ICHRA in Year One: What Mid-Size Employers Learn After Switching from Group Coverage

Switching your company's health plan is one of the most consequential decisions you can make as an employer. And right now, one of the biggest shifts in the benefits world is the move from traditional group coverage to an Individual Coverage Health Reimbursement Arrangement, or ICHRA. Employers with 20 to 250 employees are leading this transition, and the results after the first full year are starting to tell a very clear story. Whether you are considering the switch or have already started the process, understanding what other employers experienced in year one can help you set realistic expectations and avoid common pitfalls.

The concept sounds simple: instead of buying one group plan for everyone, you give each employee a fixed monthly allowance and let them choose their own health plan from the individual market. In practice, though, the first year of an ICHRA is full of lessons that most employers never hear about until they are in the middle of it.

This guide breaks down what mid-size employers actually experience in their first year on ICHRA, based on real transitions involving companies with 50 to 250 employees. We will cover the financial outcomes, the employee experience, the administrative surprises, and the tools that help you model whether ICHRA makes sense for your team.

What Is ICHRA and Why Are Employers Switching?

ICHRA became available in January 2020 after a joint rule from the Departments of Treasury, Labor, and Health and Human Services. It allows employers of any size to reimburse employees tax-free for individual health plan premiums and, in some designs, qualifying medical expenses.

The shift from group to ICHRA is driven by three forces. First, group plan renewals for mid-size employers have averaged 8 to 14 percent annual increases over the past five years, outpacing inflation by a wide margin. Second, the individual health plan market has stabilized significantly since 2019, with competitive pricing and broader carrier participation in most states. Third, employees increasingly want choice. A one-size-fits-all group plan does not serve a 25-year-old single employee the same way it serves a 55-year-old with a family of four.

How ICHRA Works in Practice

The employer sets a monthly allowance for each employee class (you can create classes based on job category, geography, full-time vs. part-time, or salaried vs. hourly). Employees then shop for an individual health plan on the ACA marketplace or directly from a carrier. They submit proof of coverage to the ICHRA administrator, and the employer's allowance is applied to their premium cost. If the employee's chosen plan costs less than the allowance, the unused portion stays with the employer. If it costs more, the employee pays the difference.

What the First Year Actually Looks Like: A Timeline

Months 1 Through 3: The Setup Phase

Most employers begin planning their ICHRA transition three to six months before their group plan renewal date. During this phase, the key tasks are selecting an ICHRA administration platform, defining employee classes and allowance amounts, building a communication plan for employees, and coordinating the wind-down of the existing group plan.

The allowance decision is the most important one. Set it too low, and employees feel like they are losing benefits. Set it too high, and you eliminate the cost savings that motivated the switch. Most benefits advisors recommend starting at or slightly above your current per-employee cost for the group plan, then adjusting downward in year two if utilization data supports it. Based on recent transitions, the sweet spot for mid-size employers tends to fall between $600 and $830 per employee per month.

Month 4: Open Enrollment

This is where the employee experience is made or broken. Under a group plan, open enrollment means choosing from two or three options on a single carrier. Under ICHRA, employees suddenly face 60 to 120 plan options across multiple carriers. Without guided support, this is overwhelming.

Companies that pair their ICHRA launch with a dedicated enrollment advisor (either through the ICHRA platform or a benefits brokerage) see dramatically better outcomes. Employees get one-on-one help comparing plans based on their doctors, prescriptions, and expected utilization. The result: higher satisfaction, better plan selection, and fewer mid-year complaints.

Months 5 Through 8: The Adjustment Period

The first few months of live coverage are when issues surface. Common first-year challenges include employees who chose the wrong plan and want to switch (which is only possible during a qualifying life event or the next open enrollment), confusion about how reimbursement timing works, employees who did not enroll at all and missed their window, and questions about whether specific providers are in-network on the employee's chosen plan.

A responsive ICHRA administrator can resolve most of these issues quickly. But the employer's HR team needs to be prepared for a higher volume of benefits questions in the first six months compared to a group plan. By month eight, most employees have settled into their plans and the question volume drops significantly.

Months 9 Through 12: Stabilization and Data Collection

By the end of year one, the ICHRA is running smoothly for most employers. This is also when the real financial picture becomes clear. Employers can now see actual reimbursement utilization (what percentage of the allowance employees are using), total employer cost versus projected group plan cost, employee satisfaction survey results, and administrative cost compared to the old group plan model.

Financial Outcomes: What Mid-Size Employers Report After Year One

Employer Cost Savings

The range is wide, but the trend is consistent. Most mid-size employers with 50 to 250 employees report first-year savings of 10 to 25 percent compared to their projected group plan renewal. The savings come from three sources: employees choosing plans that cost less than the allowance (the surplus stays with the employer), elimination of carrier-embedded administrative margins (individual plans have different cost structures than group plans), and the ability to set different allowances for different employee classes rather than subsidizing one uniform premium.

For a 100-person company with a projected group plan cost of $750 PEPM, switching to ICHRA with an average allowance of $700 PEPM, the first-year savings typically ranges from $60,000 to $180,000. The lower end accounts for employees who choose plans at or above the allowance; the upper end reflects a workforce where many employees (particularly younger ones) select lower-cost plans.

Employee Cost Impact

This is where it gets nuanced. Some employees pay less under ICHRA because they can choose a plan that matches their actual needs rather than overpaying for coverage they do not use. A healthy 28-year-old might select a high-deductible plan for $350 per month, pocket the difference between that and the $700 allowance in premium savings, and come out ahead. But a 58-year-old with chronic conditions might find that the best available individual plan costs $950 per month, meaning they are paying $250 out of pocket above the allowance. The employer needs to be transparent about this trade-off and consider age-adjusted allowance tiers to mitigate it.

Employee Experience: What Your Team Actually Thinks

The Satisfaction Curve

Employee sentiment follows a predictable pattern in year one. During the announcement phase, there is anxiety and skepticism (especially from employees who liked the group plan). During enrollment, satisfaction depends heavily on the support experience. If employees feel guided, they are generally positive. If they feel abandoned, negativity spikes. During the first quarter of coverage, satisfaction stabilizes as employees use their plans and confirm their doctors are in-network. By the end of year one, most employers report that 70 to 85 percent of employees rate their ICHRA experience as "good" or "excellent," with higher scores in companies that provided enrollment concierge services.

What Employees Like Most

Choice is the number-one positive. Employees appreciate being able to select the carrier, network, deductible, and copay structure that fits their life. Many employees also discover that they can get better coverage for less money by shopping the individual market, particularly in states with competitive marketplaces. The ability to keep the same plan even if they change jobs (since it is an individual plan, not an employer plan) is also a meaningful benefit that employees recognize over time.

What Employees Dislike

The biggest complaint is complexity. Choosing from dozens of plans is stressful, especially for employees who are not comfortable navigating health plan details. The second complaint is reimbursement timing. Some ICHRA platforms process reimbursements weekly, others monthly. Employees used to a group plan where the employer's share is invisible in the premium feel the friction of submitting documentation and waiting for reimbursement. Modern ICHRA platforms are reducing this friction with direct-pay arrangements where the allowance is applied directly to the premium, but not all platforms offer this yet.

Administrative Lessons from Year One

Choosing the Right ICHRA Platform

The ICHRA administration platform is the backbone of the entire arrangement. Key features to evaluate include direct-pay capability (applying the allowance directly to the carrier premium so employees never see a reimbursement delay), marketplace integration (connecting employees to ACA marketplace plans alongside off-marketplace options), multi-state support (critical for employers with remote or distributed workforces), compliance engine (ACA affordability calculations, Form 1095 generation, substantiation of claims), and employee support (dedicated help desk or enrollment concierge).

Defining Employee Classes

ICHRA regulations allow employers to create classes based on geographic location, job category, salaried vs. hourly status, full-time vs. part-time status, and seasonal or temporary designation. Most mid-size employers use two to four classes. The most common structure is geography-based (since individual plan costs vary significantly by state and metro area) combined with a full-time/part-time split. Overly complex class structures create administrative headaches without meaningful benefits.

Compliance Requirements

ICHRA has specific compliance obligations that differ from group plan requirements. Employers must provide a written ICHRA notice to eligible employees at least 90 days before the plan year start date. The notice must include the allowance amount, the employee's right to opt out, and information about marketplace subsidy eligibility. Employers also need to file annual reports and ensure the ICHRA meets ACA affordability standards if applicable. A qualified ICHRA administrator handles most of this, but the employer remains ultimately responsible.

How Year Two Improves on Year One

The second year is where ICHRA transitions deliver their strongest value. Armed with 12 months of data, employers can adjust allowance amounts based on actual utilization (most employees do not use the full allowance, allowing for modest reductions without impacting employee satisfaction). They can refine employee classes based on what worked and what created friction. They can improve communication and enrollment support based on first-year feedback. They can also negotiate better rates with their ICHRA administrator based on demonstrated volume and low administrative burden.

Employers who commit to a two-year ICHRA strategy typically see cumulative savings of 15 to 35 percent over their projected group plan costs for the same period.

Model Your ICHRA Transition with the Benefits ROI Calculator

Related reading: multi-employer Taft-Hartley health plans | benchmarking your health plan costs | supplemental benefits that reduce payroll taxes

Frequently Asked Questions

Does ICHRA work for employers with employees in multiple states?

Yes, and this is actually one of ICHRA's strongest use cases. Because employees shop for individual plans in their own state, a multi-state employer does not need to find a single carrier that covers all locations. Each employee accesses the plans available in their market. The employer can set different allowance amounts by geographic class to account for cost differences between states.

Can employees still get marketplace subsidies with ICHRA?

It depends. If the employer's ICHRA allowance meets the ACA affordability threshold (meaning the employee's out-of-pocket cost for the lowest-cost Silver plan would not exceed a certain percentage of household income), the employee is not eligible for premium tax credits. If the allowance is below the affordability threshold, the employee can opt out of the ICHRA and access subsidized marketplace coverage instead. Employees must choose one or the other -- they cannot receive both the ICHRA allowance and marketplace subsidies.

What happens if an employee does not enroll in a health plan?

To receive ICHRA reimbursements, the employee must have individual health plan coverage. If an employee chooses not to enroll in any plan, they cannot access the ICHRA funds. The unused allowance remains with the employer. Employers should emphasize during enrollment that opting out of coverage means forfeiting the allowance entirely.

How do pre-existing conditions affect ICHRA?

Under ACA regulations, individual health plans cannot deny coverage or charge higher premiums based on health status or pre-existing conditions (except for tobacco use in most states). This means employees with chronic conditions can access the same plan options and pricing as healthy employees. ICHRA does not change this protection.

Can the employer change the allowance amount each year?

Yes. Employers can adjust allowance amounts at the beginning of each plan year. This is one of the key advantages of ICHRA over group coverage -- the employer has direct control over the total benefits budget and can increase, decrease, or restructure allowances annually based on financial goals and employee feedback.

Is ICHRA subject to ERISA?

Yes, ICHRA is considered an employer-sponsored group health plan and is subject to ERISA. This means the employer must maintain a plan document, provide a summary plan description, and comply with ERISA reporting and disclosure requirements. Most ICHRA platforms generate these documents automatically as part of their service.

How does ICHRA affect employee recruiting and retention?

The impact depends on implementation. Companies that offer generous ICHRA allowances with strong enrollment support report that ICHRA is a recruiting advantage because employees can customize their own health plan. Companies that offer minimal allowances without support may find it harder to compete with employers offering rich group plans. The key differentiator is the communication and support experience, not just the dollar amount.

References

1. Departments of Treasury, Labor, and HHS. "Final Rules on Health Reimbursement Arrangements." Federal Register, June 2019. federalregister.gov
2. Kaiser Family Foundation. "2025 Employer Health Benefits Survey: Individual Coverage HRAs." kff.org
3. Society for Human Resource Management. "ICHRA Implementation Guide for Employers." shrm.org
4. National Association of Health Underwriters. "ICHRA Market Report 2025." nahu.org
5. Centers for Medicare and Medicaid Services. "Individual Market Performance Data." cms.gov