The Convergence: ICHRA, Level Funded, and the Contributory Platform That Replaces Both

The prevailing view holds that ICHRA and level funded are two distinct products serving distinct employer needs. The industry places them in separate boxes: ICHRA is a defined contribution mechanism through which employers reimburse employees for individual market premiums; level funded is a self-insurance arrangement in which the employer funds claims with stop loss protection against catastrophic exposure. The employer who wants cost predictability and group plan structure goes level funded. The employer who wants to exit group plan management entirely and send employees to the marketplace goes ICHRA. Different employers, different circumstances, different products. Market segmentation theory tidies the question into a chart.

The uncomfortable possibility is that this segmentation is already dissolving. ICHRA and level funded are not two points in a stable equilibrium; they are two evolutionary paths converging toward the same endpoint: an employer-funded contributory platform where the employer sets a defined contribution, the employee assembles coverage from a menu, and software manages the eligibility, substantiation, and compliance. What emerges from that convergence will not look like either current product. It will render the TPA, the group carrier, and the broker as currently configured structurally redundant for a meaningful portion of the 1-to-50 market.

The Growth Signals That Show the Direction

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ICHRA has grown more than 1,000 percent since its introduction in 2020. The HRA Council’s 2025 data report, drawing on 15 member organizations and more than 13,000 U.S. businesses, estimates between 500,000 and one million covered lives in ICHRA or QSEHRA arrangements as of 2025. Among applicable large employers (those with 50 or more full-time employees), adoption grew 34 percent from 2024 to 2025, with some cohorts showing 49 percent year-over-year growth. Among small employers with fewer than 50 employees, adoption grew 52 percent over the same period among founding member platforms. Critically, 83 percent of employers offering ICHRA or QSEHRA for the first time had not previously offered any coverage at all. ICHRA is not primarily converting employers from group plans; it is bringing previously uncovered workforces into some form of health benefit for the first time.

On the other side of the ledger, level funded is taking share from fully insured small group at a significant pace. As of 2025, 44 percent of covered workers in small firms with 10 to 49 employees were enrolled in a self-funded or level-funded plan, according to data from the KFF Employer Health Benefits Survey cited by Peterson-KFF’s analysis of commercial insurance market concentration. Fully insured small group enrollment declined 7 percent in 2024, with Mark Farrah Associates attributing the decline in part to employers opting for level funded or switching to ICHRA. UnitedHealth, the largest small group carrier, reported an 11.1 percent drop in small group membership in 2024 alone.

These two trends are not symmetrical. They operate on different populations and through different mechanisms. But they point in the same direction: employers are moving away from fully insured group coverage toward arrangements that give them more control over contribution amounts and more flexibility over benefit design. That directional commonality is the convergence the industry has not fully named.

What ICHRA and Level Funded Each Do Right

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The structural logic of convergence starts with what each model actually does well.

ICHRA gives the employer contribution control: the employer defines a dollar amount per employee (adjustable by class under Treasury Regulation 26 C.F.R. 54.9802-4, which permits variation by full-time versus part-time status, geographic location, age, and family composition). The employee then shops the individual market with that contribution, purchasing an ACA-compliant plan of their own choosing. The employer is out of the plan design business. The employer has no network adequacy responsibility, no formulary decision to make, no prior authorization policy to administer. The employer’s obligation is the contribution and the administration of the HRA itself, which software platforms handle. The employee gets genuine plan choice: in one case described by HR Dive in 2025, an employer’s first year with ICHRA produced more than 100 unique plan selections across a single workforce, with younger employees selecting high-deductible options and families selecting plans with strong pediatric networks.

Level funded gives the employer cost transparency: the employer sees actual claims data, retains surplus when the plan year ends favorably, and has the stop loss mechanism to absorb catastrophic exposure. The plan design is employer-controlled within the limits of ERISA compliance. The TPA adjudicates claims and reports spending at the member level. The employer can see what conditions are driving cost, which providers are being used, and where the next year’s exposure is concentrated. This data visibility is level funded’s primary competitive advantage over fully insured. The employer who has been paying community-rated fully insured premiums without access to claims data finds level funded’s transparency genuinely novel.

The convergence thesis is that employers do not actually need to choose between these two structural advantages. A contributory platform that combines ICHRA’s defined contribution flexibility with level funded’s cost transparency, while adding catastrophic protection at the back end, gives the employer both. The employee gets the broader choice and individual market access that ICHRA provides. The employer gets the data and the financial protection that level funded provides. The bundled group carrier in the middle gets nothing, because it is no longer in the structure.

The Contributory Platform: Assembly, Not Invention

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The contributory platform described by the convergence thesis does not require anything that does not already exist. It requires assembly of components that currently operate separately.

The employer contribution layer exists: ICHRA, administered through platforms like Thatch, Remodel Health, PeopleKeep, or Zorro, handles the defined contribution, the HRA compliance documentation, the employee notification requirements under IRS Notice 2018-88, and the substantiation of individual market premium reimbursements. Centene, recognizing the opportunity, dedicated a new division to ICHRA and launched it in six states for 2025 plan year enrollment. Oscar Health, per CEO Mark Bertolini’s public statements, is actively expanding ICHRA membership as a structural alternative for smaller employers.

The individual coverage selection layer exists: the ACA marketplace offers ACA-compliant plans in every state. In most markets, employees choosing from the individual market have access to more plan options than a typical employer group plan provides. The decision support tools helping employees work through that selection are developing rapidly, from the in-platform guidance that Zorro reports enables 75 percent of employees to select coverage independently, to the AI-driven recommendation engines that platforms are deploying at scale.

The catastrophic protection layer exists: stop loss coverage can be purchased at high attachment points by individual employers through TPAs. At attachment points of $50,000 or above per member, stop loss becomes price-efficient even for small groups, because the carrier is pricing genuinely catastrophic risk rather than expected claims experience. The employer who is not running a full self-funded group plan but wants protection against a member’s $800,000 cancer treatment or gene therapy claim can purchase a catastrophic stop loss layer without the full administrative infrastructure of a group plan.

What does not exist as a single integrated product is the combination of these three layers on a unified platform with shared eligibility data, compliance monitoring, and claims reporting across all components. That is the engineering problem. The invention already happened at the component level. The integration has not.

Why the Current Regulatory Framework Creates the Gap

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The reason the contributory platform does not exist as an integrated product is regulatory, not technological. Three specific constraints close off the clean version of the model.

First, the ACA’s employer shared responsibility rules under Internal Revenue Code Section 4980H create an affordability floor for applicable large employers: the employer’s contribution must be sufficient that the employee’s cost for minimum essential coverage does not exceed a set percentage of household income (9.02 percent for 2025, 9.96 percent for 2026 under the applicable Revenue Procedures). For large employers operating ICHRA, the affordability test applies at the individual market level by geography, requiring the employer to calculate whether their contribution is affordable for employees in each location. This is administratively manageable for an ICHRA with sophisticated platform support. It is less manageable for a hybrid structure that combines ICHRA contributions with supplemental stop loss layers, because the regulatory framework was not written for that combination.

Second, ERISA’s requirement that self-funded plans operate through a written plan document, named fiduciary, and formal claims and appeals procedures does not apply to ICHRA, which is not a self-funded group health plan. The employer offering ICHRA does not have ERISA group plan obligations. But the employer who wants the data visibility of a self-funded plan has to accept the ERISA compliance structure that comes with self-funding. Running a self-funded plan for the catastrophic layer while running ICHRA for the base contribution creates a hybrid structure with two regulatory tracks simultaneously. The compliance overhead of that hybrid is, as of now, a deterrent.

Third, state small group market regulations create barriers in specific states. States that have reclassified level funded plans as fully insured, or that impose community rating requirements on small group products, apply those requirements based on the product category, and the hybrid contributory platform does not fit neatly into any existing category. The regulatory ambiguity creates carrier hesitation and legal risk for the platform operators.

None of these constraints is permanent. They are artifacts of regulatory frameworks written for the bundled group insurance model that preceded the contributory one. The question is not whether the regulatory framework will adapt. It is whether the adaptation happens through deliberate legislative action or through market behavior that forces regulatory interpretation after the fact.

The Regulatory Accommodation Will Lag the Market

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The history of level funded is instructive. Level funded grew rapidly through the 2010s before most state insurance departments had formal guidance on how to classify or regulate it. The products were structured as self-funded arrangements exempt from state insurance regulation under ERISA, and the industry moved forward while regulators determined what, if anything, they were regulating. The states that ultimately imposed constraints (New York, New Jersey, Colorado until the market corrected its initial misread) did so after the market was already established. The regulatory response was reactive.

The contributory platform convergence is following a similar pattern. ICHRA launched through executive branch rulemaking in 2019 under the joint rule issued by the Departments of Labor, Health and Human Services, and Treasury (26 C.F.R. 54.9815; 29 C.F.R. 2590.702-2; 45 C.F.R. 146.123). Congress attempted in 2025 to codify ICHRA as “CHOICE Arrangements” (Custom Health Option and Individual Care Expense) in the budget reconciliation process, with additional features including cafeteria plan pre-tax elections and small employer tax credits. Those provisions did not survive the final reconciliation legislation, but their introduction signals bipartisan appetite for expanding the ICHRA framework. The Centene investment, the Oscar expansion, the HRA Council’s documented growth trajectory: major market participants are betting that the regulatory framework will accommodate broader ICHRA penetration because the political and market pressure favors it.

For the contributory platform specifically, the regulatory accommodation that matters is whether a hybrid structure combining ICHRA contributions with individual catastrophic stop loss protection can be structured without triggering group health plan status under ERISA Section 3(1) for the stop loss layer. If the stop loss component is purchased by the employee individually (rather than by the employer as plan sponsor), the employer may be able to maintain the defined contribution structure without the ERISA group plan obligations. That interpretation has not been tested through formal DOL guidance or litigation, which is precisely the kind of regulatory ambiguity the market will resolve through trial before regulators resolve it through guidance.

The Three Intermediaries That Disappear

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When the contributory platform is the product, three entities currently occupying the employer benefits value chain lose their functional rationale.

The group carrier, which currently bundles network access, pharmacy pricing, claims adjudication, and stop loss-like risk protection into a single premium, loses its core business proposition. The employer no longer needs the bundle because the bundle’s component functions are available separately. The carrier’s network discount function goes to the individual market plans the employee selects. The carrier’s pharmacy function goes to whatever pharmacy benefit structure the employee’s chosen marketplace plan includes, supplemented by direct pharmacy discount programs. The carrier’s risk protection function, if it is retained at all, goes to a stand-alone catastrophic stop loss layer at a high attachment point. What remains for the carrier is the individual market products on the exchange, which are profitable for carriers who compete well in that market (Centene, Molina, Oscar), and the catastrophic stop loss layer, which is a specialty product that a small number of carriers understand. The fully insured small group product becomes a niche for employers who genuinely want the group structure and are willing to pay the premium for it.

The TPA, which currently adjudicates group health plan claims, monitors eligibility, manages stop loss reporting, and produces employer-level utilization data, has less to adjudicate when there is no group health plan generating claims. Routine care claims go directly to the employee’s individually selected plan. The TPA’s residual function in a contributory platform is managing the catastrophic stop loss layer and producing the employer-level data the employer wants to see across the portfolio. Some TPAs will pivot to that function and build the platform that integrates ICHRA administration with catastrophic claims monitoring. That is an engineering and systems integration problem. The TPAs with the capital and the technology capability to execute it will survive. The TPAs whose business model is group plan claims adjudication volume will not find a replacement at the contributory platform’s scale.

The broker, whose small group function is product selection and enrollment management, loses the product selection function when the platform is the product. The employer sets a contribution amount and chooses a platform; the employee selects coverage from whatever the platform offers. The broker who adds value in that transaction is the one who helps the employer determine the right contribution level, the right employee class structure, and the right catastrophic stop loss threshold. That advisory function is not nothing. But it is a smaller function than the full-cycle small group broker engagement, and it is more easily automated than the industry currently acknowledges. TOS.07 addresses the AI displacement of the broker function in detail. The convergence thesis adds that the product shift removes a layer of broker engagement independent of whatever technology does to the advisory function.

What the Convergence Requires

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The convergence will not happen uniformly. The population that moves fastest toward the contributory platform is the employer who has not previously offered coverage and is looking for the simplest path to offering some benefit. The ICHRA data shows this already: 83 percent of new ICHRA adopters were providing coverage for the first time. These employers were not choosing between ICHRA and level funded. They were choosing between ICHRA and nothing. The contributory platform is a direct upgrade from nothing. The employer adds a catastrophic stop loss layer when they understand the exposure, or when the platform builds it into the product offering.

The population that moves more slowly is the employer currently in a level funded plan with favorable claims experience and an established TPA relationship. That employer has a real incentive structure to stay: surplus return potential, claims data visibility, and a TPA that understands their workforce. The convergence happens for that employer when the stop loss pricing pressure documented in TOS.11 makes the level funded economics unattractive, or when a platform integrates the transparency and data advantages of level funded into the contributory architecture.

The convergence requires the catastrophic stop loss market to offer products at individual employer scale with high attachment points, and to do so at prices that do not add more cost than the employer saves by exiting the group plan structure. As TOS.11 documents, the specialty drug pipeline is stressing stop loss pricing at the small group end of the market. That same pressure that threatens level funded for groups below 15 lives also threatens the catastrophic layer of the contributory platform for the same size groups. The convergence does not resolve the actuarial problem of small groups; it restructures how that problem is financed.

The endpoint is a market in which fully insured small group coverage is a small premium niche, level funded survives for employers with 20 or more lives who value the group plan structure and are appropriately served by it, and the contributory platform captures the previously uninsured segment and the employers exiting fully insured without enough employees to make level funded economics work. That is not a prediction. It is what the directional evidence supports if the current trends continue and the regulatory accommodation follows the market.