A Small Employer ICHRA Example With Real Numbers

A 14-person company may want to contribute meaningfully toward health coverage without taking on the cost volatility of a traditional group plan. This small employer ICHRA example shows how that can work in practice: the employer sets a defined monthly allowance, employees choose individual health coverage that fits their needs, and eligible expenses are reimbursed tax-free when the arrangement is administered correctly.

An Individual Coverage Health Reimbursement Arrangement, or ICHRA, is not automatically the right answer for every employer. It can be particularly useful when a workforce has varied coverage needs, when group-plan participation is difficult to maintain, or when leadership wants a predictable benefits budget. The details matter, especially employee eligibility, plan design, affordability, and compliance administration.

What an ICHRA changes for a small employer

With a traditional group health plan, the employer selects one or more plans, negotiates its contribution, and carries the risk of annual premium changes. Employees enroll in the available options, subject to the plan’s eligibility rules and enrollment periods.

With an ICHRA, the employer does not sponsor a group medical policy. Instead, it offers a set reimbursement allowance. Employees must have qualifying individual health coverage, or Medicare where applicable, before receiving tax-free reimbursements. They can then submit substantiated expenses up to their available allowance.

That distinction gives employees more choice, but it also shifts certain decisions to them. One employee may select a lower-premium marketplace plan. Another may prefer a broader provider network purchased directly from a carrier. The employer’s contribution remains the amount it established, rather than varying with each employee’s selected premium.

Small employer ICHRA example: a 14-person firm

Consider a professional services firm with 14 full-time employees. The company has historically offered a small-group medical plan, but renewal projections would raise the employer’s annual health benefit spend to roughly $156,000. Several employees have asked for plan options that better match their doctors, prescriptions, and family circumstances.

The owners decide to evaluate an ICHRA beginning January 1. After reviewing their budget and local individual-market options, they establish these monthly allowances:

• Employees age 40 and under: $450 per month
• Employees age 41 through 55: $600 per month
• Employees age 56 and over: $750 per month
• Employees with a spouse or dependent children may receive a higher allowance, consistent with the plan design

The firm has eight employees in the first age band, four in the second, and two in the third. For simplicity, assume all 14 employees are single and eligible for the ICHRA. Its maximum annual commitment is calculated as follows:

Eight employees x $450 x 12 months = $43,200. Four employees x $600 x 12 months = $28,800. Two employees x $750 x 12 months = $18,000. The maximum annual reimbursement exposure is $90,000.

That is a meaningful reduction from the projected $156,000 group-plan cost. It is also a maximum, not necessarily the amount ultimately reimbursed. Employees can only receive reimbursement for eligible, substantiated expenses up to their allowances. Unused amounts are handled according to the employer’s written plan terms; they may be forfeited or made available under rules the employer adopts.

What employees experience

Take three employees from the example. Maya, age 32, finds an individual plan costing $385 per month. Her employer allowance is $450. Assuming her coverage and expense are eligible and properly substantiated, the full $385 can be reimbursed tax-free. She has $65 of unused monthly allowance, which may or may not be available for other eligible medical expenses depending on the plan design.

David, age 48, selects a plan with a $620 monthly premium because it includes his preferred specialists. His monthly allowance is $600, leaving him to pay $20 per month after reimbursement. He values the provider access enough to make that trade-off.

Linda, age 59, has a plan that costs $810 per month. Her $750 allowance covers most of the premium, and she pays the remaining $60. Her higher allowance reflects the permitted age-based variation in the employer’s ICHRA design.

The point is not that every employee pays the same amount. The point is that the employer has a known contribution strategy while employees have more ability to match coverage to their circumstances.

Why the allowance cannot be set casually

An ICHRA may vary by employee class, such as full-time versus part-time employees, salaried versus hourly employees, employees in different geographic rating areas, or certain other permitted classifications. It may also vary by age and family size within federal limits. The design must follow applicable rules rather than simply favoring certain individuals.

For a small employer, the cleanest design is often a single full-time employee class with allowances that vary by age and family status. That is not the only option, but it is easier to explain and administer. If an employer wants to offer a traditional group plan to one class and an ICHRA to another, additional class and minimum-size rules can apply.

The employer also needs to decide what the ICHRA will reimburse. Many designs reimburse individual health insurance premiums and eligible out-of-pocket medical expenses. Others limit reimbursement to premiums. A premium-only arrangement is often easier for employees to understand, while a broader eligible-expense design can provide more flexibility.

The premium tax credit question

This is the part of the conversation that deserves individual attention. Employees buying coverage through the Health Insurance Marketplace may qualify for premium tax credits based on household income and other factors. An ICHRA offer can affect that eligibility.

Generally, if the ICHRA is considered affordable for an employee, that employee cannot receive a premium tax credit for marketplace coverage. If the ICHRA is considered unaffordable, the employee may be able to opt out of the ICHRA and seek a premium tax credit instead. The employee’s household facts and the applicable affordability calculation matter.

In the 14-person example, Maya might find that the employer’s allowance makes her coverage affordable, eliminating access to a marketplace subsidy she would otherwise receive. Another employee with a different income or family situation may reach a different result. Employers should provide the required ICHRA notice on time, and employees should be encouraged to review their marketplace options carefully before making an enrollment decision.

Administration is part of the benefit, not an afterthought

An ICHRA is a formal employer health plan. It needs written plan documents, employee notices, a substantiation process, privacy-conscious administration, and clear procedures for enrollment changes and reimbursements. Employers also need to consider reporting obligations and other compliance requirements that may apply to their organization.

The firm in this example should not collect employees’ medical documentation through a general email inbox or have an office manager make coverage determinations without a defined process. A properly structured administration approach verifies that an employee has qualifying coverage and that reimbursement requests are eligible, while protecting personal health information.

Timing matters, too. Employees generally need notice before the plan year begins, with special timing rules for newly eligible employees. Since individual coverage enrollment is connected to the ICHRA offer, a well-planned rollout gives employees enough time to understand their choices and enroll in coverage.

When this approach is likely to fit

An ICHRA can be worth serious consideration when a small employer wants budget certainty, has employees spread across different plan preferences or locations, or has struggled to find a group plan that delivers good value. It can also help employers that want to offer benefits for the first time without adopting a conventional group medical plan.

It may be less attractive when employees strongly prefer a single employer-sponsored plan, when a group plan is unusually competitive in the local market, or when a substantial portion of the workforce depends on marketplace subsidies. A comparison should account for more than the employer’s projected cost. Employee disruption, provider access, prescription coverage, administrative capacity, and recruitment goals all deserve a place in the decision.

For employers in Pennsylvania, New Jersey, Delaware, and other states, the individual market can look very different by county and carrier. A sound ICHRA recommendation starts with the workforce, not a generic allowance figure. Franklin Benefits Group can help employers compare the practical cost and employee impact of an ICHRA against traditional group coverage, then build a benefits strategy that supports both the budget and the people relying on it.

The most useful next step is to model real employee scenarios before announcing a new plan. When the numbers reflect actual ages, family situations, local coverage options, and subsidy considerations, leadership can make the decision with far more confidence.