ICHRA: 5 reasons small business should consider it for healthcare

Healthcare costs are hitting small and mid-sized employers from multiple directions at once. Individual market premiums have climbed more than 20% nationally, according to Thatch’s 2026 Health Benefits Outlook. And Mercer reports total health benefit cost per employee is projected to rise 6.7% in 2026, the highest increase in roughly 15 years.

Just as each renewal season is different, employees are expecting more flexibility in how coverage is delivered. For employers that need both predictable costs and a competitive benefits package, Individual Coverage Health Reimbursement Arrangements, or ICHRAs, are quickly becoming part of the answer.

What’s an ICHRA?

An ICHRA is a health reimbursement arrangement that allows employers to provide employees with tax-free funds to purchase their own individual health insurance. Instead of selecting a single group plan, you set a monthly allowance. Employees then choose the coverage that works best for them.

The plans employees select must meet Affordable Care Act requirements. Employees can shop through public exchanges or private marketplaces and select from the options available in their area.

The cost differences can be significant. In 2026, the average projected monthly premium for self-only employer-sponsored coverage is $816. Employers are expected to contribute an average of $685 toward that amount. By comparison, the lowest-cost self-only plans available through an ICHRA range from $456 to $615 per month. The average employer ICHRA contribution for self-only coverage is projected to be $610 in 2026, which can cover a large share of those lower-cost options.

ICHRAs are available to employers of any size, and there is no cap on how much employers can contribute. At the federal level, policymakers have proposed measures to expand ICHRAs and introduce tax credits for small businesses, though these initiatives have not yet been enacted.

Five key reasons to consider an ICHRA

1. Predictable cost control in an unpredictable market

One of the biggest reasons to consider an ICHRA is cost predictability. With a traditional group plan, your costs depend on premium increases that you do not control. With an ICHRA, you decide how much you want to contribute.

This defined contribution approach allows you to set a clear budget for benefits. Even if premiums increase in the individual market, your contribution stays the same unless you choose to adjust it. That level of control can be valuable when healthcare costs fluctuate.

2. Giving employees more choice

Every workforce is different. Some employees want the lowest premium possible. Others prioritize access to certain doctors or stronger prescription coverage. It may be difficult for a single group plan to meet everyone’s needs.

ICHRAs allow employees to choose plans that match their personal situation. Someone managing a chronic condition may select a more comprehensive plan. Another employee may choose a lower-cost option with a higher deductible. The flexibility often leads to better alignment between coverage and individual needs.

This level of personalization is now an expectation. A 2025 ADP TotalSource® Employee Benefits Survey found that 74% of employees surveyed want personalized benefits recommendations.

3. Staying competitive in hiring

Benefits still play a major role in attracting and retaining employees. Smaller organizations sometimes struggle to compete with larger employers that offer multiple plan options. ICHRAs help address that challenge by expanding choice.

Instead of offering one or two group plans, you give employees access to the full range of ACA-compliant options available in their market. That can include plans with different networks, cost structures or added services such as telehealth.

Policy changes are also influencing employee behavior. The expiration of enhanced premium federal tax credits is affecting part-time workers and employees at smaller organizations. Many of these individuals are looking to employers for coverage. Offering a flexible option, such as an ICHRA, can make your organization more attractive.

4. Greater value through tax-advantaged spending

ICHRAs also provide tax benefits. Employer contributions are tax-deductible, and employees receive reimbursements tax-free when used for eligible healthcare expenses. This structure increases the value of each benefits dollar.

Tax-advantaged healthcare spending is becoming more important overall. Employees are using these funds for preventive care, chronic condition management and specialized treatments. ICHRAs support that trend by allowing employees to direct funds where they see the most value.

5. Better alignment between coverage and needs

Workforces today include a mix of ages, family situations and healthcare needs. A traditional group plan often requires compromise. Some employees end up with coverage that is more than they need, while others find it does not fully meet their requirements.

ICHRAs allow each employee to choose coverage that fits their situation. That often improves satisfaction and helps ensure benefits spending is used more efficiently. Employees feel more ownership of their healthcare decisions, and employers gain a structure that adapts to workforce diversity.

A strategic option for small and mid-sized employers

Healthcare benefits are evolving, and many employers are moving toward models that offer more flexibility and predictable costs. ICHRAs fit well within that shift. They allow you to control spending while giving employees meaningful choice.

For small and mid-sized employers, that combination can be especially valuable. You maintain budget discipline, improve competitiveness, and offer benefits that reflect how employees actually use healthcare today.

ICHRAs are not simply another benefits option. They represent a different way of thinking about coverage, one that puts flexibility and financial control at the center. For many organizations, that makes them worth serious consideration. It’s always best to consult a licensed insurance agent to understand what options could best fit the unique needs for you, your business and your employees.