An increasing number of employers are offering their workers cash to buy their own health insurance.
Individual coverage health reimbursement arrangements, or ICHRAs, a type of health plan in which employers provide nontaxed contributions to employees to pay for medical expenses, including monthly insurance premiums, are picking up momentum.
For decades, health policy analysts and employers have tossed around the concept of shifting from traditional employer-sponsored health insurance to a defined contribution approach — giving employees a fixed amount of money with which to buy health coverage themselves.
But there wasn’t a practical way to do that due to regulatory, market, and administrative hurdles, Paul Fronstin, director of health benefits research at Employee Benefit Research Institute (EBRI), a nonprofit, nonpartisan organization, told Yahoo Finance: “The emergence of individual coverage health reimbursement arrangements may finally offer a scalable vehicle for that long-anticipated shift.”
ICHRAs were created under regulations issued by the Trump administration in 2019 and have been gaining in popularity each year since.
This year, an estimated 500,000 people are covered through ICHRAs, according to data from the HRA Council, a trade association that works with vendors to help employers offer them. That’s up 50% from 2024, still a thin slice of the market for employer-sponsored health insurance coverage. About 154 million people were enrolled in coverage through their employers last year, according to KFF.
The vast majority of ICHRA adoption is from small businesses with 20 or fewer employees, most of which are offering health coverage for the first time.
“It’s definitely something for small businesses,” Fronstin said. “The market is developing from a group of employers that never offered health benefits or weren’t offering health benefits. It’s really turning into a new benefit for these people that didn’t have access to health coverage through the job. While they’re not actually getting health coverage through their job, they’re getting tax-free money from their employer to help pay for it.”
For now, ICHRAs are playing a role in expanding access to health coverage for people, rather than displacing traditional group plans among larger firms, he said.
Fronstin estimates that up to 700,000 people are in these arrangements.
“There are a number of factors that are driving the expansion of ICHRAs, but also some barriers that still need to be worked out to make it become a little bit more of a mainstay in the health insurance landscape,” Matt McGough, a policy analyst at KFF, told Yahoo Finance.
It works like this.
Employers generally contract with an outside vendor or broker that helps employees navigate the process.
Workers do their own insurance shopping through individual insurance markets where they can typically find more choices for coverage than a traditional employer group plan that might offer only two or three choices of plans.
With a group plan, employers typically pay for the bulk of the premium. The employer contribution in a group plan depends on myriad factors, from the size of the firm to the industry, location, and the type of health insurance plan — Preferred Provider Organization (PPO) or Health Maintenance Organization (HMO).
While there are no annual minimum or maximum contribution requirements with these do-it-yourself arrangements, employers generally provide anywhere from $500 to $1,000 per month, depending on the cost of healthcare where the worker lives and whether it’s individual or family coverage.
The contribution amount may be a set dollar amount or a percentage of a premium charged by a certain plan. And the plans are portable. If you’re an employee, you can keep the coverage if you jump jobs, although you’ll no longer have the employer’s tax-free contribution.
For small businesses with no more than 50 employees, there is a tax incentive to offer these arrangements. They typically qualify for the health care tax credit, which adds up to roughly half of the employer contribution for two consecutive years.
The motivation for employers to offer an ICHRA: cost-control.
The set amount contribution allows employers to predict their costs more accurately than grappling with annual jumps in group plan healthcare premiums.
Half of large employers expect their average healthcare cost to rise by 6% next year, and they plan to reduce their employees’ health care benefits to address those rapidly growing costs, according to a recently released report from Mercer.
An increasing number of employers are seriously considering plan design changes that would shift more cost to employees, such as raising deductibles or out-of-pocket maximums.
No one is saying these ICHRA arrangements are about to overtake the market. It will be a slow and cautious process over the next several years.
“There are a growing number of vendors, many backed by venture capital firms who act as management systems that process the payment and make sure everything is IRS compliant for the tax-advantaged benefits,” McGough said. “And that’s certainly a signal of the market’s momentum.”
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As group coverage becomes more expensive and potentially unattainable for smaller businesses, an ICHRA could be more attractive, McGough said.
“We’ve heard over and over again from stakeholders across the board that this is like the transition from pensions to 401(k)s moving from that defined benefit to defined contribution,” McGough said. “Whether it will be as revolutionary as the 401(k) remains to be seen.”
Read more: What is a 401(k)? A guide to the rules and how it works
“It’s similar in the sense that it’s shifting risk — investment risk and longevity risk from employers to workers,” Fronstin added.
They also shift the responsibility of plan selection and management to the individual.
What will push these arrangements to the next level is ”when a large employer moves into this market and goes out on a limb,” Fronstin said. “That’s going to get everyone else’s attention.”
And this may take a major economic jolt. “The next recession is going to put employers’ commitment to health benefits to the tests,” he said. “If unemployment goes back up to 10% for an extended period of time, like it was in 2010, employers may say, ‘Hey, I’ve got an opportunity here. I don’t need to offer health benefits anymore the way I’ve been doing so to attract and retain employees, so I’m going to do something different.’”
Generally, no employer wants to be the first to make a change that could be seen as radical, particularly in a tight labor market where recruitment and retention are top concerns, per Fronstin. Health insurance is by far the most mentioned benefit when a worker is deciding whether to stay at or leave a current job.
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including the forthcoming “Retirement Bites: A Gen X Guide to Securing Your Financial Future,” “In Control at 50+: How to Succeed in the New World of Work,” and “Never Too Old to Get Rich.” Follow her on Bluesky.
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