Are ICHRAs the next 401(k)s? Current trends in employer spending and employer adoption of ICHRAs

Healthcare costs are accelerating faster than anyone predicted, and employers are struggling to keep up. And our team has been having an internal debate about a scenario that seemed unlikely even just a few years ago: could employer-sponsored insurance (ESI) finally be approaching its defined contribution moment—echoing the pension-to-401(k) transition that reshaped retirement benefits a generation ago? Employers have long relied on ESI to attract and retain workers, but rising premiums, portability problems, and regulatory pressures are forcing them to re-think this approach. Individual Coverage Health Reimbursement Arrangements (ICHRAs) are emerging as one alternative option—and while adoption is still limited, the parallel to the 401(k) shift is striking. Both transitions reflect a consistent pattern: employers move toward defined contribution models for cost predictability, while workers take on more autonomy, portability, and risk. Let’s explore current trends and outlook in employer spending, the 401(k)/ICHRA parallel, its potential consequences, and what this all signals for the future of healthcare benefits.

State of employer-sponsored insurance (ESI)

Let's start with a quick look at the state of employer spending and what’s going on with commercial insurance—important context for why we think a shift to ICHRAs is even a possibility at this point.

For decades, ESI has been the backbone of commercial coverage because it historically was the only way to buy insurance with pre-tax dollars. The employer sector remains the single largest source of insurance for Americans, covering about 45% of the U.S. population.

But there are some cracks showing in the ESI model, with employers and employees alike feeling its increasingly heavy burden. Employees are limited by the fact that health insurance is tied to their job—leaving a job means losing or changing coverage. ESI’s portability problem is in tension with modern labor trends where lifetime employment at a single company is increasingly uncommon, especially among younger workers and gig economy participants. Employees would benefit from a more flexible arrangement where moving jobs doesn’t mean losing or having to change insurance plans.

For employers, ESI is time-consuming—and arguably absurd. It doesn’t make much sense that employers—regardless of their industry—also need to have deep health insurance expertise. Still, for a long time, this was worthwhile tradeoff for employers. They provided health insurance and in return, saw better recruitment and retention at a price that could be capped or reduced in times of stress in ways that wages simply cannot be.

But that calculus may be changing. The biggest burden on the employer side is obvious: rising healthcare costs. Since the 1980s, premiums have consistently grown faster than wages and inflation. Rising healthcare costs pose significant challenges for employers because they directly increase business expenses, limit wage growth and investment, force difficult tradeoffs in benefit design, and can negatively impact employee recruitment and retention.

Recent trends suggest things are getting worse. For the past decade, employer medical trend has tended to fall in the mid-single digits—typically between 5 and 7%. This range was considered a sweet spot for stability: high enough to align with inflation and annual price increases, but low enough to avoid drastic benefits reductions or substantial cost-shifting. We saw a jump slightly outside the normal range in 2024—between 7-8% on average—which was even higher than the increase employers had predicted. And spending growth in 2025 and 2026 is not slowing down. It’s actually projected to be even higher—anywhere from 7% to 9%. (Note: The last time we saw a period of sustained rapid cost growth was in the late 2000s, and it led directly to the creation of the Affordable Care Act (ACA) and the explosion in High-Deductible Health Plans (HDHPs)).

The drivers behind rising costs are familiar to employers, but they are also intensifying:

• Medical inflation: The price of medical services and health insurance premiums are rising faster than general inflation and wage growth. This is partly due to upward pressure on provider prices as hospitals push higher prices through contract renewals. And we know that as more and more provider contracts came up for negotiation, price growth is likely to continue to accelerate.

• Pharmacy spend: Factors such as the surging prices of specialty drugs, the expanded use of high-cost therapies like GLP-1 medications, and lack of transparency in drug pricing contribute to significant spending increases annually—and employers anticipate future pharmacy inflation as high as 11-12% in 2026.

• Chronic disease costs: The increasing prevalence of chronic conditions, most notably cancer, cardiovascular conditions, and behavioral health, accounts for nearly 90% of healthcare costs nationwide, including direct medical claims, pharmacy spend, and indirect expenses like absenteeism and lost productivity.

Of course, nobody is standing idly by as prices continue an upward trajectory. Both the government and employers themselves have tried to rein in prices—but the near-term impacts are mixed at best.

Policies aimed at cost control

Consider, for example, some recent governmental attempts to constrain price growth via policy and rulemaking:

• Transparency rules: These rules require both hospitals and health plans to disclose prices. The idea is that price transparency should enable consumers—both individuals and wholesale purchasers like employers—to shop for care. These rules first went into effect a few years ago, and many expected that employers would be the most likely users of the information. But, so far, it appears that the main users of the data so far are actually hospitals and plans themselves—low-priced hospitals are using transparency rules to exert upward pressure on price, while plans use it to exert downward pressure in some cases. So, the actual impact is a bit of a mixed bag.

• No Surprises Act: This act protects patients from balance billing, like surprise out-of-network charges. The hope was that it would pressure hospitals to be in-network and reduce out of network costs. Like price transparency, the effect has been mixed. There have been a couple of studies studying the impact on costs—some showing costs decreasing and others showing costs increasing.

• Inflation Reduction Act: This act controls the price of popular drugs for Medicare beneficiaries. But the IRA is more likely to increase prices in the commercial sector overall, as drugmakers raise prices on drugs not subject to negotiation, or new drugs are developed with much higher prices on the commercial side to mitigate the downward pressure of price negotiation on the Medicare side.

In sum, even though we’ve had a round of recent policies that were aimed in part at curbing price growth, these policies have yet to have any major deflating effect on commercial prices. And in some cases, they have (or will almost certainly have) the opposite effect.

Employers’ methods to control costs

Employers have also had limited success at constraining prices—and they’ve tried numerous times over the past 50 years with a whole host of different strategies aimed at bringing down costs.

• Employee coalitions: Employers have formed coalitions—often for pharmacy benefits or broader healthcare purchasing—to pool their negotiating power and secure better pricing terms from insurers and pharmacy benefit managers (PBMs). While these coalitions can provide mid-sized and large employers with more leverage to negotiate lower costs or increased rebates, their effect on overall price trends is modest and depends on the size and market influence of the group.

• Managed care plans: Managed care plans—including Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs)—use provider network restrictions, pre-authorization, and care management tools to constrain utilization and negotiate rate discounts. These models historically curbed rapid price and spending growth in the 1990s but were less effective over time as provider consolidation increased and consumers pushed back against access restrictions.

• Wellness programs: Employer wellness programs aim to reduce long-term costs by improving employee health, thereby lowering the prevalence of costly claims. While some wellness programs can successfully improve population health and reduce healthcare risks, very few produce meaningful overall savings.

• Centers of Excellence: Centers of Excellence (COE) programs direct employees to select providers or hospitals with superior outcomes for high-cost procedures. These programs have effectively reduced employer spending on targeted service lines (e.g., musculoskeletal, cancer care) while maintaining or improving quality of care.

• High-Deductible Health Plans (HDHPs): HDHPs increase employee cost-sharing to curb unnecessary utilization and lower premium costs for employers. While these plans typically reduce short-term spending growth, concerns remain that they may shift costs onto employees without addressing underlying provider prices or care quality.

• Value-based care: Through value-based care contracts, employers and insurers reward providers for improving outcomes and reducing avoidable costs. While these arrangements show promise, especially in reducing hospital admissions and unnecessary procedures, widespread measurable effects on employer spending are still unclear.

• Virtual-first plans: Virtual-first insurance plans, which emphasize telehealth and digital primary care, are a newer strategy aiming to lower unit costs and reduce unnecessary in-person visits. Early reports suggest moderate employer cost savings, but long-term effect on commercial pricing is not yet fully established.

Overall, while these strategies have often moderated (or in the case of HDHPs, rebased) employer spending and created pockets of commercial price restraint, none have successfully and structurally brought down prices, and have barely made a dent in pricing growth. In the absence of lower prices, employers could look to avoid costs altogether by shifting risk to employees.

What are ICHRAs?

This is where ICHRAs come into play. ICHRAs allow employers to step out of the group plan business entirely. Instead of sponsoring coverage directly, companies provide a fixed, tax-advantaged allowance that employees use to purchase their own ACA-compliant plan on the individual market. ICHRAs offer potential solutions to both employees’ and employers’ challenges with ESI. For employees, the biggest benefit is that health insurance is uncoupled from staying at their jobs. Employees can choose their own individual health insurance plans tailored to their personal and family needs, which is often more flexible than traditional group plans—and theoretically continue with that plan when or if they move to a new job.

Employers also benefit from more predictable costs. Employers set fixed reimbursement amounts, making healthcare costs predictable and easier to budget. And of course, employers take on less risk by shifting that risk to employees. This comes with a potential downside for employees—employees are responsible for selecting and managing their own individual health insurance plans on the marketplace, which can result in exposure to higher out-of-pocket costs, especially if the reimbursement does not fully cover premiums or if their chosen plans have limited provider networks.

We’ve seen this before with retirement plans

ICHRAs represent a seismic shift from the status quo given that the majority of working Americans are covered through their employer. From that perspective, it seems unlikely that we’d ever see this shift. But we actually have seen a similar shift in benefits before—the transition from pensions to 401(k)s. The comparison to pensions and 401(k)s is more than rhetorical. Both transitions were (or in the case of ICHRAs, would be) born out of employer frustration with mounting costs, rely on regulatory changes to open the door, and represent a move away from traditional, employer-managed defined-benefit plans toward models where employees take more individual responsibility and choice, with employers gaining better cost predictability and reduced long-term obligations.

Let’s take a closer look at the conditions that led employers and employees to embrace 401(k)s—and the extent to which those same conditions do (or don’t) exist today in the case of ICHRAs.

Origins

Retirement income and health coverage have both been tied to the workplace since the aftermath of World War II. Hospital coverage and employer-paid medical benefits as workplace benefits were spurred by wage controls that made non-wage benefits a critical lever in recruiting talent. By the 1960s, the majority of working Americans received health coverage and retirement plans through their jobs. This arrangement suited an era when workers often spent decades at a single company.

Both transitions were driven by employer need for cost predictability.

But over time, both arrangements came under mounting strain. We’ve already discussed how employers found themselves squeezed between rising healthcare costs and changing labor markets—and we saw similar challenges arise in the retirement market. Employers discovered that delivering lifetime guaranteed pensions was financially riskier than they had anticipated. Pension plans required employers to predict spending 20-30 years into the future and then guarantee a specific retirement benefit based on years of service, which must be funded regardless of the company’s financial performance at the time of payout. And, like we see in healthcare, employees increasingly changed jobs more frequently, making pensions—which reward long-term tenure—less attractive or practical. Employers and employees started looking for solutions that would increase portability and transfer flexibility and risk to employees.

Both rely on tax-advantaged frameworks.

The shift from pensions to 401(k) plans was made possible through several key policies and legislative changes starting in the late 1970s and evolving over subsequent decades. The most pivotal change was the enactment of the Revenue Act of 1978, which included a provision allowing employees to make pre-tax contributions to "cash or deferred arrangements," known as 401(k) plans. Initially unintended as a pension replacement, 401(k) plans rapidly attracted employers seeking to limit long-term liabilities, especially with large corporations. For example, IBM was one of the first adopters and proponents of 401(k)s. Over time, regulations and IRS guidance clarified and expanded 401(k) provisions, allowing employer matching contributions, higher contribution limits, and portability of accounts, making 401(k)s more attractive than traditional pensions and reinforcing the 401(k) as the dominant retirement savings vehicle.

We’ve seen similar policies spur the creation of ICHRAs. The concept of Health Reimbursement Accounts (HRAs) has existed since the 1980s but really started to take off in the 2010s. The individual exchange markets were created by the ACA law in 2010. The existence and maturity of the ACA marketplaces has, in a very real way, made ICHRAs viable because there is now a universal, regulated market for buying individual coverage. The Obama administration subsequently signed the 21st Century Cures Act in 2016, setting the stage for the implementation of Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), which enabled small businesses with fewer than 50 full-time equivalent employees to provide pre-tax funds to their employees each year to use towards the purchase of health insurance plans. However, regulatory limitations hindered widespread adoption of QESHRAs:

• Only employers with fewer than 50 full-time employees can take advantage of QESHRAs—prohibiting any larger companies from adoption.

• They are only available to employers who do not offer any other group health plan (including dental or vision coverage).

• They have strict annual reimbursement set by the IRS. In 2025, employers can offer a maximum annual allowance of $6,350 for single employees and $12,800 for employees with a family.

But in 2019, the Trump administration followed up with a new IRS program that introduced ICHRAs, allowing employers of all sizes to offer employees a pre-tax fixed benefit with no limit on the distribution. This has opened the door for more widespread adoption of ICHRAs.

Employer adoption of ICHRAs

Over the last five years, adoption of ICHRAs has grown steadily, especially among smaller to mid-size employers. As of 2025, it’s estimated that between 500,000 and 1M people are covered by ICHRAs. The majority of employers offering ICHRAs are small businesses (under 50 employees). But adoption is growing quickly: larger employers (100-199 employees) saw the biggest rate of growth—49%—from 2024 to 2025.

Given the recent regulatory boost, could ICHRAs follow in the footsteps of 401(k)s?

Despite the growth, ICHRAs are far from replacing ESI as the dominant form of commercial. But remember, ICHRAs just got the regulatory boost that 401(k)s got decades ago. ICHRAs could follow in the footsteps of 401(k)s, but there are some remaining hurdles, such as:

• A significant reconfiguration of healthcare infrastructure. It’s well-known that healthcare is very complex. Change is notoriously slow, for good reason much of the time. There are many stakeholders that have to collaborate and navigate the complex system—and mistakes can actually be life or death. Insurance companies would probably experience the biggest change: they would have to actually treat beneficiaries as customers, not just as costs to be managed. It would spawn an entire industry focused on helping patients navigate the system (i.e. UHC would look more like Fidelity).

• A steep learning curve: Related to the complexity of healthcare, employers and employees would need to have a better understanding of how ICHRAs work and what the selection process looks like, including shopping for individual plans, submitting reimbursements, and complying with regulations. It will take time for the industry to learn and grow comfortable with a new process for commercial coverage. One potential solution would be more defaults—401(k)s have defaults like auto-enrollment options and default funds. ICHRAs could have similar default options like curated plan menus, navigators, or regulated choices.

• Possible financial strain (i.e. unaffordable options) for employees. Employer contributions may not cover the full cost of healthcare coverage, including individual insurance premiums or medical expenses, leading to higher out-of-pocket costs for employees. On top of that, employees using ICHRAs cannot receive ACA premium tax credits, which may make coverage less affordable.

• Instability of individual markets: Theoretically, the expansion of ICHRAs should help stabilize the individual markets because it would bring more patients (including younger, healthier patients) to the market. But right now, the stability of the markets is in question partially because of the pending expiration of enhanced subsidies and the cuts included in the One Big Beautiful Bill Act (OBBBA) that are expected to worsen the case mix.

What’s next?

In the coming decade, we may look back on ICHRAs as the moment when employer-sponsored insurance began to echo pensions: not disappearing overnight but gradually giving way to a defined contribution structure. If that happens, it would have implications for stakeholders across industry sectors, including:

• A shift in the individual market structure: Widespread adoption would swell the individual market, further nationalizing healthcare coverage, while reducing employers’ collective influence on cost and provider negotiations. About 70% of employees selected Gold- or Silver-tier health plans via ICHRA in 2025. Gold and Silver-tier health insurance plans feature higher monthly premiums but lower out-of-pocket costs compared to Bronze plans. Because they reduce the financial burden when receiving care, these plans tend to attract patients who anticipate moderate to frequent medical needs, such as those managing chronic conditions, expecting surgeries, or regularly visiting specialists. For insurers, this dynamic creates a financial balance: higher premiums support plan stability, but increased utilization by these patients demands more rigorous care and utilization management to control costs and ensure appropriate care delivery. This mix presents both an opportunity for predictable revenue and a challenge in managing resource-intensive patient populations effectively.

• The portability of ICHRAs could contribute to higher patient retention rates for health plans: Portability means employees can keep their individual health insurance plans even if they change jobs or experience employment disruptions. Data from the 2025 HRA Council report indicates about a 92% retention rate among employers continuing to offer ICHRAs year over year, signaling strong satisfaction and stability in the benefit model. This continuity could encourage employees to stay with their chosen health plans longer, reducing coverage gaps that often happen when switching employers or plans. Thus, the portability inherent in ICHRAs makes it more likely for patients to remain with one health plan, offering both better health coverage consistency and improved member retention for insurers.

Interested in this topic?

We’ll cover the latest shifts in employer spending in our upcoming webinar, “Key insights on the state of the employer landscape in 2025”, on Thursday December 11 at 1pm EST. Register here.