determined ICHRA eligibility, the design phase matters enormously. Here’s where you differentiate yourself as an advisor.

Setting Appropriate Reimbursement Amounts

The monthly reimbursement allowance is your primary design lever. This is the amount the employer commits to reimburse employees for qualified health insurance premiums and medical expenses.

Strategy Approach: - Budget-First Planning: Start with what the employer can afford monthly, then communicate that amount clearly to employees. - Competitive Analysis: Research what similar employers in the area contribute. For micro-employers, $400–$800/month per employee is common, but this varies widely. - Employee Contribution: Many small employers ask employees to contribute toward their individual plan premiums, with the ICHRA covering a percentage (60–80% is typical).

Class Differentiation

ICHRA regulations allow—and sometimes require—different reimbursement amounts for different employee classes. This is powerful for small employers with diverse workforces.

Legitimate class distinctions include: - Full-time vs. part-time employees - Salaried vs. hourly staff - Job classifications or departments - Years of service (within limits)

This flexibility allows small employers to allocate benefits strategically. For example, a micro-employer might offer higher reimbursement to core full-time employees while offering a modest allowance to part-time staff.

Funding Architecture

Help clients decide between two funding models:

Employee-First Approach: Employees select and purchase individual policies first, then submit reimbursement requests to the employer. This is simpler administratively but requires employees to front costs initially.

Employer-Coordinated Approach: The employer provides guidance on recommended plans, employee cost estimates, and reimbursement calculations before employees enroll. This requires more upfront work but improves employee understanding and reduces enrollment friction.

Communication Strategy: The Advisor’s Role

How you present ICHRA to the employer—and how they present it to employees—determines success or failure. This is where many implementations stumble.

Selling ICHRA to the Small Business Owner

Lead with financial transparency:

Cost Comparison: Show the employer exactly what they’re spending today on group coverage, what they’ll spend on ICHRA, and the projected savings over 3-5 years.
Simplicity: Emphasize reduced compliance burden, no plan renewal surprises, and simplified administration.
Flexibility: Highlight the ability to adjust allowances annually and differentiate by employee class.
Control: Frame ICHRA as giving the employer direct budget control, rather than being subject to insurance company rate increases.

Provide a realistic financial model showing best-case, realistic, and worst-case scenarios. Small business owners appreciate conservatism.

Communicating to Employees

This is non-negotiable: poor employee communication kills ICHRA implementations. Employees worry about choice, cost, and coverage continuity.

Essential Communication Elements:

Clear Timeline: When does the transition happen? Give employees 60–90 days notice.
How It Works: Explain the reimbursement process in plain language. Consider a one-page flowchart.
Individual Plan Options: Provide resources or guidance on healthcare.gov or state marketplace navigation. Many advisors offer group enrollment sessions to walk employees through plan selection.
Reimbursement Details: Clarify what’s covered (premiums, certain out-of-pocket costs) and what’s not.
Total Compensation: Show employees how their ICHRA allowance represents real compensation, comparing it to what they were paying under group coverage.
Continuity Assurance: Address the biggest concern: “What if my doctor isn’t in my new plan?” Provide strategies for plan selection that prioritize provider continuity.

Host a Q&A session (virtual is fine) and provide written materials they can review at home. Anticipate objections and address them directly.

Practical Implementation Checklist

Verify state compliance and restrictions
Analyze employee population and healthcare needs
Compare costs: current group vs. proposed ICHRA
Design class structure and reimbursement amounts
Draft employee communication materials
Select ICHRA administration platform
Establish reimbursement request and approval process
Create employee handbook language
Schedule enrollment assistance or education sessions
Document IRS compliance requirements

Final Thoughts

ICHRA isn’t a silver bullet, but for the right micro or small employer, it’s a powerful strategy that reduces costs, increases flexibility, and improves employee autonomy. Your role as an advisor is to honestly assess fit, design thoughtfully, and communicate clearly.

The best ICHRA implementations aren’t those that save the most money—they’re the ones where employees understand the value, feel supported, and experience continuity of care.

Nexus Benefit Solutions is an independent employee benefits advisory firm based in West Michigan. Questions? Reach out at jason@nexusbenefitsolutions.com or call 616-425-9740.