ICHRA for Small Business: Pros, Cons and Fit

If you own a small business in South Carolina, you want to offer health benefits that attract and keep good employees. But a traditional group plan can feel like signing a blank check.

An Individual Coverage Health Reimbursement Arrangement (ICHRA) is one alternative. You define a reimbursement budget, and your employees buy their own individual health insurance. You do not sponsor a traditional group health plan.

If you run a business in Columbia, Irmo, Lexington, or anywhere in the Midlands, knowing where this option works and where it falls short can save you real money and real headaches.

• Your team is a mix of full-time, part-time, and seasonal workers. A construction company with that mix, spread across multiple counties, might find an ICHRA far more practical than a group plan.
• Everyone on your team wants similar coverage. A ten-person accounting firm in that position might do well with a group plan.
• Some employees already have coverage through a spouse. Many group plans require a minimum percentage of employees to enroll. An ICHRA has no such requirement.
• Your employees are older, or you are in a rural county with few insurance companies. Read the section on when an ICHRA is the wrong fit before you decide.

You set a fixed monthly allowance for eligible employees. Each employee uses that money to get individual health insurance coverage, on or off the public Marketplace, and submits proof of coverage for reimbursement.

You decide the dollar amount. They pick the plan that fits their family, their doctors, and their pharmacy needs.

An ICHRA is an employer-funded health reimbursement arrangement with defined eligibility, notice, substantiation, and reimbursement rules. The IRS created this arrangement in 2020, and it is available to employers of any size, from a two-person landscaping crew in Lexington to a mid-size firm downtown.

Tax treatment depends on how the arrangement is designed and the employer's circumstances; consult your tax advisor.

An affordable ICHRA generally disqualifies an employee from the premium tax credit, whether or not the employee takes the reimbursement.

For plan years beginning in 2027, the affordability percentage is 10.22%. Affordability is determined under IRS rules that change annually and depend on the employer's own numbers. Confirm with your tax advisor.

The calculation also depends on the employee's age, location, household income, and the lowest-cost silver plan available in the employee's rating area.

Yes, within limits. The IRS does not require you to give every employee the same allowance. But an employer may use only the permitted ICHRA employee classes and combinations under the applicable rules. You may not invent your own class, and each employee may belong to only one class. The rules are specific, and getting them wrong can create compliance problems.

Classes you can use. Permitted categories include full-time, part-time, hourly, salaried, seasonal, waiting-period, staffing-agency temporary, collective-bargaining, different-location, and foreign employees working abroad, plus combinations of those categories. A restaurant owner in Irmo with both full-time kitchen staff and part-time servers could offer different monthly amounts to each group only if the classes follow the applicable rules.

What you cannot do. You cannot create an arbitrary class to single out individual employees. An employee may not be offered both an ICHRA and a traditional group plan within the same class. If you offer an ICHRA to some classes and a traditional group plan to others, minimum class-size rules may apply:

• 10 employees for employers with fewer than 100 employees
• 10% of employees for employers with 100 to 200 employees
• 20 employees for employers with more than 200 employees

Those minimums do not apply when the ICHRA is offered to everyone.

Why this matters for a small team. For a business with five or ten employees, class design is where much of the strategy lives. You might offer a higher allowance to full-time managers and a smaller one to seasonal workers. Getting the structure right from the start avoids IRS headaches later. A licensed agent can explain the class, notice, affordability, and substantiation rules; tax questions go to the employer's tax advisor.

One of the biggest draws of an ICHRA is cost predictability. With a traditional group plan, your renewal rate can jump significantly year over year, and you are often locked into one insurance company's pricing. With an ICHRA, you set the allowance and that is your ceiling.

But predictable does not mean simple. Set the allowance too low, and employees will not find it useful. Set it too high, and you are spending more than you need to. The right amount depends on what individual plans actually cost in your area. Marketplace premiums in the Columbia metro area differ from those in rural parts of the state, so a flat number that works in one zip code might fall short in another.

Factor in administration costs too. Most employers use a third-party platform to handle reimbursement claims, verify coverage, and manage compliance documents. These platforms charge monthly fees per employee, which adds to your total spend. Some brokerages help you evaluate these platforms and negotiate pricing, which is worth asking about.

A practical way to model it: look at what you would pay for a group plan, subtract the admin platform cost, and see if the remaining budget translates into a meaningful per-employee allowance. If the allowance would cover a reasonable portion of a mid-tier Marketplace plan, you are likely in good shape.

Neither option is universally better. The table below shows how the two differ on cost control, employee choice, administrative work, and participation rules.

What that means for you. With an ICHRA, a young single employee and a worker with a family of four can each choose what actually fits. The lack of a participation requirement is a real advantage for small businesses where some employees already have coverage through a spouse.

One more difference: with an ICHRA, the affordability test helps determine whether employees can access premium tax credits. That employee-level interaction depends on the applicable IRS rules and individual-market facts.

This model is not right for every business. These are the situations where it can create more problems than it solves.

• Your employees are older or have chronic health conditions. Individual Marketplace plans in your area may be expensive enough that even a generous allowance will not cover much of the premium. Age-based pricing on the individual market can make costs significantly higher for workers in their 50s and 60s compared to what a group plan's community rating would charge.
• You are in a rural South Carolina county with few insurance companies on the Marketplace. If only one insurer offers plans in your zip code, the choice benefit disappears. Your employees may end up with fewer options than a group plan would provide.
• Your employees have never shopped for their own insurance. Some workers find the Marketplace confusing. If your workforce is not comfortable comparing deductibles, networks, and covered drug lists on their own, you will need to connect them with a licensed agent who can guide them through enrollment. Murdock Insurance Group, for example, helps employees in the Columbia and Midlands area pick individual plans that work with their employer's allowance.
• You compete for talent against larger employers with rich group benefits. An ICHRA may feel like a step down to prospective hires, even if the math works out similarly. Perception matters in recruiting.

For a January 1, 2027 effective date, employees generally must receive the ICHRA notice at least 90 days before the plan year begins. For a January 1, 2027 start, the 90-day date is October 3, 2026.

The notice must include required information such as the terms, opt-out right, premium-tax-credit effect, affordability information, and a contact for questions. Confirm timing and notice content with Compliance and your advisor.

An ICHRA can be a smart, flexible way for small businesses to offer health benefits without locking into a traditional group plan's unpredictable costs. But it is not a one-size-fits-all answer. The right choice depends on your team's size, location, age mix, and how much support your employees need when shopping for coverage.

If you are weighing this option for your business in the Columbia, Irmo, or Midlands area, a conversation with a licensed independent agent can clarify whether the numbers work for your budget and your people. Murdock Insurance Group compares options across insurance companies to help you find coverage that fits. You can also call 803-661-6146 to talk through your situation.