ICHRA vs. Level-Funded Health Plans: 2026 Comparison

TL;DR

ICHRA and level-funded plans are both alternatives to traditional group health insurance, but they work in fundamentally different ways. Level-funded plans are a hybrid where employers bear partial claims risk in exchange for potential refunds during healthy years. ICHRA is a defined contribution model where employers set a fixed, tax-free allowance and employees buy their own individual coverage. The right choice depends on your workforce distribution, risk tolerance, company size, and how much control you want over plan design versus cost predictability.

Why Employers Are Comparing These Two Models

Group health insurance premiums keep climbing. PwC projects group health costs will rise roughly 8.5% in 2026, and the median proposed increase among small group insurers across all 50 states is 11%, according to KFF data. The average cost of employer-sponsored health insurance already hit $17,496 per employee in 2025, a 6% increase that outpaced both inflation and wage growth.

These numbers push employers toward alternatives to group health insurance. Two options keep surfacing in conversations among HR teams, brokers, and small business owners: level-funded health plans and Individual Coverage Health Reimbursement Arrangements (ICHRAs).

The core question separating these two models is straightforward: do you want to stay in the claims risk business, or get out of it entirely?

What Is a Level-Funded Health Plan?

A level-funded health plan is a hybrid between fully insured and self-funded coverage. The employer pays a fixed monthly amount that breaks into three components: a claims fund (money set aside to pay employee medical claims), administrative fees for the third-party administrator or carrier, and stop-loss insurance that caps the employer’s liability if claims exceed a certain threshold.

If actual claims come in below the funded amount, the employer may receive a refund. That refund possibility is the big selling point. In practice, though, refunds carry real limitations. Some carriers only issue refunds if the employer agrees to renew, and others require splitting the surplus as a service fee.

Level-funded plans let employers design the benefit package (deductibles, copays, network) much like a traditional group plan. Employees experience it the same way they would a fully insured plan, with a single carrier and familiar ID cards.

These plans are available for groups as small as 2 to 10 employees, depending on the state and carrier. Adoption has grown fast. According to a KFF annual survey, 42% of employers with fewer than 200 workers reported offering a level-funded plan in 2021, up from just 13% in 2020.

On the compliance side, level-funded plans are considered ERISA plans under federal law and carry obligations under HIPAA, the ACA, and the Consolidated Appropriations Act (including annual RxDC prescription drug data reporting to CMS).

What Is an ICHRA?

An ICHRA (Individual Coverage Health Reimbursement Arrangement) is a defined contribution approach to health benefits. Instead of selecting and managing a group plan, the employer sets a tax-free monthly allowance. Employees then purchase their own individual health insurance, either on or off the ACA marketplace, and get reimbursed up to the allowance amount.

There are no participation minimums and no contribution caps. An employer with a single W-2 employee can offer an ICHRA. There’s no requirement that a certain percentage of employees enroll. This stands in sharp contrast to group insurance, which typically requires 70% participation and employer funding of at least 50% of the employee premium.

Employer contributions are tax-deductible and exempt from payroll taxes. Employee reimbursements are tax-free. If structured to meet affordability thresholds, an ICHRA satisfies the ACA employer mandate for applicable large employers.

ICHRA adoption has exploded. The HRA Council’s 2025 report found a 34% year-over-year increase in adoption among employers with 50+ employees, and a 49% increase among those with 100 to 199 employees. Since 2020, ICHRA adoption is up 1,000%. HealthSherpa estimates 400,000 to 800,000 U.S. residents used an ICHRA to pay for health insurance in 2025, 2.8 times more than the prior year. The retention rate is striking: about 92% of employers who offered an HRA last year continued offering one in 2025.

For employers considering this model, our complete guide to adopting ICHRA covers the setup process in detail.

ICHRA vs. Level-Funded: Key Differences

Here is a side-by-side comparison of how these two models stack up across the dimensions that matter most to employers.

The structural difference between ICHRA and level-funded health plans comes down to who carries the risk. With level-funded, the employer is still in the insurance business. With ICHRA, the employer is in the reimbursement business.

Pros and Cons of Level-Funded Plans

Advantages

Level-funded plans offer a familiar experience for employees. There’s one carrier, one plan, one set of ID cards. For workforces that are used to group coverage, the transition from fully insured to level-funded is relatively seamless.

Employers gain claims data transparency, which helps with future planning and wellness program design. The ERISA preemption of state insurance mandates can simplify things in certain regulatory environments. And in years when employees are healthy and claims run low, there’s genuine potential for cost savings of 10 to 20% compared to fully insured premiums.

Disadvantages

The refund story gets overblown. Refunds depend on claims estimates being accurate, carriers may require renewal as a condition, and some split the surplus. It’s a nice-to-have, not a reliable planning assumption.

More importantly, a bad claims year means higher renewals. The employer retains claims risk, even with stop-loss protection. Participation and contribution minimums can be hard for smaller employers to meet. Compliance obligations are substantial, including RxDC reporting, ERISA filings, HIPAA requirements, and ACA nondiscrimination rules.

State-level restrictions further limit availability. New York prohibits stop-loss insurance for employers with 50 or fewer employees. California requires minimum specific attachment points of $40,000 for companies under 50 employees. These rules can make level-funded plans either unavailable or economically impractical in some of the country’s largest markets.

Pros and Cons of ICHRA

Advantages

ICHRA eliminates claims risk entirely. The employer’s total cost equals the sum of allowances, nothing more. There are no participation minimums, which is a major advantage for small businesses offering benefits for the first time. In fact, 83% of employers offering an ICHRA or QSEHRA in 2025 had not previously offered any coverage.

Employees get real choice. They can pick plans that fit their family’s specific needs, keep their preferred doctors (within the plan they select), and retain their individual policy even if they leave the company. The ICHRA offer also triggers a special enrollment period, so employees don’t have to wait for open enrollment.

For companies with distributed or remote teams, ICHRA scales naturally across states. Each employee shops their local market. No single-carrier network headaches.

Two states, Indiana and Mississippi, now offer small businesses a $400 per employee tax credit in the first year of offering an ICHRA, with $200 in the second year.

Disadvantages

Employees must navigate the individual insurance market themselves. Practitioners on Reddit consistently flag this as the biggest friction point. Comparing dozens of plan options can be overwhelming, particularly for employees with no experience evaluating deductibles, networks, and out-of-pocket maximums. Providing broker support or a guided enrollment experience is practically a requirement for a successful ICHRA rollout.

There’s also a premium tax credit interaction to consider. When an employer offers an affordable ICHRA, employees generally become ineligible for marketplace subsidies. Some employees, particularly lower-income workers, may have been better off with subsidized marketplace coverage.

The 2026 individual market presents a real cost challenge. ACA premiums increased by 21.7% on average in 2026, far outpacing the group market. Employers need to factor this into allowance-setting calculations. Our 2026 ICHRA affordability guide walks through compliance thresholds in detail.

Finally, employers lose claims data visibility. If tracking workforce health trends or designing wellness programs matters to your organization, that’s a tradeoff worth weighing.

Which Model Is Right for Your Business?

Choose level-funded if:

• Your workforce is concentrated in one or two states using the same provider networks
• You have 25 to 100 employees with a stable, generally healthy claims history
• You want direct control over plan design, deductibles, and wellness incentives
• Your state permits low stop-loss attachment points and doesn’t restrict stop-loss for small groups
• Your employees value simplicity and a familiar group-plan experience

Choose ICHRA if:

• You have a distributed, remote, or multi-state workforce
• You want completely predictable costs with zero claims risk
• You’re under 50 employees and struggle to meet participation or contribution minimums
• You’re offering health benefits for the first time
• You want employees to own their plans and choose their own doctors
• You need a solution that works from your very first hire

If you’re weighing the financial case for switching, calculating the ROI of moving to ICHRA can clarify the numbers.

The hybrid approach

This is an option almost no one discusses. Employers can offer a level-funded plan to one employee class and an ICHRA to another, as long as the classes follow ACA rules (different employee classes, not the same employees choosing between two options). For example, a company might keep salaried headquarters staff on a level-funded plan while offering ICHRA to remote or part-time workers. Learn more about setting up ICHRA employee classes by role.

2026 Market Context: What’s Changed

The 2026 market makes the ICHRA vs. level-funded health plans comparison more nuanced than it was a year ago.

Individual market premiums spiked roughly 21.7% on average, driven by the expiration of enhanced ACA subsidies and rising healthcare costs. Meanwhile, group market trends have been running between 9 and 13%, according to Milliman. This means the individual plans employees buy under ICHRA got more expensive relative to group coverage.

Despite this, ICHRA adoption continues accelerating. Enrollment data shows the model is thriving because of the flexibility it provides, not in spite of market challenges. The 92% employer retention rate speaks to that durability.

Legislative momentum is building too. Beyond the Indiana and Mississippi tax credits, CHOICE Arrangement proposals at the federal level aim to expand ICHRA access further. Not sure if your ICHRA setup meets ACA compliance thresholds for 2026? It’s worth reviewing, especially for applicable large employers.

Most transitions from a group plan to ICHRA are completed in 60 to 90 days, covering everything from plan design to employee enrollment in their new individual plans. If you’re currently on a level-funded arrangement, be aware of COBRA obligations during the switch.

How SimplyHRA Makes ICHRA Administration Simple

SimplyHRA is an ICHRA platform built for employers who want fast setup and minimal administrative overhead. Create ICHRA plans and employee classes in a few clicks. Reimbursement payments are triggered directly by payroll through integrations with Gusto, Rippling, ADP, Plane, and more. Employees receive pre-funded debit cards so they don’t have to pay out of pocket and wait for reimbursement.

A licensed broker team, authorized in every state, helps employees navigate the individual market and choose plans that actually fit their needs. That directly addresses the biggest friction point with ICHRA: employee decision overload.

Pricing is a single plan at $29 per employee per month, with no hidden platform fees or tiers.

Schedule a demo to see the platform in action, or book a free consultation if you’re still deciding between ICHRA and level-funded.

Frequently Asked Questions

Can an employer offer both an ICHRA and a level-funded plan?

Yes. An employer can offer a level-funded group plan to one employee class and an ICHRA to a separate class. The key rule is that individual employees cannot choose between the two. Classes must be defined by bona fide employment criteria such as full-time vs. part-time, salaried vs. hourly, or geographic location.

Does ICHRA satisfy the ACA employer mandate?

It can. If the ICHRA is offered to all full-time employees and the allowance meets affordability thresholds (based on the federal poverty level safe harbor or other approved methods), the employer satisfies the ACA’s employer shared responsibility provision. Applicable large employers should review affordability calculations carefully each year as benchmarks change.

Can employees keep their doctors with an ICHRA?

That depends on the individual plan they select. Because employees choose their own coverage from the full individual market, they can pick a plan that includes their preferred providers. This is actually more flexibility than most group plans offer, where the employer picks the network.

What happens to unused ICHRA funds?

Unused allowances stay with the employer. There is no “use it or lose it” penalty for the employee in the traditional sense, because the employer simply doesn’t pay out what isn’t claimed. Employers can choose whether unused amounts roll over to the next plan year or reset.

How long does it take to switch from a level-funded plan to ICHRA?

Most transitions are completed within 60 to 90 days. This includes plan design, employee communication, and individual market enrollment. Employers moving from level-funded plans should also account for COBRA notification requirements and any run-out period for existing claims.

Do level-funded plans count as self-insured?

For most regulatory purposes, yes. Level-funded plans are treated as self-insured ERISA plans under federal law. This means they are subject to ERISA reporting, HIPAA privacy rules, ACA requirements for self-funded plans, and annual RxDC prescription drug data reporting. They are not subject to state insurance premium taxes, which is one of their cost advantages.

Will my employees lose their premium tax credit if I offer an ICHRA?

If the ICHRA offer is considered “affordable” under ACA rules, employees are generally ineligible for premium tax credits on the marketplace. Some lower-income employees might have been better off with a subsidized marketplace plan. Employers should communicate this clearly and consider setting allowances at levels that genuinely offset the lost subsidy.

What is stop-loss insurance in a level-funded plan?

Stop-loss insurance protects the employer from catastrophic claims. It comes in two forms: specific stop-loss (caps liability per individual claim) and aggregate stop-loss (caps total claims for the group). The attachment point, meaning the dollar threshold where stop-loss kicks in, varies by carrier and state. Some states restrict stop-loss availability for small groups, which can make level-funded plans impractical in those markets.