The Truth About ICHRAs: Busting 5 Myths Holding Employers Back
Understanding the facts behind individual coverage health reimbursement arrangements (ICHRAs) could help your organization build a more flexible, cost-effective, and employee-centered benefits strategy.
Since ICHRAs were introduced in 2020, they've grown steadily in popularity. However, some employers still hesitate to even consider a switch to them because of lingering misconceptions. Some assume that they're only for small businesses or may be too complex to manage, while others worry their employees won't want to pick their own plans.
The reality? ICHRAs are transforming how employers of all sizes approach health benefits. They can make costs more predictable, improve employee satisfaction, and align with Affordable Care Act (ACA) compliance – all while offering employees true choice in their benefits.
"Flexibility is no longer just a perk – it's a foundation," says Gary Daniel, Chief Growth Officer at Thatch, an ADP partner, a leading platform that helps employers design and manage ICHRAs with ease. "We're seeing a shift toward benefits that adapt to both business realities and employee preferences."
In this article, we'll break down five of the biggest myths surrounding ICHRAs and provide what employers should know to separate fact from fiction.
Myth #1: ICHRAs are only for small businesses
Some believe that ICHRAs were designed exclusively for small businesses that cannot afford traditional group health insurance. However, any size employer can offer an ICHRA.
According to Internal Revenue Service (IRS) Final Rule (84 FR 28888) and ACA Section 4980H, large employers may use ICHRAs to meet coverage requirements, as long as allowance amounts meet affordability thresholds under 26 CFR § 54.4980H-5(e). For instance, the IRS rules allow class-based designs (i.e., salaried vs. hourly; full-time vs. part-time) to fit individual business needs.
In turn, small employers gain a scalable alternative to group plans without participation minimums, while larger employers are afforded cost predictability and can support distributed workforces across multiple states.
"A well-structured class design gives employers strategic control," adds Daniel. "The key is consistency. Define your classes clearly, document affordability, and review them annually to stay compliant."
Compliance checklist:
- Verify affordability using IRS safe harbors (i.e., Rate of Pay, Federal Poverty Line, or W-2).
- Maintain documentation of class definitions.
- Test affordability each renewal period.
Myth #2: Employees don't want to choose their own insurance
The old claim is that employees prefer employer-selected group plans because they're overwhelmed by individual marketplaces. In reality, modern workers place value in choice. According to the Society for Human Resource Management (SHRM), more than 9 in 10 employees say benefits flexibility is important to their job satisfaction.
"When employees understand their options, they appreciate being in control," explains Daniel. "They can pick the plan that best fits their family, budget, and priorities."
Platforms like Thatch make it simple for employees to shop, compare, and enroll in coverage, all while using employer-funded ICHRA dollars. For younger employees, customization feels natural. For families, it means the right coverage without compromise. This transparency helps build trust, leading to benefits such as employee satisfaction and retention.
Decision tree supporting employee choice:
- Provide ICHRA education and plan selection guidance.
- Offer decision-support tools (i.e., cost calculators).
- Automate enrollment and payment processes.
- Reinforce portability benefits (i.e., coverage stays with the employee).
Myth #3: ICHRAs are too complex to manage
The thought that managing reimbursements, payroll, and compliance adds more work without a traditional group health plan is simply false. Technology has simplified everything.
Modern benefits platforms automate up to 80% of enrollment, payments, and compliance reporting through integration. Translation: What once took weeks can now run in the background, giving employers predictability and employees transparency.
These systems also include built-in ACA affordability checks and IRS reporting, significantly reducing HR's administrative burden. This frees them up to focus on strategy instead of spreadsheets.
Compliance checklist:
- Confirm your ICHRA vendor supports electronic substantiation of premiums.
- Verify integration with your payroll provider.
- Keep affordability documentation on file annually.
Myth #4: ICHRAs are just a temporary experiment
Because ICHRAs were created through regulation, not legislation, there is a fear that they could be repealed at any time. However, ICHRAs are actually gaining long-term policy support.
For instance, the 2025 CHOICE Arrangement Act (Custom Health Option and Individual Care Expense) seeks to make ICHRA a permanent fixture in employer benefits, while expanding adoption through small business tax credits. In addition, several states have already introduced their own ICHRA incentive frameworks.
"We're well past the pilot stage," notes Andrew DeRosa, licensed agent at Automatic Data Processing Insurance Agency, Inc. (ADPIA®) and director of sales operations at ADP. "Lawmakers recognize that ICHRAs create sustainable, transparent benefits packages – shifting their focus to refining the guardrails, not rolling them back."
With this certainty, employers can plan multi-year benefits strategies with confidence, while early adopters can potentially gain a competitive advantage in their recruiting practices.
Myth #5: ICHRAs destabilize the ACA or individual markets
While some argue that moving employees to individual coverage will destabilize ACA marketplaces, the data tells a much different story. According to the latest statistics, enhanced tax credits under the Inflation Reduction Act made ACA plans more affordable and expanded participation by millions, solidifying risk pools.
As more employed, healthier individuals join the individual marketplace, the result is greater stability, not less.
"ICHRAs don't disrupt markets – they mature them," argues DeRosa. "By aligning employer dollars with employee choice, we're strengthening the foundation of consumer-directed health care."
Bottom line: More participation means more competition in the marketplace, leading to better pricing.
Change-management communications tips:
- Announce ICHRA changes 90 days before rollout.
- Host live webinars and FAQs with HR and benefits advisors.
- Emphasize choice, portability, and compliance protection.
- Provide year-one support for employees new to marketplaces.
5-step ICHRA implementation timeline
| Step | Description | Risk flag |
| 1. Design | Define eligibility classes and contribution amounts. | Misaligned class definitions can trigger ACA violations. |
| 2. Validate | Test affordability using IRS safe harbors and eligibility rules. | Incorrect affordability calculations may incur penalties under §4980H. |
| 3. Communicate | Educate employees and HR teams. | Poor messaging can lower adoption and trigger confusion. |
| 4. Launch | Use a platform that integrates enrollment and payroll. | Incomplete data syncs may delay reimbursements. |
| 5. Review | Audit participation rates, document compliance, and gather employee feedback. | Missing documentation may affect year-end reporting. |
Putting it all together
ICHRAs are not a niche experiment – they represent a structural shift in how health benefits are delivered. With the right partner and compliance framework, they can simplify administration, expand employee choice, and stabilize long-term costs.
"Employers are realizing that flexibility means control, not chaos," says DeRosa. "When you design an ICHRA thoughtfully, you get compliance, predictability, and happier employees."
Discussing your individual business needs with a licensed insurance agent, like ADP® affiliate, Automatic Data Processing Insurance Agency, Inc. (ADPIA®), or other licensed professionals can help you to stay compliant with laws and regulations, as well as get the most out of your insurance plans.
"When employers empower choice and predictability, they build lasting trust," concludes DeRosa. "That's what the future of benefits is all about."
To learn more about implementing an ICHRA or other benefits strategies, check out ADPIA for the latest resources on health benefit innovation.
Automatic Data Processing Insurance Agency, Inc. (ADPIA) is an affiliate of ADP, Inc. All insurance products will be offered and sold only through ADPIA, its licensed agents or its licensed insurance partners; One ADP Blvd. Roseland, NJ 07068. CA license #0D04044. Licensed in 50 states. Certain services may not be available in all states with all carriers. Some carriers may charge an additional fee for services. This information is not intended as tax or legal advice. If you have any questions, contact a tax or legal professional. ADP, the ADP logo and ADPIA are registered trademarks of ADP, Inc. Copyright © 2025 ADP, Inc. All rights reserved.
