The Guide to ICHRA Payment Management

Eliminating the reimbursement burden to make an ICHRA work like a traditional health plan.

Providing health benefits can be complicated and expensive. Particularly for small and mid-sized businesses, as traditional group plans can come with unpredictable costs and rigid structures. In response, employers are increasingly turning to an Individual Coverage Health Reimbursement Arrangement (ICHRA), a model that shifts from offering a one-size-fits-all group plan to providing employees with a defined contribution they can use to purchase their own health insurance.

The Last 5 Years: ICHRA Adoption

Since inception, the popularity of ICHRAs continues to grow and doesn’t appear to be slowing down. From 2023 to 2024 ICHRA adoption increased 29%.

While according to the 2024 Employer Health Benefits Survey, the average single premium increased by 6% and the average family premium increased by 7%. With expected inflation, GLP-1 and rising medical claims, the average cost of employer-sponsored health care coverage in the U.S. is expected to increase 9% in 2025, surpassing $16,000 per employee.

With rising costs becoming a long-term trend, ICHRAs will continue to grow in popularity as a predictable year-over-year cost solution for employers. Originally created under the Trump administration in 2019, ICHRAs were meant to help control costs and address ACA compliance and became available as of January 2020. Employers of any size can offer an ICHRA if they have one employee who isn’t a self employed owner or the spouse of a self-employed owner. Given ICHRA’s flexibility over group health insurance plans, adoption grew nearly 350% by employers of all sizes in the first two years.

By 2032, the Congressional Budget Office estimates two million Americans will be enrolled in an ICHRA. The introduction of the ICHRA marked one of the most significant shifts in employer-sponsored health benefits since the creation of traditional group health plans. Similar to how the 401(k) was introduced as an alternative to pensions, ICHRAs shift the paradigm from “defined benefit” to “defined contribution”. This approach allows employers to establish a more affordable, predictable annual healthcare budget and provides employees with the portability and flexibility they desire, significantly reducing administrative complexities for employer groups.

The ICHRA Advantage for Employers and Employees

ICHRA offers a modernized benefits approach that delivers advantages for both employers and employees. By replacing traditional group health plans with a more flexible and cost-effective ICHRA model, businesses can still offer competitive benefits that align to employee needs and substantially boost satisfaction. Today, the largest growing group in ICHRA adoption is large employers with more than 50 full-time employees, increasing by 84% in the past year alone.

For employers, an ICHRA makes the healthcare benefit budget predictable and doesn’t fluctuate based on premium rates. For employees, an ICHRA gives the freedom to select their own health insurance rather than being locked into a group plan.

For employers, an ICHRA eliminates the burden and stress that comes with plan design and yearly renewals associated with conventional group plans. Employers no longer must select, negotiate, or manage a single health plan for all employees. Instead, they set a fixed budget for reimbursements, allowing for more predictable health benefits spending. This defined contribution model also provides greater flexibility in designing benefits packages, enabling employers to tailor offerings based on employee classes. Over time, this approach can lead to cost savings, particularly as businesses look to avoid the annual premium hikes common with group plans.

EMPLOYER BENEFITS

• Cost Control: Employers can manage healthcare costs with a more affordable, predictable budget.
• Compliance: ICHRA satisfies the employer mandate for businesses of any size under the ACA.
• Potential Savings: Employers often see cost savings as they are no longer subject to the high premiums associated with traditional group health plans.

Employees are increasingly finding that an ICHRA offers a more personalized and empowering alternative to traditional group coverage. Rather than being locked into a one-size-fits-all group plan, they have the freedom to choose coverage that truly fits their unique needs — whether they prioritize lower premiums, their preferred provider, or enhanced benefits. This level of choice not only enhances satisfaction but also gives employees a sense of ownership over their healthcare. Plus, individual coverage is portable, meaning their plan can move with them even if they change jobs.

EMPLOYEE BENEFITS

• Choice: Employees select health plans from the individual marketplace that best meets their personal or family needs.
• Equity: ICHRA classifications make part-time, seasonal, and remote employees eligible for benefits.
• Tax-Free Reimbursements: ICHRA allows tax-free reimbursements for premiums and qualified medical expenses.

The transition to an ICHRA creates a win-win scenario for both employers and employees. With the ICHRA benefit, employers gain cost predictability while employees have the autonomy to prioritize what’s important to them when selecting their healthcare coverage. However, to fully realize these benefits, businesses must effectively manage ICHRA payment administration.

Challenges with ICHRA Reimbursements

Despite the benefits, ICHRAs introduce a level of administrative complexity, particularly when it comes to reimbursement. Instead of managing a group plan, employers contribute a predetermined amount toward a premium, and employees use those funds to secure their own coverage. The funds can apply to medical premiums and qualified medical expenses tax-free. While ICHRAs have been well-received and there is significant emphasis placed on the design and enrollment aspects of them, the accompanying administrative burden can be a roadblock.

This reimbursement model presents three main challenges:

1. Every employee’s premium must be paid each month, requiring a continuous cycle of documentation and processing. Compliance adds another layer of complexity as employees must provide proof of coverage regularly, and employers must verify each reimbursement to maintain the tax-free status of the benefit.
2. Requiring employees to fund premiums upfront creates a poor employee experience. Employees with ICHRAs may struggle to cover the initial payment, leading to late premiums or lapses in coverage.
3. Lack of transparency to ensure premiums are paid timely and accurately each month. Brokers and Employer groups may not have peace of mind without some visibility to ensure premiums are paid each month.

For employers, the administrative burden of processing reimbursements and maintaining documentation can be overwhelming, even with a third-party administrator (TPA). Managing monthly payments, verifying compliance, and handling paperwork consumes significant time and employee resources. Without an efficient payment administration solution, the advantages of an ICHRA are undermined by inefficiencies, errors, and compliance risks. Small businesses may find it challenging to stay on top of these requirements. Employers want the assurance that tools are in place to ensure that premiums are paid timely and accurately each month.

ICHRA Premium Payment Management 101

The success of any ICHRA hinges on its payment management. A structured and seamless approach reduces administrative burdens, ensures compliance, and enhances the employee experience. With efficient payment management, businesses of all sizes can maximize the benefits of ICHRA while avoiding the common pitfalls.

Three Capabilities for Streamlined ICHRA Payment Management

A well-executed ICHRA payment management strategy improves efficiency, minimizes errors, provides transparency, and enhances the overall success of the benefits program. To simplify ICHRA premium funding and payment management, businesses and brokers should focus on three key capabilities: automation, consolidation, and visibility.

1. Automation eliminates manual paperwork and streamlines reimbursement processing, reducing administrative time and improving accuracy.
2. Consolidation supports easy funding and reconciliation for the employer by condensing all premium payments into a single workflow.
3. Visibility into payment statuses and reporting enhances transparency, giving both employers and employees peace of mind.

The goal for benefit consultants, brokers and employers is to have the right solution in place to allow ease of funding and reconciliation for the employer, provide a premium payment solution to pay the full premium for the employee, and ensure transparency into timely and accurate premium payments.

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