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ICHRA and PEO: How They Work Together in 2027

Health insurance renewals are forcing more employers to consider options they may have ignored a few years ago.

One of those options is an Individual Coverage Health Reimbursement Arrangement, better known as an ICHRA.

An ICHRA allows an employer to provide employees with tax-free money that they can use to purchase their own individual health insurance. Instead of the company choosing one group plan for everyone, each employee can select coverage based on their location, doctors, prescriptions, budget, and family needs.

CMS now refers to ICHRAs as “CHOICE Arrangements,” but most employers, brokers, and insurance professionals still use the term ICHRA. The structure remains the same. The employer determines a contribution, employees purchase eligible individual coverage, and the ICHRA reimburses eligible premiums and, depending on the plan design, other medical expenses.

The concept is straightforward. Deciding whether it is right for your company is not.

The Short Answer: When Does an ICHRA Make Sense?

An ICHRA is worth evaluating when:

Your group health insurance renewal has become unaffordable
Your employees are spread across several states
A traditional group plan cannot provide strong networks in every location
Your company has been declined by a PEO or insurance carrier
You want more predictable employer healthcare spending
You cannot meet a carrier’s participation requirements
You want to offer health benefits for the first time
Different parts of your workforce have very different benefits needs

An ICHRA can also work with a PEO. In the right arrangement, the PEO continues providing payroll, HR, compliance, workers’ compensation, and technology while medical benefits are delivered through an ICHRA.

However, not every PEO supports this structure. The arrangement must be evaluated carefully before making a change.

What Is an ICHRA?

An ICHRA is an employer-funded health reimbursement arrangement.

The employer determines how much money will be available to employees. Employees then purchase qualifying individual health insurance, either through a public Marketplace or directly from an insurance carrier. Eligible coverage can also include Medicare for qualifying employees.

Employees must be enrolled in qualifying individual coverage before receiving reimbursements. Short-term medical plans, healthcare-sharing arrangements, and most supplemental products do not qualify.

ICHRA contributions are generally:

Tax-deductible for the employer
Tax-free to the employee
Not subject to payroll taxes
Not capped by a federal annual contribution limit

The employer controls the contribution amount, while employees control which individual health plan they select.

When an ICHRA Can Be a Strong Option

Your Renewal Is No Longer Sustainable

A large renewal increase is one of the most common reasons employers explore an ICHRA.

With a traditional group plan, the company’s cost is affected by the demographics, participation, location, and claims experience of the group. A few high-cost claims can materially change the next renewal. If you are early enough in the cycle, there are also several ways to reduce a 2027 renewal before changing your funding model entirely.

An ICHRA moves employees into the individual insurance market and gives the employer more control over its contribution.

That does not automatically make it less expensive. Individual insurance prices vary considerably by age, ZIP code, family size, and carrier availability. The only responsible comparison is an employee-by-employee analysis.

The employer should compare:

Current employer contributions
ICHRA contribution levels
Individual premiums in every employee location
Deductibles and out-of-pocket exposure
Provider networks
Prescription coverage
Costs for spouses and dependents

An ICHRA should solve the cost problem without simply transferring it to employees.

Your Employees Are Spread Across Multiple States

A group health plan that performs well in one state may provide limited options in another.

This is particularly challenging for remote companies. A national PPO may be expensive, while a regional HMO may leave employees outside the core service area with poor access to care.

An ICHRA allows employees to select individual coverage available where they live. That can give a distributed workforce more local carrier and network choices.

Your Company Cannot Get Competitive Group Coverage

An ICHRA can become a valuable fallback when:

PEOs decline the company during underwriting
Small-group carriers will not quote competitively
Claims experience is driving unusually high premiums
Too few employees enroll to meet participation requirements
Employees are concentrated in difficult insurance markets

In these situations, an ICHRA can preserve an employer-sponsored benefit instead of forcing the company to eliminate health benefits entirely.

You Need Greater Budget Predictability

With an ICHRA, the employer establishes a defined contribution rather than committing to an unknown percentage of future group premiums.

This makes annual budgeting more predictable. Employers can still increase contributions over time, but they have greater control over when and by how much.

That predictability can be valuable for nonprofits, professional services firms, startups, and other organizations operating within fixed budgets.

Employees Need More Choice

A traditional group plan asks every employee to choose from the same limited menu.

An ICHRA can allow one employee to prioritize a lower premium, another to select a plan that includes a specific hospital, and another to choose coverage based on prescriptions or family needs.

More choice can be valuable, but it can also be overwhelming. Employers should not hand employees a reimbursement amount and send them into the individual market alone.

A strong ICHRA strategy should include:

Licensed enrollment support
Decision-support technology
Provider and prescription searches
Clear reimbursement instructions
Ongoing support when coverage issues occur

When an ICHRA May Not Be the Right Answer

An ICHRA is not automatically better than group insurance or a PEO-sponsored health plan.

It may not be the best fit when:

Your current group plan has competitive pricing
Employees highly value a broad national network
Individual options are limited in key employee locations
Older employees would face substantially higher premiums
The employer cannot contribute enough to make coverage affordable
Employees do not want the responsibility of choosing individual plans
The company wants one consistent benefits package across its workforce

The employer also needs to evaluate the effect on premium tax credits.

If an employee is offered an affordable ICHRA, the employee generally cannot receive a Marketplace premium tax credit. If the ICHRA is considered unaffordable, the employee may be able to decline it and qualify for a premium tax credit.

For plan years beginning in 2027, the applicable affordability percentage is 10.22%. Employers with 50 or more full-time equivalent employees should have affordability tested carefully to satisfy the Affordable Care Act’s employer mandate.

Can an ICHRA Work With a PEO?

Yes. An employer does not necessarily have to choose between an ICHRA and a PEO.

Many companies join a PEO for more than health insurance. They may still need:

Payroll processing and tax administration
Multi-state registration and compliance
Workers’ compensation
HR guidance
Employment practices liability insurance
Onboarding and benefits technology
Handbook and policy support

Depending on the provider, a company may be able to retain those PEO services while delivering medical coverage through an ICHRA. It is also worth understanding how a PEO differs from an ASO model before deciding which services you actually want bundled.

There are three structures worth evaluating.

Option 1: Traditional PEO With Its Master Health Plan

This is the structure most employers associate with a PEO.

The company uses the PEO’s payroll, HR, compliance, workers’ compensation, technology, and master group health plan.

This can be the strongest option when the PEO’s health rates and networks are competitive. It also gives employees a more traditional group-benefits experience.

Option 2: PEO Services With an ICHRA Instead of the Master Health Plan

Some PEOs allow the employer to use their payroll, HR, compliance, and workers’ compensation services without participating in the PEO’s master medical plan.

The employer then establishes an ICHRA through the PEO or a separate ICHRA administrator.

This can preserve the operational advantages of a PEO while giving the employer more flexibility over its healthcare strategy.

However, employers should confirm:

Whether the PEO permits medical benefits to be carved out
Whether declining the master plan changes the PEO’s administrative fee
Who administers the ICHRA
How reimbursements flow through payroll
Who handles employee enrollment support
Who completes ACA reporting
Whether ancillary benefits remain available
How deductions and reimbursements appear in the HR platform

The technology may look integrated during a sales demonstration while relying on separate systems behind the scenes. That is not necessarily a problem, but the employer should understand the employee and administrative experience before signing. These are the same details behind the hidden costs of choosing the wrong PEO.

Option 3: A Class-Based Strategy

ICHRA regulations allow employers to offer an ICHRA to certain permitted employee classes while offering a traditional group plan to others.

Permitted classes can include distinctions such as:

Full-time and part-time employees
Salaried and hourly employees
Employees in different geographic rating areas
Seasonal employees
Employees covered by a collective bargaining agreement
Certain temporary employees
New hires and existing employees under specific conditions

Employers generally cannot offer employees within the same class a choice between the traditional group plan and the ICHRA. Minimum class-size rules may also apply when a traditional plan and ICHRA are offered to different groups.

This creates opportunities for companies with different workforce populations, but it also creates compliance risk if the classes are designed incorrectly. A benefits attorney, qualified broker, or experienced ICHRA administrator should review the structure.

Free Benefits Benchmark

Not Sure Whether an ICHRA or PEO Is Right for Your Company?

Stream HR will compare your current benefits, competing PEO plans, and ICHRA options side by side.

We evaluate the real employer cost, employee-level impact, provider networks, technology, service, and implementation requirements. If your current arrangement is already your best option, we will tell you to stay exactly where you are.

Our service is completely free to employers.

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ICHRA vs. PEO Health Plan

Category	ICHRA	PEO Health Plan
Employer cost	Employer sets a defined contribution.	Cost is based on the PEO’s rates and the employer’s contribution strategy.
Employee choice	Employees choose from individual plans available in their location.	Employees choose from plans selected by the PEO and employer.
Networks	Networks vary by individual market and location.	Often provides access to regional or national group networks.
Renewal exposure	The employer controls its contribution.	Rates can change based on underwriting and overall master-plan performance.
Multi-state flexibility	Often a strong option for distributed workforces.	Flexibility depends on the PEO, carrier, and available networks.
Employee experience	Provides more individual choice but requires employees to make more decisions.	Provides a more familiar group enrollment experience.
Administration	Requires an ICHRA administrator and coordination with payroll.	Benefits are generally consolidated through the PEO.

Neither option wins in every situation.

The right answer depends on the actual rates, networks, employee demographics, contribution strategy, administrative structure, and long-term goals of the company.

How to Compare an ICHRA Against a PEO

A proper analysis should compare at least three paths:

Renew the current arrangement
Evaluate competing PEO master health plans
Model an ICHRA employee by employee

The comparison should include more than employer premium savings.

It should measure:

Total employer cost
Employee payroll contributions
Employee deductibles and out-of-pocket maximums
Network disruption
Prescription coverage
Dependent affordability
PEO or ICHRA administrative fees
Implementation requirements
ACA and reporting responsibilities
Employee education and enrollment support

This is the same principle that applies when selecting a PEO: the lowest headline price is not always the lowest total cost.

The Bottom Line

An ICHRA is not a replacement for every group health plan, and it is not a reason by itself to leave a PEO.

It is another financing option.

For companies facing an unaffordable renewal, operating across several states, struggling with participation, or unable to receive competitive underwriting, an ICHRA may provide a more sustainable path.

For other employers, a PEO-sponsored group plan may still offer better pricing, stronger networks, and a simpler employee experience.

In some cases, the best answer is combining the two: using a PEO for payroll, HR, compliance, workers’ compensation, and technology while delivering medical benefits through an ICHRA.

The only way to know is to compare all three strategies using your actual employees and actual market pricing.

Compare Your ICHRA and PEO Options

Before changing your benefits strategy, see how your current plan, the PEO market, and an ICHRA compare using your actual employee data.

Stream HR handles the analysis at no cost to your company. If staying with your current arrangement is the best answer, we will tell you that too.

Get My Free Comparison

Frequently Asked Questions

Can a company use an ICHRA while staying with a PEO?

Yes, if the PEO allows the employer to carve medical coverage out of its master plan or offers an ICHRA-compatible structure. Availability, pricing, administration, and technology integration vary by PEO.

Is an ICHRA cheaper than a PEO health plan?

Sometimes, but not always. Costs depend on employee ages, locations, household coverage needs, individual-market premiums, employer contributions, and the PEO’s quoted rates. The two options should be compared employee by employee.

Can an employer offer an ICHRA and group health insurance?

An employer can offer different arrangements to permitted employee classes. It generally cannot give employees within the same class a choice between an ICHRA and a traditional group plan. Class definitions and minimum-size rules must be followed.

Do employees pay taxes on ICHRA reimbursements?

Properly structured reimbursements for qualifying individual coverage and eligible medical expenses are generally tax-free to employees.

Can employees keep their individual insurance if they leave the company?

Generally, yes. The employee owns the individual insurance policy and may keep it by paying the full premium. The employer’s ICHRA contribution ends when eligibility ends.

Is an ICHRA ACA-compliant for employers with 50 or more employees?

An ICHRA can satisfy the ACA employer mandate when it is offered to the required employees and provides affordable coverage. Affordability and ACA reporting should be calculated and managed carefully.