ICHRA vs Group Health Plan: 2027 Cost Guide | CafeHealth
What is Individual Coverage HRA (ICHRA)?
An ICHRA (Individual Coverage HRA) is a way for you to give employees tax-free money to buy their own health insurance on the individual market, instead of putting everyone on one group health plan you pick. The biggest difference is control: with a traditional group plan, you choose the carrier, the network, and the plan design for everyone. With an ICHRA, you set a budget, employees shop for coverage that fits their own life, and you reimburse them up to that amount, tax-free, through payroll. No group plan to renew every year, no single network everyone has to live with.
This isn't the same thing as a QSEHRA (Qualified Small Employer HRA), which caps out at a much smaller dollar amount and only works for businesses under 50 employees. An ICHRA has no employer size limit and no annual contribution cap set by the IRS, which is a big part of why larger employers are starting to look at it seriously for the 2027 plan year.
What Is an ICHRA and How Is It Different From a Group Health Plan?
A traditional group health plan is one plan (or a small menu of plans) that your company negotiates with an insurance carrier. Everyone enrolled gets the same network, the same deductible structure, and you absorb whatever the renewal increase looks like each year, which has averaged mid-to-high single digits for employer plans according to the Kaiser Family Foundation's Employer Health Benefits Survey. An ICHRA flips that model. You decide on a monthly reimbursement amount, employees go to the ACA marketplace or a broker and pick their own plan, and you reimburse their premium (and sometimes other medical expenses) up to your set allowance.
Three Models, Three Very Different Experiences
●Traditional group plan: Employer picks the plan, employees have limited or no choice, cost is largely driven by claims experience and renewal trends.
●QSEHRA: Small employer reimbursement arrangement, capped contribution limits set annually by the IRS, only available to employers with fewer than 50 full-time employees who don't offer a group plan.
●ICHRA: No employer size limit, no IRS dollar cap on contributions, can be offered alongside a group plan to different employee classes, and reimbursements are tax-free to the employee when used for individual market premiums.
The administrative lift is different too. With a group plan, your broker and carrier handle a lot of the back-end work. With an ICHRA, you need someone verifying that employees actually have qualifying individual coverage before you reimburse them, tracking substantiation monthly, and running compliant payroll reimbursements. That's exactly the kind of thing a third party administrator like CafeHealth handles day to day, which is worth knowing before you assume this is a do-it-yourself project.
Why Are Employers Dropping Group Coverage for ICHRA Right Now?
Three reasons keep coming up in broker conversations. First, cost predictability. With a group plan, you find out your renewal number once a year and it's whatever the carrier says it is. With an ICHRA, you set the contribution amount yourself and it doesn't move unless you decide to change it. You're not at the mercy of one group's claims history anymore.
Second, class-based contribution design. You can offer different ICHRA amounts to different employee classes, like full-time versus part-time, or salaried versus hourly, which lets you be more precise about where your benefits dollars go instead of spreading one plan evenly across everyone regardless of role or tenure.
Third, employee choice. Younger employees, employees with a spouse already covered elsewhere, and employees in different states all have different needs. A one-size group plan rarely fits all of them well. An ICHRA lets each person pick a plan that matches their own doctor network, prescription needs, or budget, which tends to land better with a geographically spread-out or hybrid workforce.
What Are the ACA Affordability Rules You Need to Hit for 2027?
This is the part employers skip past and then get surprised by. If you have applicable large employer (ALE) status under the ACA's employer mandate, your ICHRA has to be considered affordable for at least one employee class, or you risk a penalty under Internal Revenue Code Section 4980H.
Here's how the math works. The IRS publishes an affordability percentage every year by Revenue Procedure. For 2025, that figure was 9.02% of household income, per IRS Revenue Procedure 2024-35. For plan years going forward, including 2027, you'll need to check the current year's Revenue Procedure on irs.gov, since this percentage moves annually based on premium growth trends relative to income growth.
The ICHRA Affordability Safe Harbor
Since employers don't know an employee's actual household income, the IRS created a specific calculation for ICHRA affordability:
1.Take the lowest-cost Silver plan available to the employee on the ACA marketplace for self-only coverage.
2.Subtract your monthly ICHRA contribution from that premium.
3.Compare the result to the IRS affordability percentage applied to the employee's W-2 wages, rate of pay, or the federal poverty line, whichever safe harbor method you choose.
If the remaining cost to the employee falls under that threshold, your offer is affordable for that class. Get this number wrong and you could owe a shared responsibility penalty, so this is a calculation worth running through a TPA or benefits counsel rather than estimating it yourself.
How Do ICHRA Employee Classes Work, and What's This Minimum Class Size Thing?
The final ICHRA rule, jointly issued by the IRS, DOL, and HHS in 2019 (26 CFR 54.9802-4), lets you split your workforce into employee classes and offer different contribution amounts to each one. The recognized classes include:
●Full-time employees
●Part-time employees
●Seasonal employees
●Employees in a waiting period
●Salaried employees
●Non-salaried (hourly) employees
●Employees covered by a collective bargaining agreement
●Temporary employees of staffing firms
●Employees working in different geographic locations (rating areas)
●Foreign employees working abroad
●A combination of any of the above
Here's the catch: if you're using certain classes to vary contributions, you have to meet a minimum class size requirement so the class can't be used to steer specific individuals toward or away from group coverage. Under the 2019 final rule, the minimum is 10 employees if your total workforce is under 100, 10% of your total employee count if you have 100 to 200 employees, and 20 employees if you have more than 200. This rule exists specifically to stop employers from carving out one sick employee or one older employee into their own tiny class. A good TPA will run this check for you before you finalize class design, since getting it wrong can unwind your whole compliance position.
What Notices and Paperwork Do You Need Before Plan Year Starts?
You can't just flip the switch on January 1st. Under IRS Notice 2018-88 and the related DOL model notice guidance, employers have to give employees a written notice at least 90 days before the ICHRA plan year begins, explaining the ICHRA offer, the contribution amount, how it affects marketplace subsidy eligibility, and their right to opt out.
Beyond the notice, you'll need a few other pieces in place:
●A plan document describing eligibility, classes, contribution amounts, and substantiation rules.
●A summary plan description (SPD) for ERISA compliance, since ICHRAs are generally subject to ERISA like other group health plans.
●A process to verify individual market enrollment for each participant before reimbursement starts, and ongoing substantiation monthly or annually depending on your plan design.
●Updated payroll coding so reimbursements are processed correctly and don't accidentally show up as taxable income on a W-2.
Missing the 90-day notice window is one of the most common ICHRA mistakes, mostly because employers treat it like a regular open enrollment timeline instead of its own separate compliance deadline. Build this into your renewal calendar the same way you'd mark a group plan renewal date.
How Does HSA Eligibility Work With an ICHRA?
If your employees are enrolling in HSA-qualified high-deductible plans through the marketplace, you can structure your ICHRA to work alongside an HSA, as long as the reimbursement design doesn't disqualify the HDHP status (for example, the ICHRA generally can't reimburse first-dollar expenses below the deductible if the employee wants to keep contributing to an HSA).
For 2026, the IRS set HSA contribution limits at $4,400 for self-only coverage and $8,750 for family coverage, per IRS Revenue Procedure 2025-19, with an additional $1,000 catch-up contribution allowed for people 55 and older. These limits move most years, so check the current Revenue Procedure before you finalize plan materials for a new plan year. If you want employees to have the option to pair their ICHRA allowance with an HSA, that needs to be built into the plan design from day one, not added on later.
How Do You Actually Switch From Group Coverage to ICHRA?
The timeline matters more than most employers expect. Here's a realistic sequence if you're targeting a 2027 plan year start:
1.6-9 months out: Decide on class structure, contribution amounts, and run affordability modeling against current ACA marketplace rates in your service areas.
2.4-6 months out: Draft plan documents, SPD, and finalize your TPA relationship for ongoing administration and substantiation.
3.90 days before plan year start: Deliver the required written notice to all eligible employees.
4.60-30 days out: Help employees shop the marketplace, understand their allowance, and enroll in individual coverage.
5.Plan year start: Begin monthly reimbursements and ongoing substantiation tracking.
This is where a lot of employers underestimate the lift. Running substantiation checks every month, keeping up with changing employee classes, handling mid-year hires and terminations, and making sure reimbursements stay tax-free all take ongoing attention. That's the exact gap a dedicated ICHRA administrator is built to fill, handling enrollment support, compliance documentation, and payroll coordination so it's not sitting on your HR team's plate every month.
ICHRA vs Group Health Plan: Quick Comparison
●Cost control: ICHRA gives you a fixed, employer-set budget. Group plans expose you to annual renewal increases tied to claims experience.
●Choice: ICHRA lets employees pick their own plan and network. Group plans offer one or a few options for everyone.
●Administrative complexity: Group plans lean on carrier administration. ICHRA requires monthly substantiation, class management, and payroll coordination, usually through a TPA.
●Size flexibility: ICHRA works for employers of any size with no IRS contribution cap. QSEHRA caps out at under 50 employees with a lower dollar limit.
●Compliance obligations: Both are subject to ERISA. ICHRA adds the 90-day notice rule and the ACA affordability safe harbor calculation that group plans don't need in the same way.
Ready to see how the numbers actually play out for your company? Book a free consultation with Shannon and get a straight answer on whether an ICHRA makes sense for your 2027 plan year, no sales pitch required.
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Quick Questions People Ask About ICHRA vs Group Health Plans
What is an ICHRA and how does it work?
An ICHRA is a health reimbursement arrangement where your company sets a monthly dollar amount, employees use that money to buy their own individual health insurance plan, and you reimburse them tax-free through payroll once they show proof of coverage. There's no group plan to manage, no single carrier, and no IRS cap on how much you can contribute.
Can my company switch from a group health plan to an ICHRA mid-year?
Technically yes, but it's rarely a clean switch mid-plan-year because of the 90-day advance notice requirement and because employees generally need a qualifying event to enroll in individual marketplace coverage outside the normal open enrollment window. Most employers time the switch to align with their group plan's renewal date or the start of a new calendar year to avoid gaps in coverage.
How is ICHRA affordability calculated for the 2027 plan year?
You take the lowest-cost Silver plan available to the employee on the marketplace, subtract your monthly ICHRA contribution, and compare what's left to the IRS affordability percentage for that year applied to the employee's wages or another approved safe harbor. The percentage itself changes annually by IRS Revenue Procedure, so you'll want to confirm the current figure on irs.gov before finalizing contribution amounts.
What are the ICHRA employee classes and can I offer different amounts to each?
Yes, that's actually one of the main selling points. The IRS recognizes classes like full-time, part-time, seasonal, salaried, hourly, union, and geographic location, among others, and you can set a different contribution for each one. Just know that certain classes require a minimum number of employees in them, based on the 2019 final ICHRA rule, so the design can't be used to single out one or two specific people.
How much advance notice do I have to give employees before switching to an ICHRA?
You're required to give employees a written notice at least 90 days before the plan year starts, per IRS Notice 2018-88. That notice needs to spell out the contribution amount, which class they're in, and how accepting the ICHRA affects their eligibility for marketplace premium tax credits.
Is an ICHRA cheaper than a group health plan overall?
It depends on your current group plan's claims experience and renewal trend, but a lot of employers move to ICHRA specifically because it caps their exposure at a known dollar amount per employee class instead of an unpredictable annual renewal. Whether it's cheaper in your specific case really comes down to running the numbers side by side, which is worth doing before you commit either way.
