Health benefits used to mean one thing for most employers: pick a group plan, pay a chunk of the premium, and hope the cost doesn't eat your budget alive next year. That model is breaking down. Average family premiums for employer-sponsored health insurance reached $26,993 in 2025, up 6% from the prior year and more than double the rate of general inflation over the same period.¹ For small and mid-size employers especially, the math is getting harder to justify.
That's one reason the defined contribution approach to health benefits has moved from a niche workaround to a mainstream strategy. Rather than sponsoring a group plan, employers using defined contributions set a fixed dollar amount they'll contribute toward coverage, and employees use that money to purchase their own individual health insurance. It shifts cost predictability to the employer side and plan choice to the employee side, and it does it with favorable tax treatment that didn't exist for most employers until relatively recently.
This post breaks down how defined contribution health benefits work, the main vehicles available to employers today, and how to decide which approach makes sense for your organization.
What are defined contribution health benefits?
Defined contribution health benefits are an employer-funded approach in which the company sets a fixed monthly or annual dollar amount that workers can use to pay for health coverage and eligible medical expenses. Unlike traditional group health insurance, where the employer selects a plan (or a menu of plans) and subsidizes a percentage of the premium, defined contribution puts the selection decision in employees' hands.
The employer's financial exposure is capped at whatever allowance they choose. Employees can shop for a plan that fits their specific situation, including their preferred doctors, their prescription needs, and their household budget. The employer reimburses eligible expenses up to the set limit, tax-free, rather than writing a check to an insurance carrier.
This is the core distinction between a defined contribution approach and traditional "defined benefit" group coverage. With a group plan, you're promising a level of benefit and absorbing whatever cost fluctuations come with it. With defined contribution, you're promising a dollar amount, full stop.
How defined contribution health benefits work
The mechanics are straightforward. The employer establishes a formal benefit, sets an allowance amount, and determines which employee classes are eligible. Employees enroll in an individual health insurance plan of their choosing on the ACA marketplace or through a broker. When they have eligible expenses, they submit documentation for reimbursement. The employer reimburses up to the allowance limit, and those funds are tax-free to the employee and tax-deductible for the employer.
No premium payments to a carrier. No plan renewals. No participation rate requirements. No network decisions made at the company level.
The two primary vehicles for defined contribution health benefits are health reimbursement arrangements (HRAs): specifically, the ICHRA and QSEHRA.
ICHRA: Defined contribution health benefits for employers of any size
The Individual Coverage HRA, or ICHRA, was created by federal rulemaking in 2019 and became available to employers on January 1, 2020. It allows employers of any size to reimburse employees tax-free for individual health insurance premiums and qualifying medical expenses, with no annual contribution caps and no minimum employer size requirements.
ICHRA is the most flexible defined contribution option available. Key features include:
No contribution limits. Employers can set any allowance amount they choose.
Class-based structuring. Employers can offer different allowance amounts to different classes of employees, such as full-time versus part-time workers, salaried versus hourly staff, or employees in different geographic areas. There are 11 recognized employee classes under ICHRA rules, giving employers significant design flexibility.
ACA compliance for applicable large employers. ALEs with 50 or more full-time equivalent employees can use an ICHRA to satisfy the ACA's employer mandate, provided the allowance meets affordability standards. This is a significant advantage that QSEHRA cannot offer.
No requirement to offer group coverage. Employers who offer an ICHRA to a class of employees cannot simultaneously offer a traditional group plan to that same class. But they can run both structures for different employee groups.
The defined contribution approach through ICHRA has accelerated sharply since the arrangement launched. ICHRA adoption grew 34% among large employers from 2024 to 2025, driven by employers seeking flexible, cost-controlled alternatives to traditional group health plans.² Small employer adoption was up 52% over the same period, and among employers offering an ICHRA or QSEHRA for the first time, 83% had not previously offered any coverage at all.³
An estimated 400,000 to 800,000 U.S. residents used ICHRAs to pay for health insurance in 2025, nearly three times more than the prior year.⁴
Take Command's experts can help you determine whether ICHRA is the right structure for your organization and how to set allowance amounts that meet affordability standards for ACA purposes.
QSEHRA: Defined contribution health benefits for small businesses
The Qualified Small Employer Health Reimbursement Arrangement, or QSEHRA, was created by the 21st Century Cures Act in 2016 and has been available since 2017. It was designed specifically for small businesses with fewer than 50 full-time equivalent employees that do not offer a group health plan.
Like the ICHRA, a QSEHRA allows employers to reimburse employees tax-free for individual health insurance premiums and qualifying out-of-pocket medical costs. The key differences from ICHRA are:
Annual contribution caps apply. The IRS sets contribution limits each year. For 2025, the maximum reimbursement is $6,350 per year for self-only coverage and $12,800 per year for employees with a family.⁵
Not available to businesses with 50 or more employees. QSEHRA is strictly limited to small employers.
Cannot satisfy the ACA employer mandate. Because QSEHRA is only available to non-ALEs, this is not a factor for most QSEHRA users, but it is worth noting for employers approaching the 50-employee threshold.
No employee class distinctions. Unlike ICHRA, QSEHRA must be offered on the same terms to all eligible full-time employees. You can vary the allowance based on family status (self-only vs. family coverage), but not by other employee characteristics.
For small businesses that have been informally reimbursing employees for individual premiums, QSEHRA formalizes and tax-advantages that arrangement. Without a qualifying HRA in place, informal reimbursements are subject to payroll taxes for the employer and income taxes for the employee.
Defined contribution vs. traditional group health insurance
The table below captures the core differences between a defined contribution approach and a traditional group plan.
| Defined contribution (ICHRA/QSEHRA) | Traditional group plan | |
| Employer cost predictability | Fixed dollar contribution | Variable, tied to premium increases |
| Employee plan choice | Any ACA-compliant individual plan | Plans selected by employer |
| Participation requirements | None | Typically 70-75% of eligible employees |
| Administration | Streamlined, often software-based | Annual renewals, carrier negotiations |
| ACA employer mandate compliance | ICHRA: Yes, if affordable | Yes |
| Tax benefits | Tax-free for employer and employee | Tax-free for employer and employee |
| Company size requirements | ICHRA: Any size; QSEHRA: Under 50 | Best suited to larger employee populations |
One of the most practical differences for small employers is the participation requirement issue. Traditional small group plans require a minimum percentage of eligible employees to enroll, which can put coverage at risk if even a few workers opt out because they have coverage through a spouse. The defined contribution approach through ICHRA or QSEHRA has no such requirement.
Why employers are moving to defined contribution health benefits
Cost predictability is the most commonly cited reason. Family premiums for employer-sponsored group coverage have risen 6% or more for three consecutive years, outpacing both inflation and wage growth.¹ When those increases are absorbed through a traditional group plan, the employer has limited options: raise deductibles, shift more of the premium to employees, or accept the higher cost. With a defined contribution approach, the employer sets the budget upfront and is protected from mid-year surprises.
Workforce flexibility is another driver. An ICHRA allows employers to set a fixed monthly allowance based on specific employee classes, such as full-time, part-time, or remote workers, making it easier to manage benefits across a diverse, multi-location workforce without being locked into a single group plan structure.⁶
Employee satisfaction is also a factor. In one employer's first year with ICHRA, employees selected over 100 unique plans. Younger employees chose lower-premium, higher-deductible options.
Families selected plans with robust pediatric coverage. Others prioritized keeping specific providers in-network.⁶ That level of personalization is not possible with a traditional group plan.
Retention of the model also speaks for itself: roughly 92% of employers who offered an HRA in 2024 continued doing so in 2025.²
What employers need to set up defined contribution health benefits
Setting up an ICHRA or QSEHRA requires a few key steps:
Establish the plan formally. HRAs must be set up as a formal written plan before the plan year begins. This includes plan documents that define eligibility, allowance amounts, reimbursable expenses, and the claims process.
Set an allowance amount. For ICHRA, there is no cap, so employers have full flexibility. For ALEs, allowances must meet the IRS affordability threshold for the plan year to satisfy the employer mandate. For QSEHRA, the IRS caps apply.⁵
Provide required employee notice. Employees must receive written notice about the HRA at least 90 days before the plan year begins, or within 90 days of becoming eligible. The notice outlines the allowance amount, reimbursable expenses, and how employees can use the benefit.
Use HRA administration software. While HRAs can technically be run manually, the administrative requirements around documentation, expense verification, and compliance reporting make purpose-built software the practical choice for most employers. Take Command's platform handles plan setup, employee onboarding, expense verification, and reporting, so employers don't have to manage it by hand.
Is a defined contribution approach right for your organization?
Defined contribution health benefits are a strong fit for:
Small businesses under 50 employees that want to offer health benefits without the complexity of a group plan, particularly through a QSEHRA.
Employers of any size with geographically distributed workforces, where a single group plan network creates access problems for employees in different regions.
ALEs looking for a predictable alternative to group coverage that still satisfies the employer mandate, using an ICHRA structured to meet affordability requirements.
Employers with part-time or variable-hour workforces that don't meet traditional group plan participation thresholds.
Businesses offering health coverage for the first time and looking for a low-complexity entry point.
They may be a less obvious fit for large employers with a stable, uniform workforce in a single market, where group plan economies of scale are more favorable. Even in those situations, ICHRA can be layered in as a supplement for specific employee classes.
The right defined contribution approach can simplify your benefits, protect your budget, and give your employees the coverage flexibility they're looking for. Take Command's experts are here to help you figure out exactly where to start. Talk to a Take Command expert today.
Frequently asked questions
Can I offer both an ICHRA and a group health plan at the same company?
Yes, but not to the same class of employees. An employer can offer a traditional group plan to full-time employees while using an ICHRA to cover part-time or seasonal workers. What you cannot do is offer both options to the same employee class and let each individual choose. The rules require that employees in the same class receive the same type of benefit.
Can employees use ICHRA or QSEHRA funds to pay for dental and vision coverage?
Individual dental and vision plans purchased separately from a health plan are generally reimbursable under both ICHRA and QSEHRA, as long as they qualify as insurance under IRS rules. Employees can use their allowances for premiums on stand-alone dental and vision policies, not just medical coverage.
What happens to unused ICHRA or QSEHRA funds at the end of the plan year?
Unused funds do not carry over to the employee. Under QSEHRA, unused amounts are forfeited at year end unless the employer adopts a carry-forward provision, which is limited. Under ICHRA, employers can design the plan with or without a carryover feature, depending on their preference. Either way, the employer is not obligated to pay out unused allowances.
How does an ICHRA affect an employee's eligibility for ACA premium tax credits?
An employee who is offered an ICHRA that meets IRS affordability standards is generally not eligible for a premium tax credit (PTC) for marketplace coverage. If the ICHRA is deemed unaffordable relative to the lowest-cost silver plan in the employee's area, the employee may opt out of the ICHRA and claim the PTC instead. Employees should evaluate both options during open enrollment.
Does ICHRA work for employers in states with limited individual market options?
ICHRA works wherever ACA-compliant individual health plans are available for purchase. In some rural or low-competition markets, the number of available plans may be limited, which affects the employee's plan selection rather than the employer's ability to offer the ICHRA itself. Take Command's experts can help you assess the individual market in your area before setting allowance amounts.
References
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KFF. 2025 Employer Health Benefits Survey. October 2025.
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HRA Council. Growth Trends for ICHRA & QSEHRA, Vol. 4. June 2025.
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Becker's Payer Issues. "ICHRA growth up 1,000% since 2020: 8 notes." June 2025.
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HealthSherpa / NIS Benefits. "ICHRA adoption surges: enrollment triples." February 2026.
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Internal Revenue Service. Revenue Procedure setting QSEHRA contribution limits for 2025.
- HR Dive. "ICHRA adoption is accelerating: Here's what HR leaders need to know." September 2025.
Let's talk through your HRA questions
I wrote this blog because I care about ideas (big and little) that can help fix our healthcare system. I used to work on projects for Kaiser Permanente and the Parkland Health & Hospital System so I've seen the system inside and out. It's so important that consumers keep up with industry shifts and changing health insurance regulations. I'm also Take Command Health's Content Editor and a busy mom. Learn more about me and connect with me on our about us page. Thanks!
