Optimizing ICHRA contributions: Strategies to maximize value

The individual coverage health reimbursement arrangement (ICHRA) is a flexible way for employers of all sizes to offer healthcare benefits to their workforce. However, the key to a successful ICHRA that provides enough value to your employees is setting the right budget.

Choosing the right ICHRA allowance can be challenging if it’s your first time. To get you started, we'll walk you through six strategies for determining an ICHRA budget that will support your employees’ medical needs.

In this blog, you’ll learn:

• How an ICHRA works, including its flexibility compared to employer-sponsored group health plans.
• Six strategies for setting an effective ICHRA budget, such as considering local health insurance costs.
• How to customize your ICHRA by tailoring allowances for employee classes and selecting eligible expenses for reimbursement.

How does the ICHRA work?

The ICHRA is a cost-effective alternative to traditional group health insurance. With an ICHRA, employers can reimburse employees tax-free for their individual health plan premiums and more than 200 types of qualified medical costs.

Instead of requiring employers to deal with insurance companies’ strict minimum participation requirements and annual rate hikes, the ICHRA gives employers and employees more control over their budget and healthcare.

Here’s a brief snapshot of how the ICHRA works:

1. You set a monthly allowance amount. Employers choose the amount of money they want to offer their employees for medical care. The ICHRA has no minimum or maximum contribution limits. So, you can offer as much allowance as your budget allows.
2. Your employees get qualifying individual health insurance coverage. Employees must have a qualifying type of individual coverage to participate in the benefit.
3. Your eligible employees buy healthcare services and items. Your employees pay for premiums and other necessary medical care items and services out-of-pocket.
4. Your employees submit proof of an expense. Current employees must show proof of eligible medical expenses to receive reimbursement. Employee claim documentation is usually a receipt or invoice.
5. You or your HRA administrator review the documentation. The document must show five essential elements, including the service or product and the total amount paid. If it's an eligible expense with documentation that meets the required criteria, you can approve it.
6. You reimburse your employees. After approving the medical expense, you reimburse your employees tax-free up to their set allowance amount. Once an employee reaches their allowance, they can't exceed it.

ICHRAs also offer significant tax savings for small businesses and employees. ICHRA reimbursements are income-tax-free for employees. So, there’s no need to report these funds on your employees’ W-2s at the end of the year. Employers also pay no payroll taxes on reimbursements and can deduct the payments as a business expense.

Six strategies for maximizing your ICHRA contributions

Our 2024 Employee Benefits Survey found that 92% of employees rated health benefits as important. But according to a survey by the Society for Human Resource Management (SHRM), only 68% of employees say they’re satisfied with their health benefits¹. If you want your ICHRA to make an impact, offering your staff a meaningful allowance is essential.

So, how should you determine your ICHRA allowance? Here are six ways to maximize your ICHRA contributions.

1. Consider the cost of individual health insurance in your location

A major reason why employers offer an ICHRA is to cover their employees’ individual policy premiums instead of offering a group plan. Based on recent KFF data, the average monthly cost of a benchmark silver marketplace plan in 2025 is $497². But depending on your state, the cost of individual health coverage will vary.

For example, below are the top three most and least expensive states for an individual health insurance plan in 2025:

Monthly premiums will vary based on other factors like your employee’s age, family size, and chosen medical plan. However, understanding how geographic location impacts premium costs is a good first step when determining your ICHRA allowance, especially if you have remote workers who live in different states.

2. Research average ICHRA allowances

If it’s your first time offering an ICHRA, you may opt for a smaller budget while you and your staff familiarize yourselves with the benefit. Once your employees realize the ICHRA’s value, you can raise their allowance amount annually. But before you do, you may want to research the average ICHRA allowances to give you an idea of your options.

According to our 2024 ICHRA Report, the average monthly ICHRA contribution amount was $524. While this may be enough in your location to cover your employees’ monthly healthcare expenses, you should check how much other organizations in your state are putting toward their ICHRA benefits.

Organizations in the following states offered their employees these average monthly ICHRA allowances in 2024:

1. District of Columbia: $1,115
2. New York: $998
3. Virginia: $927
4. Connecticut: $912
5. New Jersey: $911

Lastly, let’s look at company size. In 2024, applicable large employers (ALEs)—or companies with 50 or more full-time equivalent employees (FTEs)—offered their employees an average ICHRA allowance of $448 per month. Non-ALE companies with fewer employees contributed a higher average amount of $600 monthly.

You might not be able to match another company’s or state’s budget exactly. But by researching the trends, you’ll better understand how your ICHRA ranks among the pack.

3. Study what competitors in your industry are offering

Another factor to consider is what your competitors in your industry offer regarding health benefits. Traditional group health plans remain a common choice. However, the ICHRA is rising in popularity due to its flexibility and adaptability across various company types.

Depending on your industry and business goals, you may opt for a higher ICHRA allowance to attract and retain key employees more effectively.

Here’s how much monthly ICHRA allowance companies in these industries offered their employees on average in 2024:

1. Engineering: $1,126
2. Dental: $938
3. Real Estate: $926
4. Technology: $827
5. Agriculture: $789

If you don’t think you can offer these allowances yet, don’t worry. Remember, the ICHRA has no minimum or maximum contribution levels, so you can adjust your budget as your business grows.

4. Ensure your allowance beats the ICHRA affordability test (for ALEs)

If you're an ALE, you can offer an ICHRA instead of traditional group health plans to satisfy the Affordable Care Act’s (ACA) employer mandate. However, you must follow the ACA's affordability rule.

In 2025, an ICHRA is affordable if an employee pays no more than 9.02% of their income for the lowest-cost silver plan on a public exchange. You determine this after factoring in their ICHRA allowance.If your benefit isn’t affordable, your employees can opt out of the ICHRA and collect their premium tax credits to pay for health coverage (if they qualify for subsidies). But by doing so, they won’t be able to take advantage of their ICHRA for premium payments and other out-of-pocket costs.

Because you’re unlikely to know your entire staff’s annual household income, you can use the ACA’s safe harbors to help you meet the ICHRA affordability rule and budget more effectively.

5. Review your employee class customization options

One of the ICHRA’s capabilities is allowing employers to vary allowance amounts by several employee classes. With this extra flexibility, your ICHRA can help you control your budget. You can also target specific employee groups when hiring and retaining top talent.

You can customize these amounts for 11 employee classes, such as salaried or hourly workers. The ICHRA also allows you to vary allowances by employee age and family status.

For example, you can offer your full-time employees larger monthly allowance amounts (such as $800 per month) than your part-time employees (let’s say, $350 per month). If you’re a remote organization, you can offer a higher amount to remote employees in states with higher healthcare costs than those in other cheaper locations.

If you're offering an ICHRA with PeopleKeep, only the following classes of employees are available:

• Full-time employees
• Part-time workers
• Seasonal employees
• Salaried staff members
• Non-salaried employees
• State-based workers
• A combination of the above classes, such as full-time salaried

6. Examine which expenses you want to make eligible for reimbursement

According to IRS regulations, HRA funds can only reimburse an employee for eligible out-of-pocket expenses outlined in IRS Publication 502³ and the CARES Act⁴. But, during the plan design process, you can restrict what types of medical costs you want to allow for reimbursement.

For example, you may offer an ICHRA that only reimburses individual plan premiums for cost control purposes. You could also make premiums and certain items eligible, like prescription drugs, but exclude other healthcare expenses, such as dental and vision care. But, employees will get the most value from their ICHRA if you allow reimbursement for a wide range of costs.

In 2024, the average annual healthcare spending per person in the U.S. was about $15,074⁵. For an ICHRA allowance, this would equal $1,256 per month. While your benefits budget may not allow you to offer this amount exactly, you may want to provide a significant portion of it to address your employees’ various healthcare needs.

Conclusion

If you’re looking for a flexible alternative to costly group health insurance, the ICHRA is an affordable and customizable option. Using these six strategies, you can effectively design your ICHRA to fit your business's diverse needs without sacrificing quality, employee satisfaction, or financial security.

Do you want to avoid the time-consuming burden of administering an ICHRA? If so, PeopleKeep can help! Our HRA software makes setting up and managing your ICHRA easy so you can focus on other company tasks. Book a call with one of our HRA specialists, and we’ll get you on your way.

1. SHRM - Better Pay and Benefits

2. KFF - Marketplace Average Benchmark Premiums

3. IRS Publication 502

4. CARES Act

5. U.S. Healthcare Spending Rises