Offering SHOP coverage vs. ICHRA

By Elizabeth Walker on January 28, 2026 at 8:00 AM

Choosing the right health benefit is one of the most important decisions a small business owner or HR manager can make. Two benefit options that will likely appear during your research are SHOP coverage and the individual coverage health reimbursement arrangement (ICHRA).

The Small Business Health Options Program (SHOP) allows employers to offer traditional group coverage and potentially receive a tax credit for doing so. In contrast, the ICHRA reimburses employees tax-free for individual health plans and out-of-pocket medical costs.

In this article, we’ll compare SHOP coverage vs. ICHRA, breaking down how they differ in terms of flexibility, employee choice, and administrative effort.

In this blog post, you’ll learn:

What SHOP coverage and an ICHRA are, and how each benefit works for employers and employees.

How SHOP coverage and ICHRAs compare on key features, customization options, and cost control.

How to decide which benefit is the better fit for your small business and future goals.

What is SHOP coverage?

The SHOP Marketplace allows eligible small employers to offer traditional group health insurance, called SHOP coverage, to their employees. SHOP plans are ACA-compliant, meaning they cover essential health benefits and can’t deny coverage due to pre-existing conditions. Plans use the metal tiers bronze, silver, gold, and platinum to categorize coverage based on how the insurer and employees share costs.

To offer SHOP coverage, small businesses must meet the following requirements:

Employers must have between 1 and 50 full-time equivalent employees (FTEs). In California, Colorado, New York, and Vermont, small employers can qualify for a SHOP plan if they have up to 100 FTEs.
1. If the business has only one FTE, that employee can’t be the owner, the owner’s spouse or family member, or a business partner.
According to federal guidelines, all full-time employees who work at least 30 hours per week must receive SHOP coverage if you offer it. Seasonal workers and part-time employees who work fewer than 30 hours per week can participate in coverage if the employer allows it.
While it can vary by insurer and state, small employers must typically meet a minimum participation requirement of 70%. Employers are exempt from participation requirements if SHOP coverage begins between November 15 and December 15.
HealthCare.gov manages the federal SHOP Marketplace, but some states operate their own SHOP exchanges¹. If the SHOP marketplace is state-based, the employer must have an office or employee work site in the state where they buy coverage.
1. To sign up, small employers typically work with a SHOP-registered broker or agent or enroll directly through an insurance carrier.

The small business health care tax credit

One potential benefit of offering a SHOP plan is access to the Small Business Health Care Tax Credit, which may help offset a portion of employer premium costs.

Eligible business owners may receive²:

Up to 50% of employer-paid premium costs for for-profit businesses
Up to 35% of employer-paid premium costs for nonprofit organizations

To qualify for the tax credit, small employers must:

Have fewer than 25 FTEs
Pay an average salary of less than $66,000 per yearin 2026
Offer SHOP coverage to all their full-time workers
Pay at least 50% of their employees’ plan premiums for employee-only coverage

You can use the Marketplace’s small business tax credit calculator to determine eligibility and estimate their credit amount if they qualify³.

These tax credits phase out depending on employees’ salaries. For 2026 wages, the phase-out begins at $34,100 in average annual wages and continues until the $66,000 limit⁴.

The tax credit is generally available for up to two consecutive tax years⁵. Because the credit isn’t permanent, it’s best viewed as a short-term benefit for a subset of very small employers rather than a long-term savings strategy for small businesses.

What is the ICHRA?

An ICHRA is a formal alternative to traditional group health plans. With the ICHRA, employers set a defined monthly allowance that eligible employees can use to buy individual healthcare coverage and other medical costs. Once employees substantiate coverage and submit proof of qualified healthcare expenses, the employer reimburses them for the cost, tax-free, up to their allowance amount.

There are several advantages to offering an ICHRA:

Unlike group health plans, ICHRAs have no minimum participation requirements, making them suitable for small employers of any size. There are also no annual contribution limits, allowing employers to set personalized allowances that fit their company’s budget.
Employers have flexible plan design options. They can set specific allowance amounts based on family size, age, or employee class (e.g., full-time and part-time workers). Employers can also customize eligibility using employee classes. They can also choose to reimburse health insurance premiums only or premiums plus other out-of-pocket expenses.
The ICHRA doesn’t coordinate with premium tax credits. Eligibility for these credits depends on ICHRA affordability. If it’s affordable, employees must waive their credits. They can collect their credits if the ICHRA is unaffordable and they opt out.
If one of your goals is to grow your company, you don’t have to switch to a large group plan. Applicable large employers (ALEs), or businesses with more than 50 FTEs, can design their ICHRA to fulfill the ACA’s employer mandate requirements.

How does SHOP coverage compare to the ICHRA?

Whether you’re offering a health benefit for the first time or looking to switch to a new coverage option, let’s go into detail about how SHOP coverage and the ICHRA compare.

1. Employer eligibility

To offer SHOP coverage, employers typically must have 1–50 FTE employees, offer coverage to all eligible full-time workers, and meet a 70% minimum participation requirement in most states. Small employers must also have a physical office or work site in the state where they shop for coverage.

The ICHRA is available to employers of any size or industry as long as they have at least one W-2 employee. Employers can offer both SHOP coverage and an ICHRA at the same time, but they can’t offer both options or a choice between them to employees within the same class.

For example, you could offer the ICHRA to remote employees in one state and SHOP coverage to full-time workers in the state where your physical office is located.

2. Employee eligibility

Employers must offer their SHOP plan to all full-time employees working in the U.S. Extending coverage to part-time or seasonal employees is optional and at your discretion.

Employees who want to participate in the ICHRA must have a qualifying individual health plan. Acceptable coverage includes ACA-compliant individual health plans sold on public or private exchanges, Medicare Parts A and B together, and Medicare Part C. Catastrophic plans for individuals who qualify and certain student health insurance policies are also eligible. Employers may extend ICHRA eligibility to employees’ spouses and dependents if they obtain proper coverage.

3. Average cost for employers

The cost of SHOP coverage depends on factors like plan type, location, and your employees’ ages. But to give you an idea, in 2025, the average annual premiums for employer-sponsored group health insurance were about $9,325 for self-only plans and $26,993 for family coverage⁶.

SHOP coverage may be more affordable if you qualify for the tax credit, which can offset up to 50% of premium costs for eligible for-profit businesses and up to 35% for nonprofits. However, this only applies to very small businesses, and the tax credit phases out based on average employee wages.

ICHRAs work differently, as employer costs vary depending on the allowance amount they set for their employees. But according to PeopleKeep’s and Remodel Health’s 2024 ICHRA Report, ALEs provided an average monthly allowance of $448 per employee, while non-ALEs averaged $600 per employee. However, you only reimburse approved medical expenses, and with PeopleKeep, unused ICHRA funds stay with you at the plan year’s end or if an employee leaves your company.

4. Participation and contribution requirements

Contribution and participation rules for SHOP coverage vary by state and insurer. However, employers who want to qualify for the small business health care tax credit must contribute at least 50% of employee-only premium costs. You may also choose to contribute toward your employees’ dependents’ premiums, but it isn’t a requirement.

ICHRAs offer greater flexibility. There are no minimum or maximum contribution limits, so you can adjust your allowance based on your budget and your employees’ medical needs. ICHRAs also have no minimum participation requirements, unlike traditional group plans that often require most employees to participate.

5. Flexibility

SHOP coverage provides limited customization because employers typically select one or a few group plans for all their eligible employees. While employers can choose from available carriers and metal tiers in their state’s SHOP Marketplace, plan coverage often offers standard benefits. This one-size-fits-most approach can make it harder to accommodate employees with different healthcare needs, family structures, or locations.

An ICHRA is more flexible. Employers can tailor the benefit by creating employee classes and adjusting eligibility rules and contribution amounts based on legitimate job-based criteria. Allowances can also vary by employee age and family status, allowing employers to better support their diverse workforce.

Employers may provide older employees in a class with an allowance up to three times the amount provided to the youngest staff members in that class. You can also vary allowances by family status, offering higher tax–free reimbursement amounts to employees with dependents than to single employees.

Employees then choose the individual health plan that best fits their needs.

6. Benefit availability

SHOP plan availability varies by state and location. In some areas, employers may find only a limited number of certified SHOP plans or none at all within certain ZIP codes. Some states have stopped facilitating state-run SHOP programs entirely, and carriers have stopped selling these plans in many places. This can restrict employer options and limit employees’ ability to choose a health insurance plan, especially if you have a diverse team with multiple work locations.

ICHRAs are available nationwide and work alongside the individual health insurance market. Because employees purchase health coverage where they live, businesses can support employees in all 50 states, including remote and multi-state teams. Regardless of location, employees enroll in qualifying individual health coverage to use the benefit.

7. Tax advantages

SHOP coverage offers tax benefits for both employers and employees. Employer-paid premium contributions are tax-deductible for the business. Employees often pay their portion of the premium on a pre-tax basis, lowering their overall taxable income.

ICHRAs also provide enticing tax advantages. ICHRA contributions are tax-deductible, and reimbursements are exempt from payroll taxes for employers. Employees also receive ICHRA reimbursements on an income tax-free basis, meaning you don’t need to report the payments as taxable wages on their W-2 forms.

8. Administrative burden

Managing SHOP coverage involves many of the same responsibilities as those of larger employers with traditional group health insurance.

Small businesses must handle:

Plan review and selection
Policy renewal increases and insurer negotiations
Open enrollment for employees
Participation and eligibility management
Premium payments to insurance carriers
Compliance with federal and state insurance regulations
Ongoing coordination with insurers or brokers

These tasks can be too difficult for small teams to manage on their own, and can become more complex as the organization grows or experiences workforce changes.

ICHRAs typically require less day-to-day administration for small business owners, especially when paired with an HRA administrator, making ICHRAs easier to manage long-term.

With PeopleKeep by Remodel Health, small employers can:

Plan their ICHRA’s plan design using our intuitive platform
Automate time-consuming administrative tasks, such as drafting legal plan documents, reviewing employees’ claim documentation, and processing reimbursements
Ensure compliance with federal rules
Fulfill tax reporting requirements
Access a year-round customer support team
Direct employees to browse and compare health insurance plans directly on their PeopleKeep dashboard

If your company grows larger, you can switch to Remodel Health’s ICHRA+® administration solution for greater compliance support and a full-service, white-glove service from a dedicated team of experts.

SHOP coverage vs. ICHRA comparison chart

The chart below recaps the key differences between SHOP coverage and the ICHRA.

	SHOP coverage	ICHRA
What is it?	A small group health insurance plan on the SHOP Marketplace allows eligible small employers to choose and offer a traditional, ACA-compliant group plan to their employees and their dependents.	An ICHRA reimburses employees tax-free for individual health insurance premiums and qualified out-of-pocket medical expenses, rather than offering a group health plan.
Employer eligibility requirements	Generally available to employers with 1–50 FTEs (or up to 100 FTEs in some states). Employers must offer coverage to all eligible full-time employees and have an office or work site in the state where they purchase the plan.	Available to employers of any size with at least one W-2 employee. Employers can offer an ICHRA on its own or alongside a group plan, as long as the same employee class doesn’t have a choice between the two benefits.
Employee eligibility requirements	Employees must be full-time staff members who work 30 or more hours per week and work in the U.S. While not required, employers may choose whether to include part-time or seasonal workers.	All W-2 employees who have a qualifying form of individual health insurance coverage can participate in the benefit if the employer offers it to them.
Participation rate requirements	Typically, employers must meet a 70% minimum participation rate, though this can vary by insurance provider and state. Insurers will waive participation requirements if the employer starts SHOP coverage between November 15 and December 15.	The ICHRA has no participation requirements. Employers can offer an ICHRA even if only one employee participates.
Contribution requirements	Contribution rules may vary by state and insurer. To qualify for the tax credit, employers must pay at least 50% of employee-only premiums.	The ICHRA has no minimum or maximum contribution limits. Employers can choose any allowance and adjust the amount at the end of the plan year.
Average cost for employers	Small group plan premiums can vary based on factors such as plan type, location, and employee age. However, average annual premiums in 2025 were about $9,325 for self-only coverage and $26,993 for family plans. Employers may qualify for the tax credit to save money on SHOP coverage premiums.	Costs depend on the allowances the employer chooses to offer. In 2024, ALEs provided about $448 per employee per month on average, while non-ALEs offered about $600 per employee per month. Unused allowances stay with the employer. There are also fees associated with using an ICHRA administrator, such as PeopleKeep by Remodel Health.
Flexibility	SHOP plans have limited flexibility. Employers typically select one or two policies for all their employees to choose from, with standardized benefits and limited customization.	The ICHRA is highly flexible. Employers can customize eligibility rules and allowances by employee class, age, and family status. Employers can also design the benefit to reimburse premiums only or premiums plus other qualified medical expenses.
Benefit availability	Availability varies by state and ZIP code. Some areas have few or no SHOP plan options, limiting employee choice.	Available in all 50 states. Employees can choose from any eligible individual plan available in their local market.
Tax advantages	Employer premium contributions are tax-deductible. Small employers that run a for-profit business that qualify for the tax credit may save up to 50% on premiums (or up to 35% for small nonprofit organizations).	ICHRA reimbursements are tax-free for employees. They’re also tax-deductible and exempt from employer payroll taxes.
Administrative burden	Like traditional group health insurance, employers must manage plan selection, renewals, enrollment, premium payments, and insurer negotiations. This can be time-consuming, complex, and challenging for small businesses with limited resources.	There are substantially fewer administrative tasks for small businesses to handle with an ICHRA. This is especially true if they partner with an ICHRA administration vendor that can streamline compliance, documentation review, substantiation, payroll integration, and reporting.

Conclusion

Both SHOP coverage and the ICHRA can help small employers offer comprehensive health benefits. However, they differ in key features. SHOP coverage follows a traditional group insurance model. But its limited plan availability and rising premiums can make coverage unsustainable. In contrast, the ICHRA offers a more flexible, modern approach by shifting plan choice to employees, making it well-suited for small businesses with diverse teams.

If you’re looking for an affordable way to support your employees’ healthcare needs, PeopleKeep has the solution. Schedule a call with us today, and we’ll help you design a personalized ICHRA that works for your staff and budget.