ICHRAs vs. Self-Funded Plans: Choosing the Best Health Benefits Solution for Your Employees

As healthcare costs continue to rise faster than general inflation, employers are exploring different ways to provide health benefits to their employees. Individual Coverage Health Reimbursement Arrangements (ICHRAs), a type of Medical Expense Reimbursement Plan (MERP), are a relatively new type of health reimbursement arrangement that allows employers to reimburse their employees for some or all of the premiums they pay for health insurance they have purchased independently. ICHRAs have been available for employers to implement since 2020 and are gaining popularity. An annual report from the HRA Council shows a 29% increase in ICHRA adoption from 2023 to 2024 alone.  

What are ICHRA?

ICHRAs are a type of MERP that allow companies to reimburse employees for the cost of health insurance premiums and, in some cases, other medical expenses. Under an ICHRA, employees purchase their own individual health insurance plans from the Affordable Care Act (ACA) marketplace. The employer then reimburses employees for some or all of their premiums, tax-free.  

ICHRAs can offer flexibility for both employers and employees. Employers can set different reimbursement amounts for various classes of employees, such as full-time, part-time, or seasonal workers. Employees can choose the insurance plan that best fits their needs. ICHRAs are appealing to employers because this approach allows them to have more control over their healthcare costs while providing customizable benefits to employees. 

How Do ICHRA Differ from Self-Funded Benefit Plans?

ICHRAs and self-funded benefit plans are both employer-sponsored health benefit options, but they differ in several key ways: 

1. Funding Structure

With ICHRAs, employers provide employees with a fixed, pre-tax reimbursement amount that they can use to purchase individual health insurance or pay for qualified medical expenses. The employer’s financial commitment is limited to the set reimbursement amount, but there is no opportunity to directly manage or mitigate healthcare costs beyond that. 

In self-funded plans, employers take on financial risk by directly funding and paying for employees’ healthcare claims. Instead of paying premiums to an insurance company, the employer covers the costs of claims as they happen with the help of a third-party administrator (TPA). Self-funded employers can reap the rewards of healthcare savings and healthier employees when they encourage their employees to seek care from high-value providers. Self-funded employers can also use stop-loss insurance to protect against unusually high claims. This helps manage their financial risk while still benefiting from the flexibility of self-funding. 

2. Coverage

With ICHRAs, employees use funds from their employer to buy individual health insurance plans, typically through the ACA marketplace. This allows employees to choose the coverage that suits their needs and the needs of their families. However, it also places the responsibility for finding and selecting a health insurance plan on the employee. Those who choose not to select health insurance, or default to the cheapest plan, can face higher costs and worse health outcomes. Integration with other benefits is also more limited, and the individual nature of the plans can create a more fragmented experience for employees. 

With self-funded health plans, employers have full control over the design of the health plan, including what benefits are covered, customized provider networks, and cost-sharing structures. This allows for tailored coverage that meets the specific needs of the workforce. Self-funded plans can be easily integrated with other employer-provided benefits, such as wellness programs, health savings accounts (HSAs), or employee assistance programs (EAPs), providing a more holistic approach to employee health and well-being. 

3. Regulatory Requirements

ICHRAs must comply with specific IRS and ACA rules, including offering the arrangement on the same terms to employees within the same class and providing a minimum level of coverage. Self-funded plans must comply with The Employee Retirement Income Security Act of 1974 (ERISA), the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), and other federal and state regulations. However, self-funding offers more flexibility in plan design compared to fully insured group plans. 

4. Data and Insights

Self-funding gives employers access to detailed claims data, allowing them to analyze healthcare usage, identify trends, and implement wellness programs or cost-containment strategies based on this information. 

Employers who self-fund with The Alliance have deep access to their claims data. We help our employer-members understand their claims data through our Smarter Health^SM analysis, a customized report that examines claims data to identify trends and potential savings. By utilizing this data, employers can create health benefit plans that are closely aligned with their employees’ needs. Employers can also guide their employees toward high-value care. 

With ICHRAs, employers do not receive access to detailed claims data. This limits their ability to understand and manage healthcare trends within their workforce. 

Self-Funding vs. ICHRA: Which Offers Better Employee Benefits?

Self-funded employers can offer comprehensive, consistent coverage that may be more attractive to employees, leading to higher satisfaction and retention. ICHRAs offer flexibility, but employees may prefer the simplicity and security of traditional group health plans.

ICHRAs can be a viable option for employers looking to provide optional health coverage for part-time employees. However, ICHRAs are not as popular for full-time employees as it places the burden on employees to navigate the complexities of healthcare on their own. Navigating healthcare is already confusing. Putting more work on employees can lead to insufficient plan choices and skipped care. This can potentially result in missed diagnoses and higher treatment costs. Some employers are choosing to offer ICHRAs for part-time employees while maintaining self-funded plans for full-time staff. 

While ICHRAs provide a flexible, low-risk option, self-funded plans offer greater control and potential cost savings. Self-funded plans provide valuable data insights, and a more integrated approach to employee benefits. This makes self-funding the preferred choice for many employers seeking to offer robust and customized health coverage. 

Reach out to us to learn how The Alliance can help you offer better benefits at a lower cost.