Introduction

When advising small business owners on health benefits, you’ll inevitably face a critical question: “What’s the best approach for our company?” Two increasingly popular structures—Individual Coverage Health Reimbursement Arrangements (ICHRAs) and level-funded plans—both offer flexibility and potential cost advantages, but they operate on fundamentally different mechanics.

The choice between these two isn’t about finding a universal “winner.” Instead, it’s about understanding how each structure aligns with your client’s specific priorities: budget predictability, administrative tolerance, employee expectations, and long-term strategic goals.

In this guide, we’ll break down the key differences, explore the distinct advantages and challenges of each approach, and provide a framework for matching the right strategy to the right business.

Understanding the Basics

What Is an ICHRA?

An Individual Coverage Health Reimbursement Arrangement is an employer-funded account that reimburses employees for individual health insurance premiums they purchase themselves. Rather than the employer selecting and sponsoring a group plan, employees shop for coverage on the ACA marketplace or private market and submit proof of purchase for reimbursement (typically up to an employer-set monthly limit).

Key features: - Tax-advantaged reimbursement: Employees receive tax-free reimbursements for qualifying premiums - Individual ownership: Employees control their own policy selection and carrier - No group coverage requirement: The employer doesn’t sponsor a traditional group health plan - Simple compliance: Relatively straightforward nondiscrimination and documentation requirements introduced in 2020

What Is a Level-Funded Plan?

A level-funded (or partially self-funded) plan is a hybrid structure where an employer essentially self-funds employee medical claims while purchasing stop-loss insurance to protect against catastrophic costs. The employer pays a predictable monthly fee that covers: - Expected claims (based on actuarial projections) - Administrative fees - Stop-loss insurance premium - Potential surplus or deficit reconciliation

Key features: - Predictable budgeting: Fixed monthly contribution with clear cost allocation - Claims data ownership: The employer retains claims data and insights - Stop-loss protection: Capped exposure on individual or aggregate claims - Greater control: Employer involvement in plan design and claims management

Cost Implications: Predictability vs. Variability

ICHRA Cost Structure

ICHRAs offer straightforward budgeting: - Monthly per-employee allowance: Fixed contribution (e.g., $400/month per employee) - No claims volatility: Cost is entirely predictable month-to-month - Transparency: Clear understanding of out-of-pocket employer spend - Potential savings: Smaller employers may see lower overall costs by avoiding group plan administrative overhead

Cost consideration: With an ICHRA, the employer doesn’t benefit from large-group rating. An employee earning a $500/month individual marketplace plan will consume your $400 allowance plus require the employee to cover the gap. Conversely, an employee finding a $300 plan stays within budget. The employer’s cost is fixed regardless of claims.

Level-Funded Cost Structure

Level-funded plans introduce more complexity: - Monthly aggregate costs: Employers pay for projected claims plus administrative overhead - Claims-based adjustments: Year-end reconciliation can result in surplus returns or deficit billings - Stop-loss thresholds: Individual and aggregate limits determine how much the employer truly “risks” - Potential savings or overages: Unlike ICHRAs, actual claims experience directly impacts year-end settlement

Cost consideration: If your client’s employee population experiences lower-than-expected claims, they may receive a significant surplus refund. Conversely, if claims run high (despite stop-loss protection), they might owe additional premium. This variability can make multi-year budgeting more challenging.

Administrative Burden and Compliance

ICHRA Administration

Relatively light lift: - Employees handle their own plan selection and enrollment - Employer establishes the reimbursement policy and allowance - Documentation centers on proof of coverage (Form 1095-B, policy declarations) - Nondiscrimination testing exists but is simpler than traditional group plans - No claims administration or employee support for specific plan details

Potential challenge: Employees unfamiliar with marketplace shopping may need guidance, and some smaller employers worry about leaving employees to navigate complex healthcare options alone.

Level-Funded Administration

More involved: - Ongoing coordination with third-party administrators (TPAs) - Claims management, appeals, and utilization review - Employee education about plan design, coverage details, and claims processes - Monthly reconciliation and reporting - Coordination with stop-loss carriers - More robust nondiscrimination compliance documentation

Potential advantage: The employer gains insights into claims patterns, which can inform wellness initiatives and plan design adjustments. Many employers find this engagement valuable.

Control, Flexibility, and Plan Design

ICHRA Control

ICHRAs offer a different type of flexibility: - Employee choice: Employees select plans matching their individual needs (PPO, HMO, high-deductible with HSA eligibility, etc.) - Employer simplicity: The employer sets one or a few allowance levels but doesn’t dictate plan specifics - Individual optimization: Employees may find better plan fits than a one-size-fits-all group offering - Limited design input: Employers can’t shape the specific benefits, networks, or cost-sharing structure

Level-Funded Control

Level-funded plans give employers considerably more design authority: - Customized benefits: Employers work with TPAs and brokers to design deductibles, copays, out-of-pocket maximums, and covered services - Network selection: Choice of provider networks (PPO, HMO, regional options) - Wellness integration: Direct alignment between plan design and wellness strategies - Claims experience leverage: Claims data informs future plan adjustments - Employer governance: Active role in plan governance and decision-making

For employers who want to shape the employee experience and align benefits with organizational priorities, level-funded plans offer substantially more control.

Employee Experience and Satisfaction

ICHRA Employee Experience

Autonomy: Employees appreciate control over plan selection
Transparency concerns: Some employees worry they’re left to fend for themselves
Subsidy limitations: If marketplace plans cost more than the allowance, employees bear the difference
HSA compatibility: Employees can pair high-deductible plans with Health Savings Accounts, maximizing tax advantages
Portability: Employees own their policies and can keep them if they leave

Level-Funded Employee Experience

Traditional feel: More closely resembles conventional group health benefits
Employer support: Clear HR/benefits support for claims, appeals, and questions
Consistent coverage: Employees know what to expect, similar to larger employers
Network familiarity: Consistent network across the employee base
Integration: More aligned wellness and benefits communication

Which Structure Fits Your Client?

ICHRA Is Often a Better Fit When:

The employer wants minimal administrative burden: They prefer simplicity over control
Workforce is geographically dispersed: Individual marketplace plans work across state lines
Budget certainty is paramount: No claims variability; fixed monthly costs
Employees are benefits-savvy: They can navigate marketplace shopping confidently
The employer has limited HR infrastructure: No dedicated benefits staff
Tax savings matter: Employees benefit from HSA eligibility with high-deductible plans

Level-Funded Plans Are Often Better When:

The employer wants to shape plan design: They have specific benefit priorities
Claims data insights are valuable: The organization wants to optimize benefits strategically
The workforce is stable and understood: Predictable enrollment and claims patterns
Employer size allows: Generally more efficient above 20-30 employees
Flexibility in year-end surplus/deficit is acceptable: They can absorb claims variability
Employee satisfaction requires traditional coverage: The workforce expects conventional group benefits

Regulatory and Compliance Considerations

Both structures have compliance requirements:

ICHRA must adhere to: - ACA market rules (no lifetime/annual limits on essential health benefits) - Nondiscrimination rules (allowances must be uniform within defined classes) - COBRA applicability (varies by state and structure) - Form 1095-B reporting

Level-funded plans must follow: - Full ACA requirements for group health plans - ERISA regulations (if applicable) - Network adequacy and coverage standards - Comprehensive nondiscrimination testing

Work with compliance experts and legal counsel to ensure proper structure and documentation.

The Bottom Line

Neither ICHRAs nor level-funded plans are inherently “better”—they serve different employer philosophies and needs.

Choose ICHRA if you want simplicity, budget certainty, and are comfortable letting employees own more of the selection process.

Choose level-funded if you want control, claim insights, traditional employee experience, and can absorb claims variability.

Many sophisticated employers use a hybrid approach: an ICHRA for some employee classes and a level-funded plan for others, optimizing for each group’s needs.

The best way to decide? Collaborate with your client to understand their priorities, budget tolerance, HR capacity, and employee population. From there, the right structure becomes clear.

Nexus Benefit Solutions is an independent employee benefits advisory firm based in West Michigan. Questions? Reach out at jason@nexusbenefitsolutions.com or call 616-425-9740.

ICHRA vs. Level-Funded Plans: Which Structure Fits Your Client?