If you run a small business and you’re shopping for group health plans, there’s a good chance someone has pitched you a level-funded plan. The sales pitch sounds appealing: fixed monthly payments, potential refunds if claims stay low, and more cost control than a traditional fully insured policy.
But if you’re comparing ICHRA vs. level-funded plans, the real question isn’t which one costs less this year. It’s which model puts your business in a better position over the next three to five years, and which one leaves you exposed to hidden risks.
Level-funded plans are more complicated than they seem at first glance. For small employers, the way these plans are structured can expose you to risks that ICHRA allows you to avoid.
This guide breaks down how level-funded plans compare to an ICHRA for small business owners who want strategic options for benefit plans. Learn who carries the financial risk, what happens when costs spike, how much control you have over your budget, and which model gives employees real choices.
For some small businesses, level-funded plans may still be the better choice. By the end of this article, you’ll have what you need to make an informed decision about which option to pursue.
How Level-Funded Plans Work
A level-funded plan is a self-funded health plan wherein the employer pays a fixed monthly amount that covers three things: estimated claims costs for the group, administrative fees, and stop-loss insurance that caps the employer’s exposure if claims run high.
The appeal is understandable. You pay the same amount every month, which feels predictable. If your team stays healthy and claims come in low, you might get money back at the end of the year. According to the Kaiser Family Foundation 2025 Employer Health Benefits Survey, 37% of covered workers at firms with 10 to 199 employees are now enrolled in a level-funded plan. That number has grown steadily over the past several years as small employers look for alternatives to the rising costs of fully insured group health insurance.
However, many employers miss the risk factor of level-funded plans: when your employees sign up for a level-funded plan, your business begins to act like the insurance company. The employer is on the hook for claims up to the stop-loss threshold. Stop-loss kicks in for catastrophic costs, but everything below that threshold comes out of the employer’s claims fund.
For a large employer with thousands of employees, that risk is spread across a big enough pool that one bad year doesn’t sink the ship. For a 15-person company, one employee’s car accident or cancer diagnosis can burn through the claims fund and trigger a brutal renewal the following year.
That’s the structural problem with level-funded plans for small employers. The risk pool is too small to absorb shock.
The Renewal Cliff Risk Factor
We regularly see small employers run a level-funded plan for two or three years. Claims are low, and they may even get a refund. Everything looks great.
Then one employee has a complicated pregnancy, or a spouse needs surgery. Claims spike. The stop-loss carrier covers the catastrophic portion, but the carrier now sees your group as high risk.
At renewal, one of three things happens.
- Your premiums jump 20 to 40%.
- Your carrier declines to renew the level-funded arrangement, forcing you back to a fully insured plan at even higher rates. And there may not even be one available, since many carriers are exiting the market entirely.
- The stop-loss insurer raises its premiums so much that the level-funded option is no longer cost-effective.
We call this the renewal cliff. It’s baked into the level-funded model because the carrier underwrites your specific group each year. Your rates are tied directly to your employees’ health histories. One bad claims year hits your bottom line that year and follows you into the next renewal cycle.
Mercer’s 2025 National Survey projects that employer health benefit costs will rise 6.7% in 2026, the highest projected increase in 15 years. For small employers on level-funded plans, that number can be much higher when claims experience goes sideways.
How an ICHRA Changes the Risk Equation for Small Employers
An ICHRA (which stands for Individual Coverage Health Reimbursement Arrangements) works on a completely different model. The employer sets a fixed monthly reimbursement amount for each employee. Employees then buy their own individual health insurance plans, either through the ACA Marketplace or directly from a carrier, and get reimbursed tax-free up to the employer’s set amount. Those reimbursements are tax-deductible for the employer and free of payroll taxes for both the employer and the employee.
The structural difference is what can protect you from the renewal cliff.
With a level-funded plan, the employer absorbs claims risk for the entire group. With an ICHRA, each employee’s coverage is an individual policy. The risk is spread across the entire individual insurance market, which numbers in the millions.
During the 2026 open enrollment period, over 23 million consumers signed up for individual coverage through ACA Marketplaces, according to Centers for Medicare & Medicaid Services. Your 15-person company isn’t a standalone risk pool anymore. Each employee’s premiums are set by the broader market, not by your group’s claims history.
With a level-funded plan, your company of 12 people is absorbing risk across 12 lives. With an ICHRA, each of those 12 employees is part of a risk pool of millions of people. That’s a completely different math equation, and it’s the reason individual coverage health reimbursement arrangements produce more stable, predictable costs over time.
When one employee has a major health event, it doesn’t affect what anyone else on your team pays. It doesn’t trigger a rate increase for the business. The employer’s cost stays exactly where they set it.
ICHRA gives employers flexibility in how they structure contributions, too. You can create different classes of employees and set different reimbursement amounts for each class. Full-time employees can receive one amount, part-time another. You can vary contributions by age (within a 3:1 ratio) and family size. That kind of customization doesn’t exist in a level-funded plan, where everyone is locked into the same group policy.
Budget Control: Predictable Costs vs. “Predictable Until It Isn’t”
Level-funded plans market themselves on budget predictability. And for any given year, that’s technically true because you know your monthly payment. But that predictability resets at every renewal. After a high-claims year, the number can shift sharply, and your cash flow projections from last quarter become fiction.
With an ICHRA, the employer’s contribution is a fixed dollar amount per employee, per month. Period. You set $400 per employee, you spend $400 per employee. If an employee doesn’t use the full reimbursement amount, the unused funds remain with the employer. There’s no claims fund to manage, no stop-loss premium to negotiate, and no renewal gamble.
The difference matters most when you’re trying to plan beyond a single year. If you’re forecasting health benefit costs for a three-year business plan or preparing for a seasonal hiring push, an ICHRA lets you set that number with confidence. A level-funded plan gives you a best-case estimate that could unravel with one bad quarter of claims.
For a small business operating on tight margins, that kind of cost volatility is a real operational risk.
Employee Choice: One Plan vs. Every Plan on the Market
Level-funded plans typically work like traditional group coverage from the employee’s perspective. The employer picks one plan (or sometimes two), and everyone enrolls in those options. Same carrier, same network, same deductible structure across the board.
For a diverse workforce, that can create friction. A 25-year-old single employee and a 55-year-old with a family of four have very different health care needs. With a level-funded plan, both are stuck with the same limited options the employer selected.
An ICHRA allows employees to choose their own individual health plan from the full market. They can pick a plan with their preferred doctors, choose a higher-deductible plan to keep premiums low, or select a plan with more coverage. They can pick the carrier and network that makes sense for where they live, which matters when you have employees spread across different cities or regions.
This is where the ICHRA model shifts the employer’s role. You’re no longer the person deciding which health plan your employees get. You’re the person funding their ability to pick the plan that works for them. That distinction matters for morale, for retention, and for the conversations you don’t have to have when someone is unhappy with the group plan you chose.
According to HRA Council data, about 70% of employees in ICHRA arrangements choose Gold or Silver-tier plans. They’re not defaulting to bare-bones coverage. They’re choosing a health insurance plan that fits their actual needs.
Employee Choice: One Plan vs. Every Plan on the Market
Level-funded plans typically work like traditional group coverage from the employee’s perspective. The employer picks one plan (or sometimes two), and everyone enrolls in those options. Same carrier, same network, same deductible structure across the board.
For a diverse workforce, that can create friction. A 25-year-old single employee and a 55-year-old with a family of four have very different health care needs. With a level-funded plan, both are stuck with the same limited options the employer selected.
An ICHRA allows employees to choose their own individual health plan from the full market. They can pick a plan with their preferred doctors, choose a higher-deductible plan to keep premiums low, or select a plan with more coverage. They can pick the carrier and network that makes sense for where they live, which matters when you have employees spread across different cities or regions.
This is where the ICHRA model shifts the employer’s role. You’re no longer the person deciding which health plan your employees get. You’re the person funding their ability to pick the plan that works for them. That distinction matters for morale, for retention, and for the conversations you don’t have to have when someone is unhappy with the group plan you chose.
According to HRA Council data, about 70% of employees in ICHRA arrangements choose Gold or Silver-tier plans. They’re not defaulting to bare-bones coverage. They’re choosing a health insurance plan that fits their actual needs.
Who Handles the Compliance and Administration?
This is where small business owners tend to underestimate the gap between these two models.
With a level-funded plan, the employer is responsible for ERISA compliance, plan documents, Summary Plan Descriptions, COBRA administration, nondiscrimination testing, and annual filings. You’re also managing enrollment, handling employee questions about coverage, and dealing with the carrier directly when something goes wrong. For a company without a dedicated HR department, that workload falls on whoever drew the short straw, usually the owner or the office manager.
An ICHRA has its own compliance requirements. It’s an ERISA-governed health benefit, which means you need proper plan documents, employee notices, and procedures for substantiating reimbursements. The difference is who does that work. Not every administrator handles all of it, but a full-service administrator like HRASimple counsels you on plan design and takes care of IRS reporting, ACA compliance documentation, reimbursement processing, and employee enrollment support. When you’re comparing administrators, it’s important to ask about what the administrator actually handles for you.
The difference in daily workload is real. With a level-funded plan, the employer is in the middle of every coverage question and claims issue. With a properly administered ICHRA, the employer sets the budget and a full-service administrator comes alongside to shoulder the majority of the administrative burden. Employees call the administrator with questions about their own policies, not you.
For small employers already stretched thin, that shift in administrative burden often matters as much as the cost differences.
When Level-Funded Might Still Make Sense
We’d be doing you a disservice if we said ICHRA is the answer for every employer. It’s not.
Level-funded plans can work well for employers with employees who are generally healthy, concentrated in one geographic area, and willing to accept the financial risk in exchange for the possibility of a refund in low-claims years. If your workforce is young, healthy, and stable, a level-funded plan might deliver lower costs for a stretch.
The question is what happens when that changes. Workforces get older, employees start families, and people get sick. The structural risk doesn’t disappear just because it hasn’t materialized yet.
There’s a data privacy angle worth considering, too. Level-funded plans give employers access to claims data, which means you can see aggregate health spending patterns for your group. Some employers value that transparency. Others would rather not be anywhere near their employees’ health information. An ICHRA keeps that wall in place, since each employee’s plan is individual and private.
If your priority is long-term cost stability, employee choice, and getting out of the insurance management business, an ICHRA is built for that. The numbers back it up: ICHRA adoption grew 52% among small employers from 2024 to 2025, and 92% of employers who offered an HRA kept offering one the following year, according to HRA Council data. Once employers make the switch, they usually stay.
This is where small business owners tend to underestimate the gap between these two models.
With a level-funded plan, the employer is responsible for ERISA compliance, plan documents, Summary Plan Descriptions, COBRA administration, nondiscrimination testing, and annual filings. You’re also managing enrollment, handling employee questions about coverage, and dealing with the carrier directly when something goes wrong. For a company without a dedicated HR department, that workload falls on whoever drew the short straw, usually the owner or the office manager.
An ICHRA has its own compliance requirements. It’s an ERISA-governed health benefit, which means you need proper plan documents, employee notices, and procedures for substantiating reimbursements. The difference is who does that work. Not every administrator handles all of it, but a full-service administrator like HRASimple counsels you on plan design and takes care of IRS reporting, ACA compliance documentation, reimbursement processing, and employee enrollment support. When you’re comparing administrators, it’s important to ask about what the administrator actually handles for you.
The difference in daily workload is real. With a level-funded plan, the employer is in the middle of every coverage question and claims issue. With a properly administered ICHRA, the employer sets the budget and a full-service administrator comes alongside to shoulder the majority of the administrative burden. Employees call the administrator with questions about their own policies, not you.
For small employers already stretched thin, that shift in administrative burden often matters as much as the cost differences.
Why Your Local Insurance Market Matters
One thing that often gets overlooked in the ICHRA vs. level-funded comparison is how much your state’s individual insurance market affects the math.
In states with competitive individual markets, the gap between individual plan premiums and small group rates can be substantial. In Georgia, where we’re based, individual market premiums are up to 58% lower than comparable small-group plans. That kind of spread makes the ICHRA model especially effective, because every dollar of employer reimbursement goes further.
When employees shop for their own coverage through an ICHRA, they’re buying into a market with multiple carriers and a wide selection of plan options. An employee in one city may have different carrier options than a coworker two hours away, and an ICHRA lets each person pick the plan that works for their location and their doctors. A level-funded plan can’t offer that kind of flexibility.
You Don’t Always Have to Choose One or the Other
Something important worth noting: these two models aren’t always mutually exclusive. In some cases, an employer can offer a level-funded plan to one group of employees and an ICHRA to another.
ICHRA rules let you divide your workforce into classes based on legitimate distinctions like full-time versus part-time, salaried versus hourly, or employees in different geographic regions. You can offer a traditional group or level-funded plan to one class and an ICHRA to a different class. What you can’t do is offer both to the same class of employees and let them pick between the two.
This opens up strategies that a pure either/or framing misses. Maybe your headquarters staff stays on the level-funded plan while your remote or multi-state employees go on an ICHRA, where they can find in-network coverage where they actually live. We currently administer this exact setup for clients running an ICHRA alongside a group plan for different classes, and for the right situation it works well.
It’s not the right answer for every employer, but it’s worth knowing the option exists..
Deciding What Fits Your Business
For small businesses weighing their options, the core question is this: Do you want to stay in the insurance business, managing a group plan and absorbing claims risk? Or do you want to set a budget, let your employees choose, and hand the administration to someone who runs it full time?
We’re HRASimple, a Georgia-based ICHRA administrator. We counsel employers on plan design and handle compliance, IRS reporting, reimbursement processing, and employee enrollment support, without nickel-and-diming you on admin fees. Our team can help your employees find the right individual plan, at no extra cost.
If you want to see what an ICHRA would look like for your specific business, we’ll run the numbers with you to see if this model fits what you’re looking for.
Schedule a free consultation or call us at (888) 851-9613.
Further Reading
- ICHRA vs. Group Plans for a broader comparison that includes fully insured options
- The 11 ICHRA Employee Classes Explained to understand how employers can customize ICHRA contributions by employee type
- The KFF 2025 Employer Health Benefits Survey for the latest data on employer-sponsored coverage costs and trends