Replace Group Health in 2026: ICHRA Guide for Employers

TL;DR

Replacing group health insurance means canceling a traditional employer-sponsored plan and substituting it with an alternative benefits structure, most commonly an Individual Coverage HRA (ICHRA). Employers set a fixed monthly allowance, employees choose their own individual health plans, and reimbursements flow tax-free. With group premiums now averaging over $17,400 per employee annually and rising 8 to 11% each year, this shift from defined-benefit to defined-contribution is accelerating fast.

Schedule a free consultation to see if replacing your group plan makes sense for your team.

What Does “Replace Group Health” Actually Mean?

The phrase “replace group health” refers to an employer’s decision to cancel its traditional group health insurance policy and substitute it with a different mechanism for helping employees get covered. In almost every case today, the replacement is an Individual Coverage HRA (ICHRA), a defined-contribution arrangement where the employer provides employees a set monthly allowance to purchase their own individual health insurance. Employees pick plans that fit their needs, and the employer reimburses premiums tax-free up to the allowance limit.

This became a practical option in January 2020, when the federal government finalized rules allowing ICHRAs to serve as a legitimate alternative to group coverage. Before that, employers who wanted to help workers buy individual plans faced legal barriers under the ACA.

One important distinction: replacing group health does not mean removing benefits. It is a structural shift. Employees still get health coverage. They just get it through the individual market instead of a one-size-fits-all group policy.

Why Employers Replace Group Health Plans

The short answer is money. The longer answer involves money, flexibility, and workforce complexity.

Premium pressure is the primary driver

In 2025, the average cost of employer-sponsored health insurance hit $17,496 per employee, a 6% increase that outpaced both inflation and wage growth. For 2026, Mercer projects that number will exceed $18,500 per employee. PwC’s estimate is even more aggressive, projecting an 8.5% cost increase for the year.

Small employers face the steepest climbs. According to KFF analysis, the median proposed premium increase among 318 small group insurers for 2026 is 11%.

These numbers explain why 89% of employers currently sponsoring group health plans worry they won’t be able to afford it within three years. In the same eHealth survey, 93% said it’s time for a new health benefit solution.

Workforce challenges compound the cost problem

Group health plans are designed around a single geographic area and a relatively uniform employee population. That model breaks down when a company has remote workers across multiple states, a mix of full-time and part-time staff, or employees at different life stages who need very different coverage.

When employers replace group health with an ICHRA, each employee can choose a plan that matches their location, family size, and medical needs. For companies with part-time and seasonal staff, it also eliminates the participation minimums that make group plans hard to maintain.

How Replacing Group Health Works: The ICHRA Path

The transition from a group plan to an ICHRA follows a clear sequence. Here’s how it works in practice:

Step 1: Evaluate fit. The employer assesses whether ICHRA makes sense for their workforce, considering employee demographics, geographic spread, and the local individual market. Our employer profiles guide walks through common scenarios.

Step 2: Design the ICHRA. The employer defines employee classes and sets monthly allowance amounts. Up to 11 different employee classes are permitted (full-time, part-time, seasonal, salaried, hourly, geographic regions, and more). Within each class, allowances can vary only by age (up to a 3:1 ratio) and family size.

Step 3: Notify and cancel. The employer provides written notice to employees at least 90 days before the ICHRA start date and coordinates the group plan cancellation to align with the ICHRA effective date.

Step 4: Employees enroll in individual coverage. Offering an ICHRA is a qualifying life event that triggers a 60-day special enrollment period. During this window, employees can shop for individual coverage on a public or private marketplace.

Step 5: Reimbursements begin. Once employees have individual coverage, they submit proof and receive tax-free reimbursements up to their monthly allowance. Modern platforms automate this through payroll integrations, which eliminates most of the manual work.

See how SimplyHRA handles this with automated reimbursements, payroll-triggered payments, and built-in compliance tools.

Full Replacement vs. Partial (Hybrid) Approach

Employers don’t have to go all-in. There are two ways to replace group health coverage:

Full replacement means every employee moves from the group plan to ICHRA. The entire company operates on the defined-contribution model.

Partial (hybrid) replacement means different employee classes receive different benefits. For example, salaried employees might keep a traditional group plan while hourly workers receive an ICHRA. Or headquarters staff stays on the group plan while remote employees across other states get ICHRA allowances.

The critical rule: within any single employee class, the employer cannot offer both a group plan and an ICHRA. It’s one or the other per class. For a deeper breakdown, see our guide on designing eligibility criteria for benefit classes.

Minimum class size requirements also apply when an employer offers different benefits to different classes. These thresholds prevent employers from creating artificially small classes to discriminate.

Key Compliance Considerations

Replacing group health insurance involves several regulatory layers. Getting these right is essential.

ACA affordability for Applicable Large Employers

Applicable Large Employers (ALEs, those with 50 or more full-time equivalent employees) must still satisfy ACA affordability and minimum essential coverage requirements when offering an ICHRA. For 2026, an ICHRA is considered affordable if the employee isn’t expected to pay more than 9.96% of their household income for a self-only silver plan after applying the allowance. Most ALEs use the Federal Poverty Level safe harbor to demonstrate compliance. Our 2026 ICHRA affordability guide covers the calculations in detail.

Premium tax credit trade-off

This is one of the most important employee-side considerations when you replace group health coverage. If an employee accepts an ICHRA that meets the affordability threshold, they lose eligibility for marketplace premium tax credits, even if the ICHRA allowance is less than what the subsidy would have been. If the ICHRA is deemed unaffordable, the employee can opt out and retain their premium tax credits.

COBRA implications

This is a common confusion point. ICHRAs are not classified as “group health plans” under COBRA regulations, so employers offering an ICHRA are not required to provide COBRA continuation coverage in the traditional sense. The employee’s individual health plan continues regardless of whether the ICHRA reimbursement stops. When an employee leaves the company, they lose the employer’s reimbursement but keep their individual policy. ERISA requirements still apply, meaning employers must maintain plan documents, summary plan descriptions, and proper notices. For a complete walkthrough, see our post on COBRA obligations when replacing group coverage with ICHRA.

Not sure if your ICHRA design meets compliance requirements? Schedule a consultation with our team.

What Employees Experience

The employee side of the equation deserves honest attention. When an employer replaces group health insurance, the experience for workers changes significantly, for better and for worse.

The gains

Employees get to choose a plan that actually fits their situation. A 28-year-old single employee doesn’t need the same coverage as a 52-year-old with a family of four, but under a group plan they often share the same network and cost structure. With ICHRA, each person picks a plan that matches their doctors, prescriptions, and budget. Plans are also portable. If an employee leaves the company, they keep their individual policy and just lose the reimbursement.

The friction points

Navigating the individual market is harder than being handed a group plan during open enrollment. Employees must evaluate deductibles, co-pays, provider networks, and drug formularies on their own. Practitioners on Reddit report that this is especially challenging for employees who have always had employer-selected group coverage and have never shopped for insurance independently.

Geographic disparities matter too. An employee in a major metro area might have 30 plan options to choose from, while someone in a rural area could face limited choices and higher premiums. This is why enrollment support matters so much. Employers who invest in broker assistance or guided enrollment see much better outcomes than those who simply cancel the group plan and hand out allowances. SimplyHRA includes in-house broker support to help employees navigate plan selection in every state.

The Broker Dynamic

One factor rarely discussed in glossary articles: some brokers may be reluctant to recommend that employers replace group health coverage. This isn’t necessarily about bad advice. It’s about economics. When an employer has a group plan, the broker typically earns a commission from the insurer at placement and again at each annual renewal. When the employer moves to ICHRA, that recurring commission structure changes or disappears. KFF’s Health System Tracker has documented this dynamic through interviews with brokers and employers.

This doesn’t mean brokers are wrong to raise concerns. But employers should be aware of the incentive structure and seek objective guidance when evaluating their options.

ICHRA Adoption Is Accelerating

Despite being only six years old, ICHRA growth is striking. According to the HRA Council, small business ICHRA adoption increased 52% from 2024 to 2025, with a 34% increase among employers with more than 50 employees. Since 2020, overall ICHRA adoption is up roughly 1,000%.

The total market is still small, covering an estimated 500,000 to 1 million lives compared to 150+ million in traditional employer-sponsored plans. But retention is strong: approximately 92% of employers who offered an HRA in 2024 continued in 2025, suggesting that companies who replace group health tend to stay with the new model.

Interestingly, 83% of employers offering ICHRA in 2025 had not previously offered any coverage at all. Only 17% transitioned from an existing group plan. That means ICHRA is not just a replacement tool; it’s opening health benefits to employers who couldn’t participate in the group market to begin with.

Common Misconceptions About Replacing Group Health

“Replacing group health means employees lose coverage.” No. Employees gain individual coverage, often with more plan choices than a group plan provides.

“Only small businesses can do this.” Employers of any size can offer ICHRA. Adoption among companies with 100 to 199 employees grew 49% year over year in 2025.

“ICHRA is always cheaper.” It depends on the local individual market, employee demographics, and how the allowance is set. In some cases, group plans may still be more cost-effective. But the predictability of a fixed ICHRA allowance versus unpredictable annual group renewals is a major advantage.

“Employees keep their marketplace subsidies.” Only if the ICHRA is deemed unaffordable. If the employer’s allowance meets the affordability threshold, employees who accept it forfeit premium tax credits.

2026 Context: A Pivotal Year

The decision to replace group health insurance is more nuanced in 2026 than in previous years. Enhanced Affordable Care Act subsidies are expiring, which means individual market premiums are jumping significantly. Zorro estimates average individual market premium increases of 26% nationwide for 2026.

At the same time, group premiums are also climbing steeply, with small group insurers proposing a median 11% increase. For many employers, the math still favors ICHRA because they can control their contribution amount regardless of what happens to premiums. But employees in areas with expensive individual markets may feel the pinch, making allowance design and enrollment support more important than ever.

Enrollment data from early 2026 suggests employers aren’t retreating from ICHRA despite these pressures. The flexibility to adjust allowances by class, age, and geography gives employers tools that rigid group plans simply don’t offer.

Related Terms

Browse the full glossary for definitions of these and other benefits terms:

• Group health insurance
• Individual Coverage HRA (ICHRA)
• QSEHRA
• Defined contribution health benefits
• Employee classes
• Special enrollment period
• Premium tax credit
• Minimum essential coverage

Ready to explore whether replacing your group health plan is the right move? Schedule a demo to see how SimplyHRA makes the transition simple.

Frequently Asked Questions

Is it legal to replace group health insurance with an ICHRA?

Yes. Since January 2020, federal regulations explicitly allow employers to offer ICHRAs as an alternative to traditional group health plans. The ICHRA satisfies ACA employer mandate requirements when properly designed, including affordability and minimum essential coverage standards for Applicable Large Employers.

What happens to employees’ coverage when an employer replaces group health?

Employees don’t lose coverage. The transition from a group plan to an ICHRA triggers a special enrollment period, giving employees 60 days to select an individual health insurance plan on the public marketplace or a private exchange. The employer’s allowance then reimburses their premiums tax-free.

Can an employer offer a group plan to some employees and ICHRA to others?

Yes, through a hybrid approach. Employers can assign different employee classes to different benefit structures. For example, full-time salaried workers might keep the group plan while part-time or remote employees receive ICHRA. The rule is that everyone within a single class must receive the same type of benefit.

Do employees lose premium tax credits if their employer offers ICHRA?

It depends on affordability. If the ICHRA allowance meets the affordability threshold (employee pays no more than 9.96% of household income for a silver plan in 2026 after the allowance), they cannot receive premium tax credits, even if they opt out. If the ICHRA is deemed unaffordable, they can decline it and claim credits.

Does COBRA apply when an employer replaces group health with ICHRA?

ICHRAs are not classified as group health plans under COBRA regulations, so traditional COBRA continuation does not apply. When an employee leaves, they keep their individual health plan and simply stop receiving the employer’s reimbursement. ERISA notice and disclosure requirements still apply to the ICHRA itself.

How much can employers save by replacing group health insurance?

Savings vary widely based on company size, location, and workforce demographics. Some employers report savings of 10 to 20%, while one large health system documented $7 million in annual savings. The primary financial advantage is cost predictability: employers set a fixed allowance rather than absorbing unpredictable annual premium increases.

How long does the transition from group health to ICHRA take?

Most employers can design and launch an ICHRA within a few weeks using a platform that handles compliance and enrollment. The key timing constraint is providing employees at least 90 days of advance written notice before the ICHRA start date, and coordinating the group plan cancellation date with the ICHRA effective date.

Are there alternatives to ICHRA for replacing group health?

Yes, though ICHRA is the most common path. Small employers with fewer than 50 employees can consider a QSEHRA, which has lower contribution limits but simpler administration. Level-funded plans offer another option that retains some group plan characteristics while adding cost controls. Our guide on alternatives to group health covers the full range.