Learn why ICHRA outperforms taxable stipends for small business health benefits. Compare tax savings, Medicare employee options, compliance advantages, and flexibility to make the smartest choice for your team.
Small business owners face a tough choice when it comes to health benefits. Traditional group health insurance premiums increased by an average of 9% in 2025, pushing per-employee costs beyond $16,000 annually. For many small employers, this isn't sustainable.
Faced with these escalating costs, many small businesses turn to what seems like a simple solution: give employees extra money in their paychecks to buy their own insurance. It sounds reasonable—you're helping employees while avoiding the complexity of group plans.
But there's a much more innovative approach that most small business owners don't know about: the Individual Coverage Health Reimbursement Arrangement (ICHRA).
ICHRA delivers the same goal—helping employees afford health insurance—but with significant tax advantages, better compliance, and happier employees. It even works for employees on Medicare, making it ideal for businesses with an aging workforce. This guide explains why ICHRA is the superior choice for North Carolina small businesses looking to provide meaningful health benefits without breaking the bank.
ICHRA (pronounced "ik-rah") stands for Individual Coverage Health Reimbursement Arrangement. It's a formal health benefit that allows employers to reimburse employees a fixed monthly amount for individual health insurance premiums and qualifying out-of-pocket medical expenses—completely tax-free.
How It Works:
1. You set a monthly contribution amount for each employee class
2. Employees purchase their own individual health insurance plans (or use Medicare if eligible)
3. Employees submit proof of coverage and expenses
4. You reimburse employees tax-free (no payroll taxes, no income taxes)
Introduced in 2020 under federal regulations, ICHRA has seen explosive growth. Adoption among small employers (fewer than 50 employees) increased by 52% in recent years, with nearly 450,000 employees now covered nationwide. Large employers have seen an 83% increase in adoption, signaling that businesses of all sizes recognize the advantages of ICHRA.
Adding extra money to employees' paychecks for health insurance seems straightforward. But this approach has serious drawbacks that cost both you and your employees.
The Tax Problem:
When you add taxable income to help employees buy insurance, you're losing 20-40% of that value to taxes before it ever reaches their pockets.
Example: $500/Month Taxable Stipend
Employee Side:
• Gross stipend: $500
• Federal income tax (22% bracket): -$110
• State income tax (NC 4.5%): -$22.50
• Social Security (6.2%): -$31
• Medicare tax (1.45%): -$7.25
• Net amount for insurance: $329.25
Employer Side:
• Stipend cost: $500
• Employer Social Security (6.2%): $31
• Employer Medicare (1.45%): $7.25
• FUTA/SUTA (estimated 2%): $10
• Total employer cost: $548.25
The Result: You spend $548.25 so your employee can have $329.25 for health insurance. That's a 40% loss in value—money that goes to taxes instead of healthcare.
ICHRA reimbursements are tax-free for employees and tax-deductible for employers. No payroll taxes. No income taxes. Every dollar goes toward healthcare.
Same Example: $500/Month ICHRA Reimbursement
Employee Side:
• ICHRA reimbursement: $500
• Federal income tax: $0
• State income tax: $0
• Social Security/Medicare: $0
• Net amount for insurance: $500
Employer Side:
• ICHRA contribution: $500
• Employer payroll taxes: $0
• Total employer cost: $500
The Result: You spend $500, and your employee gets $500 for health insurance. 100% efficiency.
Annual Savings Comparison (10 Employees at $500/month):
• Taxable Stipend Total Employer Cost: $65,790/year
• ICHRA Total Employer Cost: $60,000/year
• Employer Savings: $5,790/year
• Taxable Stipend Employee Value: $39,510/year (for all 10)
• ICHRA Employee Value: $60,000/year (for all 10)
• Additional Employee Benefit: $20,490/year
One of ICHRA's most powerful advantages is its ability to cover employees enrolled in Medicare. For small businesses with older workers—or employees approaching 65—this solves a problem that taxable stipends cannot address effectively.
The Challenge with Medicare-Eligible Employees:
Traditional group health plans create complications for Medicare-eligible employees. Group coverage becomes secondary to Medicare, creating coordination-of-benefits headaches. Many employees would prefer to use Medicare as their primary coverage, but without employer support, they lose the health benefit their younger colleagues receive.
With taxable stipends, Medicare employees receive the same reduced after-tax value as everyone else. Plus, there's no structure ensuring the money goes toward their Medicare costs.
How ICHRA Works with Medicare:
ICHRA can reimburse employees tax-free for Medicare premiums and related expenses. This includes:
• Medicare Part A premiums (if applicable—most people pay $0)
• Medicare Part B premiums ($202.90/month standard in 2026)
• Medicare Part C (Medicare Advantage) premiums
• Medicare Part D (prescription drug) premiums
• Medicare Supplement (Medigap) premiums
• Medicare-related out-of-pocket expenses (deductibles, copays, coinsurance)
Real-World Example: Medicare Employee
Susan is 67 and works part-time at your small business. Her monthly Medicare costs:
• Medicare Part B premium: $202.90
• Medicare Supplement Plan G: $180.00
• Medicare Part D (prescription drugs): $35.00
• Total monthly Medicare costs: $417.90
With a $450/month ICHRA contribution:
• Susan's Medicare premiums are fully covered
• She has $32.10 remaining for out-of-pocket medical expenses
• The entire reimbursement is tax-free
• Susan receives the same health benefit value as younger employees
With a $450/month taxable stipend instead:
• Susan receives approximately $295 after taxes
• She must pay $122.90 out-of-pocket to cover her Medicare costs
• She receives significantly less value than colleagues with pre-tax group coverage
1. Equitable Benefits Across All Ages:
ICHRA allows you to provide meaningful, tax-advantaged health benefits to all employees—whether they're 25 and buying an ACA marketplace plan or 68 and enrolled in Medicare. Everyone receives the same tax-free reimbursement value.
2. Retain Experienced Workers:
Many skilled employees work past 65 by choice. ICHRA helps you retain this valuable talent by supporting their Medicare costs, demonstrating that your business values workers of all ages.
3. Simplify Administration:
With traditional group coverage, Medicare-eligible employees create coordination-of-benefits complications. ICHRA eliminates this—Medicare is their primary coverage, and you simply reimburse their premiums. No secondary claims, no confusion.
4. Support Comprehensive Medicare Coverage:
Medicare alone leaves coverage gaps. ICHRA contributions can help employees afford:
Medicare Supplement (Medigap) Plans: Cover the 20% coinsurance, deductibles, and other costs Original Medicare doesn't pay
Medicare Advantage Plans: All-in-one coverage with additional benefits like dental, vision, and hearing
Part D Prescription Drug Plans: Essential drug coverage with a $2,100 out-of-pocket cap in 2026
5. Flexible Contribution Amounts:
You can set different ICHRA contribution amounts for different employee classes. For example, you might offer higher contributions to Medicare-eligible employees (whose premiums tend to be higher due to age-rated Medigap plans) while staying compliant with non-discrimination rules.
6. No Impact on Medicare Benefits:
ICHRA reimbursements don't affect Medicare eligibility or benefits. Employees can fully utilize their Medicare coverage while receiving tax-free employer support for their premiums and out-of-pocket costs.
Medicare Must Be the Employee's Coverage:
To receive ICHRA reimbursements, Medicare-eligible employees must actually be enrolled in Medicare (or another qualifying individual coverage). They cannot receive reimbursements without proof of coverage.
Employer Can Exclude or Include Medicare:
Employers have flexibility in plan design. You can choose to:
• Include Medicare premiums and expenses (most common)
• Exclude Medicare premiums but cover out-of-pocket expenses
• Exclude Medicare entirely (less common, as it reduces benefit value for older workers)
Coordination with Social Security:
Most Medicare beneficiaries have Part B premiums deducted from their Social Security checks. With ICHRA, employees can be reimbursed for these premiums after the fact, effectively restoring the deducted amount tax-free.
IRMAA Surcharges:
Higher-income Medicare beneficiaries pay Income-Related Monthly Adjustment Amounts (IRMAA) on Parts B and D. ICHRA can reimburse these surcharges too, providing additional value to affected employees.
Tax Treatment:
ICHRA: Tax-free for employees, tax-deductible for employers, no payroll taxes
Taxable Stipend: Subject to federal/state income tax, Social Security, Medicare, and unemployment taxes
Value Retention:
ICHRA: 100% of contribution goes to healthcare
Taxable Stipend: Only 60-80% reaches healthcare after taxes
Medicare Employee Support:
ICHRA: Reimburses Medicare Parts A, B, C, D, Medigap, and out-of-pocket expenses tax-free
Taxable Stipend: Taxed income with no structure for Medicare expenses; less money reaches coverage
Employee Choice:
ICHRA: Employees choose from ACA plans, Medicare options, or other qualifying coverage
Taxable Stipend: Same choice, but with significantly less money to spend
Budget Predictability:
ICHRA: Fixed monthly contribution—you know exactly what you'll spend
Taxable Stipend: Fixed amount, but total cost is higher due to payroll tax obligations
ACA Compliance:
ICHRA: Designed for ACA compliance—satisfies employer mandate when structured correctly
Taxable Stipend: Does NOT satisfy ACA requirements—potential penalties for applicable large employers
HSA/FSA Compatibility:
ICHRA: Integrates with HSAs and FSAs for additional tax savings (non-Medicare employees)
Taxable Stipend: No integration with tax-advantaged accounts
Class Customization:
ICHRA: Set different amounts for employee classes (full-time, part-time, by location, Medicare-eligible, etc.)
Taxable Stipend: Typically one-size-fits-all, which may disadvantage specific demographics
Any employer, regardless of size, can implement an ICHRA. There's no minimum employee threshold, making it ideal for small businesses with just a handful of staff and large corporations with thousands of employees.
ICHRA Eligibility Includes:
• Sole proprietors with employees
• Small businesses (1-50 employees)
• Mid-sized companies (50-200 employees)
• Large employers (200+ employees)
• Nonprofits and religious organizations
• Government entities
Employees Who Can Participate:
• Full-time employees
• Part-time employees
• Seasonal workers
• Remote employees
• Medicare-eligible employees (65+)
• Employees and their dependents
This broad accessibility is a game-changer for small businesses with diverse workforces. Whether your team includes part-timers, remote workers, or experienced employees over 65, ICHRA allows you to extend benefits equitably to everyone.
Health Insurance Premiums:
• Individual health insurance plans providing minimum essential coverage under the ACA
• HSA-eligible high-deductible health plans
• Traditional copay plans
• Medicare Part A premiums (if applicable)
• Medicare Part B premiums
• Medicare Part C (Medicare Advantage) premiums
• Medicare Part D prescription drug premiums
• Medicare Supplement (Medigap) premiums
Out-of-Pocket Medical Expenses (Optional):
Employers can choose also to reimburse IRS Code 213(d) expenses, including:
• Copays and coinsurance
• Deductibles
• Prescription medications
• Dental expenses
• Vision expenses
• Mental health services
• Medicare Part B deductible ($283 in 2026)
• Medicare coinsurance amounts
What Does NOT Qualify:
• Group health insurance premiums
• Standalone dental or vision premiums (without medical coverage)
• Cosmetic procedures
While ICHRA requires some administrative setup, it's far less burdensome than managing group health insurance—and partners like Health Plans of NC can handle much of the heavy lifting.
Employer Requirements:
1. Plan Document: Create a formal plan document outlining terms, contribution amounts, and eligibility.
2. Employee Notice: Provide written notice before the initial effective date and at least 90 days before each subsequent plan year.
3. Opt-Out Option: Allow employees to decline participation if they prefer ACA marketplace subsidies instead.
4. Section 125 Plan: Maintain a cafeteria plan for pre-tax deductions if employees contribute to their premiums.
Employee Requirements:
• Purchase a qualifying individual health insurance plan or enroll in Medicare
• Submit proof of coverage and eligible expenses for reimbursement
• Opt out if choosing ACA subsidies instead of ICHRA contributions (not applicable to Medicare employees)
The case for ICHRA over taxable stipends has never been stronger:
Rising Health Costs: Group health premiums increased 9% in 2025, and individual market costs are climbing due to inflation and expiring ACA subsidies. Every dollar matters—don't lose 20-40% to taxes.
Aging Workforce: More employees are working past 65 than ever before. ICHRA provides a structured, tax-advantaged way to support their Medicare costs—something taxable stipends cannot do efficiently.
Proven Track Record: ICHRA adoption grew 84% among mid-sized firms and 52% among small employers. Nearly 450,000 employees are now covered—the model works.
Employee Expectations: In a competitive job market, offering meaningful health benefits differentiates your business. ICHRA provides real value to employees of all ages, not taxed-away income.
Improved Tools: Administration platforms have matured, making ICHRA implementation easier than ever for small businesses.
At Health Plans of NC, we help North Carolina small businesses implement ICHRA and maximize their health benefit dollars. Our team can:
• Analyze your current health benefit spending (taxable stipends or group plans)
• Calculate your potential ICHRA savings
• Design an ICHRA contribution strategy that fits your budget
• Help employees find and enroll in individual health insurance or Medicare plans
• Assist Medicare-eligible employees with plan selection and enrollment
• Handle plan documents, notices, and compliance requirements
• Provide ongoing support for you and your employees
Stop losing 20-40% of your health benefit dollars to taxes. Contact Health Plans of NC today for a free, no-obligation ICHRA analysis. Discover how much you could save—and how much more your employees (including those on Medicare) could receive—by making the switch.
Your team and your budget will thank you.
Tax Efficiency: ICHRA 100% | Stipend 60-80%
Employer Payroll Taxes: ICHRA None | Stipend 7.65%+
Employee Income Taxes: ICHRA None | Stipend 15-35%+
Medicare Coverage: ICHRA Reimburses Parts A, B, C, D, Medigap tax-free | Stipend Taxed, no structure
ACA Compliant: ICHRA Yes | Stipend No
HSA Compatible: ICHRA Yes | Stipend No
Employee Class Customization: ICHRA Yes (including Medicare-eligible class) | Stipend Limited
Bottom Line: ICHRA saves money for employers AND provides more value to employees—whether they're buying ACA plans or enrolled in Medicare. There's no reason to use taxable stipends when ICHRA is available.