How to Switch From Group Health to ICHRA (2026 Guide)

TL;DR

Switching from group health insurance to an Individual Coverage HRA (ICHRA) lets employers replace unpredictable renewal premiums with a fixed monthly allowance per employee, while employees choose their own ACA-compliant individual plans. The process requires careful timing (90-day notice rule, 60-day Special Enrollment Period), correct employee class design, and affordability testing for Applicable Large Employers. This guide walks through every compliance requirement, concrete dates for a 2026 mid-year conversion, payroll mechanics, COBRA implications, and the real-world friction points that trip up employers and employees alike.

What “Switch from Group Health to ICHRA” Actually Means

When an employer switches from group health to ICHRA, they stop sponsoring a traditional group health insurance policy and instead fund an Individual Coverage Health Reimbursement Arrangement. Employees purchase their own ACA-compliant individual major medical coverage (on the Marketplace or off-exchange), and the employer reimburses premiums, and optionally other qualified medical expenses, tax-free under a written HRA plan document (IRS Final Rule, 2019-28 IRB).

The shift changes three things at once:

For HR: You stop negotiating with a single carrier and start administering a reimbursement program with employee classes, monthly substantiation, and new notice requirements.

For payroll: Instead of remitting group premiums, you process individual reimbursements (often triggered by payroll runs) and handle Section 125 pre-tax elections for off-exchange enrollees.

For employees: They gain plan choice but lose the simplicity of a one-size-fits-all group card. They now shop for coverage, submit proof of enrollment, and receive reimbursements.

This is not a minor administrative tweak. It is a structural change to how your company funds health benefits.

When Switching from Group Health Insurance to ICHRA Makes Sense

Not every employer should make this move. But several conditions make the case compelling.

Renewal volatility is breaking your budget. Average employer family premiums hit $25,572 in 2024 (up 7% year over year), with 2025 estimates near $27,000 (AHA/KFF survey data). That kind of swing makes forecasting nearly impossible. ICHRA converts your health benefit into a defined contribution: you set the monthly allowance and know your cost to the penny.

Your workforce is distributed. Group plans are priced for a single rating area. If you have employees in Austin, Boise, and Brooklyn, a group plan either overpays in cheap markets or undercovers in expensive ones. ICHRA lets each employee buy a plan in their local market.

You can’t hit SHOP participation minimums. The SHOP marketplace typically requires around 70% employee participation (HealthCare.gov). ICHRA has no participation minimum. For small firms or those with many employees on spousal coverage, this alone can be decisive.

You want to offer benefits for the first time without the overhead. HRA Council data shows roughly 83% of recent ICHRA adopters were first-time benefit sponsors, with about 17% switching from existing group plans (HRA Council 2024 Data Report). The defined-contribution model has a lower barrier to entry than group insurance.

Practitioners on Reddit confirm the financial appeal. One small business owner on r/smallbusiness described paying roughly $44,000 per year in group premiums for just three employees before discovering ICHRA as an alternative (r/smallbusiness discussion). For context on how group and individual coverage compare across different company sizes, see our breakdown of group insurance vs. individual insurance.

The market is moving in this direction, too. Major carriers are building ICHRA-specific products. Centene, for example, appointed its first president over an ICHRA business unit (Ambetter Health Solutions) in early 2025 (Centene investor release), signaling that individual-market plan access for ICHRA participants is improving, not shrinking.

The Compliance Rules You Must Hit

The switch from a group health plan to ICHRA is governed by a clear set of federal rules. Skip any of them and you risk penalties, employee confusion, or both. If you’re running a multi-state team, our ICHRA compliance by state guide covers the jurisdiction-level nuances.

Employee Classes and the Same-Terms Rule

You must assign employees to recognized classes. The federal final rule (84 FR 28888) allows these categories:

• Full-time, part-time, salaried, non-salaried, seasonal
• Employees in the same insurance rating area
• Temporary agency workers
• Non-resident aliens with no U.S.-source income
• Collectively bargained vs. non-bargained employees
• Waiting-period and new-hire subclasses

Within each class, you must offer the same ICHRA terms. You cannot offer one full-time employee $400/month and another full-time employee in the same class $250/month.

For detailed guidance on structuring these categories, see our walkthrough on how to calculate employee classes by role and location.

Minimum Class Sizes (When Mixing Models)

If you offer some classes a traditional group plan and other classes an ICHRA, minimum class-size rules kick in:

• Fewer than 100 employees: minimum class of 10
• 100 to 200 employees: minimum is 10% of total headcount
• More than 200 employees: minimum class of 20

These thresholds are tested at the start of the ICHRA plan year. If you’re moving everyone to ICHRA and dropping the group plan entirely, these minimums don’t apply.

The 3:1 Age-Based Allowance Cap

You can vary ICHRA allowances by age within a class, but the oldest participant’s maximum cannot exceed three times the youngest participant’s amount. This mirrors the ACA’s 3:1 age-rating band.

Required Notices

Use the DOL’s model Individual Coverage HRA notice. It must include your ICHRA allowance amounts, start date, opt-out language, and a clear explanation of PTC implications.

Timing is non-negotiable: deliver notices to current employees at least 90 days before the ICHRA plan year starts. New hires who become eligible must receive the notice by their eligibility date.

Monthly Coverage Substantiation

Employees must attest each month that they have individual health coverage meeting minimum essential coverage (MEC) standards. No attestation, no reimbursement. The DOL provides a model attestation template you can adapt.

Need a compliance review before committing? Schedule a consultation to walk through class design, affordability testing, and notice timing with a specialist.

Timing Blueprint: A 2026 Mid-Year Conversion Example

Timing is where most employers switching from group health to ICHRA get tripped up. Here’s a concrete example.

Scenario: Your group plan terminates June 30, 2026. Your ICHRA starts July 1, 2026.

The Special Enrollment Period works both ways. Employees get a 60-day window before and after the triggering event (being offered an ICHRA or losing group coverage) to select a Marketplace plan (HealthCare.gov ICHRA guidance). If they select by June 30, coverage starts July 1.

First-Year and New-Hire Exception

For employees who first become eligible less than 90 days before the ICHRA start, you can deliver the notice by their eligibility date rather than the 90-day deadline. Their SEP runs 60 days before and after their effective date.

Critical tip: Align your group plan termination date with the ICHRA start on the first of a month. A June 30 termination / July 1 ICHRA start avoids coverage gaps and simplifies payroll. Avoid mid-month transitions at all costs.

Affordability Testing and the PTC Trap

For Applicable Large Employers (50+ full-time equivalent employees), affordability testing determines whether employees can opt out of the ICHRA and claim Premium Tax Credits on the Marketplace instead.

The 2026 Formula

The ACA affordability threshold for 2026 plan years increases to 9.96% (up from 9.02% in 2025) (WTW/IRS announcement).

The calculation:

Required employee contribution = Lowest-cost silver plan (LCSP) self-only premium at the employee’s location and age, minus the monthly ICHRA allowance.

If that number exceeds 9.96% of the employee’s household income (divided by 12 for monthly), the ICHRA is “unaffordable” and the employee can opt out and pursue PTCs.

A Worked Example

A 40-year-old employee in ZIP 78701 (Austin, TX):

• LCSP self-only premium: $420/month
• ICHRA allowance: $300/month
• Required contribution: $120/month
• Employee annual income: $40,000
• Monthly affordability cap: $332 (9.96% × $40,000 ÷ 12)

Because $120 is well under $332, the ICHRA is affordable. This employee cannot claim PTCs.

ALEs should document which safe harbor they’re using (W-2, rate-of-pay, or FPL) and keep the supporting calculations.

The Pre-Tax Rule That Trips Up Payroll

This is one of the most under-communicated rules in the entire ICHRA framework: employees can pay their remaining premium share pre-tax through a Section 125 cafeteria plan only if they buy off-exchange. Marketplace (on-exchange) premiums cannot be salary-reduced under Section 125 (IRS 2019-28 IRB).

Get this wrong and your payroll deductions are non-compliant. Train your payroll team before go-live, not after.

The “Double-Dip” Warning

If the ICHRA is affordable, employees who participate in it and also claim PTCs on the Marketplace will face a tax bill when they file. Your ICHRA notice must make this crystal clear. In practice, guided enrollment support (a licensed broker walking employees through the decision) is the most effective way to prevent this mistake.

COBRA When You Terminate Your Group Plan

COBRA obligations depend on whether the group plan continues to exist for anyone.

Scenario 1: You terminate the group plan for all employees. If no one remains on the group plan, there is no plan left to continue under federal COBRA. Continuation coverage generally does not apply (NY DFS COBRA FAQ, confirming this principle).

Scenario 2: The group plan continues for some classes while others move to ICHRA. In this case, employees losing group coverage due to a qualifying event are entitled to standard COBRA continuation rights (DOL COBRA guide).

State mini-COBRA: Many states extend COBRA-like protections to smaller employers (often those with fewer than 20 employees) and may have different termination rules. Check your state. For a deeper dive into COBRA obligations during this transition, read our guide to COBRA when replacing group coverage with ICHRA.

Payroll, Accounting, and Reporting

The financial mechanics of an ICHRA are different from group insurance. Instead of sending a single premium check to a carrier, you’re processing individual reimbursements tied to each employee’s coverage.

Payroll-Triggered Reimbursements

The cleanest approach is tying ICHRA reimbursements to your regular payroll cycle. When payroll runs, approved reimbursements are processed simultaneously. This keeps cash flow predictable and accounting clean. SimplyHRA’s platform automates this with payroll-triggered payment workflows that integrate with systems like Gusto, Rippling, ADP, and Plane, reducing manual entries and duplicate data.

For controllers managing the reconciliation process, our guide to reconciling benefit reimbursements with payroll covers the accounting categories and audit trails you need.

Section 125 Pre-Tax Setup (Off-Exchange Only)

If employees buy off-exchange plans, you can let them pay their remaining premium share pre-tax through a cafeteria plan. This requires a Section 125 plan document and payroll configuration. For Marketplace enrollees, this option does not exist. Keep the two populations clearly separated in your payroll system.

1095-C Reporting for ALEs

ALEs offering ICHRAs report on Form 1095-C using ICHRA-specific Line 14 codes (1L through 1R, including 1M and 1N). You’ll also select the appropriate affordability safe harbor (worksite ZIP or residence ZIP) per the IRS 1095-C instructions.

Practitioners on Reddit note that 1095-C coding confusion is a common pain point. Employees receive these forms and don’t understand the codes, which can generate IRS letters or software-flagged errors during tax filing. Clear employer communications and correct coding upfront prevent year-end headaches. For a plain-English breakdown of the forms employees will see, we have a guide on 1095-A vs. 1095-B vs. 1095-C for SMBs.

PCORI Fees

ICHRAs are classified as self-insured group health plans for PCORI purposes. Budget for the fee, filed via IRS Form 720 by July 31 each year:

• Plan years ending Jan through Sep 2025: $3.47 per covered life (due July 31, 2026)
• Plan years ending Oct 2025 through Sep 2026: $3.84 per covered life (due July 31, 2027)

(IFEBP regulatory update)

What Your Employees Will Ask (and How to Answer)

The hardest part of switching from group health to an ICHRA isn’t the compliance paperwork. It’s the human side. Employees who had a group plan card in their wallet now have to shop for their own insurance, and many have never done that before.

One telling observation from practitioners on Reddit: after a switch, some employees feel they “went from having a parent to having a Google search bar.” Employers that invest in guided navigation (human support plus digital tools) see fewer complaints and smoother transitions.

“How do I pick a plan?”

Provide access to a licensed broker or enrollment assistant. SimplyHRA offers in-house broker support authorized in every state to help employees compare plans, verify provider networks, and choose appropriate coverage levels. This is not optional. It’s the single most impactful thing you can do for adoption.

“Will my doctor still be in-network?”

Marketplace plans, especially lowest-cost silver plans (LCSPs), can have narrower networks than employer group plans. Discussions on r/HealthInsurance highlight real frustrations with directory accuracy, particularly with certain carriers. Advise employees to verify their providers directly with the carrier before enrolling, not just by checking an online directory.

“Can I still get Premium Tax Credits?”

Only if the ICHRA is unaffordable (using the LCSP formula above) and they opt out of the ICHRA entirely. If the ICHRA is affordable and they accept it, they cannot claim PTCs. If they claim PTCs anyway, they’ll owe money at tax time. Say this clearly in your communications and in the DOL model notice.

“What forms will I get at tax time?”

• Marketplace plans: Form 1095-A
• Employer ICHRA reporting (for ALEs): Form 1095-C with ICHRA codes
• Medicaid or other coverage: Form 1095-B

Step-by-Step Checklist for the Switch

Here is the condensed sequence for employers transitioning from a group health plan to ICHRA.

1. Confirm your goals and run affordability math.
Decide your target monthly allowance. For ALEs, pre-test affordability using location, age, and your chosen safe harbor (W-2, rate-of-pay, or FPL).

2. Design your employee classes.
Select from the federally recognized categories. If you’re keeping a group plan for any class, confirm minimum class-size thresholds.

3. Set allowances.
Choose amounts by class, with optional age-banding (capped at 3:1 oldest-to-youngest). Decide whether to reimburse premiums only or premiums plus qualified medical expenses.

4. Draft plan documents and SPD.
Create the formal ICHRA plan document and Summary Plan Description.

5. Send the DOL model ICHRA notice.
Deliver at least 90 days before the plan year start for current employees. Include allowance amounts, start date, opt-out language, and PTC implications.

6. Coordinate group plan termination.
Align the termination date with ICHRA start (first of the month). Issue “loss of coverage” letters for employees’ SEP documentation.

7. Enable employee plan shopping.
Provide broker or navigator support. Educate on LCSP, network verification, and the PTC double-dip risk.

8. Configure payroll.
Set up reimbursement workflows, Section 125 elections for off-exchange enrollees, and accounting categories for ICHRA reimbursements and PCORI accrual.

9. Go live and substantiate monthly.
Collect MEC attestations each month. No attestation means no reimbursement.

10. File ongoing compliance.
Pay PCORI fees via Form 720 by July 31 each year. Issue 1095-C forms with ICHRA codes. Maintain audit-ready records.

For a printable version of this process, see our ICHRA onboarding checklist for new employer customers. And to avoid the most common errors during transitions, read mistakes to avoid when offering ICHRA.

Ready to start your switch? Schedule a demo to see how SimplyHRA handles class setup, payroll-triggered reimbursements, automated MEC verification, and employee enrollment support in a single platform.

Six Gotchas That Catch Employers Off Guard

1. Missing the 90-day notice window. Late notices don’t just create compliance risk. They compress your employees’ shopping window and create panic.

2. Forgetting the SEP cutoff. Employees who miss the 60-day SEP window may not be able to enroll in individual coverage until the next Open Enrollment. That means a coverage gap and an angry workforce.

3. Ignoring minimum class sizes when mixing models. If even one class stays on group insurance, the minimum class-size rules apply to every ICHRA class. Test this before you finalize your plan design.

4. Allowing pre-tax for Marketplace enrollees. Section 125 pre-tax treatment works only for off-exchange plans. Marketplace premiums cannot be salary-reduced. Train your payroll team explicitly on this distinction.

5. Underestimating employee plan-shopping stress. Dropping a group card and telling people to “go find a plan” is a recipe for backlash. Budget for broker support. It is the difference between a smooth transition and a retention problem.

6. Skipping COBRA analysis for partial transitions. If you keep the group plan for some classes, COBRA applies to those losing group coverage. State mini-COBRA can extend obligations to smaller employers even if you terminate the plan entirely.

Frequently Asked Questions

Can we switch from group health to ICHRA mid-year?

Yes. An ICHRA can start on the first of any month. The key is coordinating: deliver the DOL model notice 90 days in advance, align the group plan termination date with the ICHRA start date, and ensure employees use the ICHRA-offer SEP to enroll in individual coverage so there’s no gap (HealthCare.gov).

Do we owe COBRA when we end our group plan to start an ICHRA?

If you terminate the group plan for all employees and no one remains on it, there is no plan to continue under federal COBRA. If the group plan continues for some employees and others lose coverage, normal COBRA rules apply to those losing it. Always check state mini-COBRA laws, which may have broader requirements (DOL COBRA guide).

Can employees pay their remaining premium share pre-tax?

Only for off-exchange individual plans, through a Section 125 cafeteria plan. Marketplace (on-exchange) premiums cannot be salary-reduced under Section 125 (IRS 2019-28 IRB).

Does ICHRA have minimum participation requirements?

No. Unlike SHOP small-group plans (which often require around 70% participation), ICHRA has no participation minimums. Every eligible employee can choose whether to participate.

Are age-based allowance variations permitted?

Yes. You can vary the ICHRA allowance by age within a class, but the ratio between the oldest and youngest participant’s allowance cannot exceed 3:1 (84 FR 28888).

What is the 2026 affordability threshold for ICHRA?

For plan years beginning in 2026, an ICHRA is affordable if the employee’s required contribution (LCSP self-only premium minus the ICHRA allowance) does not exceed 9.96% of household income (WTW/IRS). If it exceeds that threshold, the employee can opt out and pursue Premium Tax Credits.

What tax forms will employees receive after switching to ICHRA?

Employees on Marketplace plans receive Form 1095-A. ALEs report ICHRA offers on Form 1095-C using ICHRA-specific Line 14 codes. Employees with Medicaid or other qualifying coverage may also receive Form 1095-B.

Can we offer ICHRA to one class and keep the group plan for another?

Yes, but you cannot offer both a group plan and an ICHRA to the same class in the same plan year. And when you mix models across classes, minimum class-size rules apply to the ICHRA classes (84 FR 28888).