Small business owners know very well that finding health benefits for a team (especially smaller-sized ones) is hard/complicated/tedious (pick your favorite word). Between skyrocketing group health premiums and the endless acronyms (HSA, HRA, ACA —are they just pulling letters out of a hat?), it’s enough to make anyone want to throw in the towel. But don’t give up just yet. There are more options out there than you might think, and some of them are designed specifically to make life easier for small businesses.
We’ve talked about the differences between Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs) before. (You can catch up on that here if you’re curious.)
For this article, we’re taking a closer look at a special type of HRA that’s been gaining traction lately—the Individual Coverage Health Reimbursement Arrangement, or ICHRA. Don’t worry—it may sound complicated, but it’s actually deemed a simpler health benefits solution.
Quick Recap of the Acronym Soup
Before we get too far, let’s briefly revisit what makes HRAs and HSAs different (and what they're good for).
What is an HSA?
Picture this as a personal piggy bank for medical expenses. A Health Savings Account is an account that the employee owns where they can stash pre-tax dollars for health-related costs like doctor’s visits, prescriptions, acupuncture (yes, really), and more. It’s portable—meaning the money follows employees if they switch jobs—and any unused funds roll over indefinitely. Plus, HSAs can grow through investments.
What's the catch? Employees can only use an HSA if they're enrolled in an eligible High Deductible Health Plan otherwise known as HDHP. (Yet another acronym.) Also, they’re responsible for managing the account themselves, which can feel like extra homework for some. How high a deductible? Per IRS guidelines in 2025, a health insurance plan fits the category with a deductible of at least $1,650 if you have an individual plan or a deductible of at least $3,300 if you have a family plan. (More details can be found on the IRS website.)
What is an HRA?
Think of this as the employer showing up with a gift card for health expenses. The employer decides how much pre-tax money each employee gets, and the employee uses it to cover things like premiums, deductibles, and copays. Unlike HSAs, the employer controls the funds, and anything unused at the end of the year goes back to the company. There are no restrictions such as having a high deductible health plan, so it’s more flexible or rather it was more flexible.
What happened to HRAs? How did they evolve to ICHRAs?
Health Reimbursement Arrangements have been a way for employers to give employees tax-free money for healthcare expenses for years. The IRS officially recognized HRAs in 2002 as an employer-funded health benefit that reimburses employees, tax-free, for healthcare expenses. But, in 2014, the Affordable Care Act, the big federal healthcare law passed that established a marketplace among other things, prohibited combining individual health insurance with an HRA. As a result, organizations could only offer HRAs tied to a group health plan.
Then what happened
The introduction of a new type of HRA in 2020 was a major policy shift. The government realized that small businesses were struggling to afford traditional group plans, so they created a way for employers to fund health benefits without managing a group plan themselves. That way was the establishment of the individual coverage health reimbursement arrangement.
Employers now had the ability to reimburse employees for “qualified” health plans, which included all health plans purchased from the marketplace, while still maintaining the tax advantages of traditional HRAs. Bing, battaboom…HRAs were back.
Biggest Change:
- Pre-2020: HRAs couldn’t be used for individual ACA plans.
- 2020+ (ICHRA): HRAs can now be used for individual ACA plans, with some compliance rules in place.
This shift made ICHRA a powerful tool for small businesses that want to offer tax-free health benefits without the burden of group insurance.
And it couldn’t have come at a better time especially for small businesses. Over the past few years, the number of SMBs offering health benefits has dropped from 60% to 40%. Wowzer.
The IRS and ACA rules didn’t allow HRAs to be used for individual market plans because they were considered a way for employers to circumvent ACA requirements (like offering a group plan that didn’t meet essential health benefits).
But their evolution into ICHRA is a major shift in how businesses—especially small ones—offer health benefits.
Meet ICHRA, the MVP for Small Businesses
Individual Coverage Health Reimbursement Arrangement (say that five times fast), was introduced in 2020 as a way to make offering health benefits simpler, more personalized, and affordable—especially for small businesses that can’t afford to offer a traditional group health plan.
Here’s how it works in plain English:
- For Employers: You set a fixed, monthly budget that you’re comfortable with (no surprises here).
- For Employees: They take that money and buy their own health insurance plan from the marketplace. Everyone gets to pick the coverage that works best for them, rather than being forced into a one-size-fits-all group plan. It’s like Build-A-Bear but for health insurance except not as cuddly.
Why is everyone talking about ICHRAs?
There are some obvious advantages, especially for small employers:
- Cost Control: You decide exactly how much you’re spending per employee. Personalization: Employees like the freedom to choose a plan that fits their unique needs (because Janet in marketing probably doesn’t want the same coverage as Joe in accounting).
- Tax Advantages: All contributions are tax-free.
- Simplicity: Unlike traditional health plans, you’re not stuck managing the group insurance policies.
But What About HSAs?
Ah, glad you asked. HSAs are still a fantastic option—if you’re working with a group health plan and it’s a High Deductible Health Plan. They allow employees to save and grow their own funds, which can be great for covering out-of-pocket costs or saving for future medical expenses. But they’re not a standalone solution for small businesses that want to offer a health benefit without a group plan.
Which One Should You Choose?
We get it. Deciding between all these options can feel like choosing between salty and sweet popcorn—both have their charm, but the right pick depends on your situation. And the right pick can even be a little of both.
Here’s a breakdown to help you decide:
Go for an HSA if...
- You already offer a group health plan (especially a high deductible one), your employees like it, and just want to give your employees a way to save on out-of-pocket expenses.
Go for an HRA (or ICHRA) if...
- You don’t currently offer a health benefit but want to start.
- You’re tired of being locked into expensive and restrictive group plans.
- You like the idea of giving employees more freedom while keeping costs predictable.
The Double Whammy Option
Here’s a little pro tip for the overachievers out there—you don’t necessarily have to choose one over the other. Some businesses use ICHRA to provide tax-free money for premiums and an HSA to help employees save for out-of-pocket costs. You get the best of both worlds, and your employees get extra support. It’s a win-win.
Why ICHRA Has Changed the Game
Before 2020, small businesses had limited choices for offering health benefits—expensive group plans or…nothing. And frankly, "nothing" isn’t much of a benefit. ICHRA has opened the door for small businesses to create a tailored, affordable, and effective benefits package that works for both employers and employees.
StretchDollar’s ICHRA plans take things a step further by simplifying the whole process with pre-defined categories (like Full-Time vs. Part-Time teams) and an easy-to-use platform. It’s designed specifically for small businesses, and we think you’re going to love how easy it makes the whole health benefits headache.
Whether you go for an HSA, an HRA, or both, offering pre-tax health benefits is an amazing way to attract and retain great employees without blowing your budget. Understanding the differences between these options can set your business up for success and save you a lot of headaches and time along the way.
