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If you're reimbursing employees for their personal health insurance premiums without a compliant plan in place, you are accruing a $100-per-day penalty per employee under the Affordable Care Act. That's $36,500 per year. Per employee. Not a hypothetical, a real IRS penalty that most early-stage founders have never heard of.

The fix exists, it's IRS-approved, and it's arguably better than the group plan you were going to set up anyway. It's called an Individual Coverage Health Reimbursement Arrangement - an ICHRA.

Why the Penalty Exists

The ACA was designed in part to prevent employers from sidestepping the group health insurance mandate by handing employees cash and saying "go figure it out." Informal reimbursements - whether via payroll, expense reports, or direct payments — don't satisfy the requirement. The $100/day penalty per employee is the IRS's way of making that very clear.

Most founders doing this aren't trying to cut corners. They're trying to be employee-friendly. They don't want to pick a one-size-fits-all group plan that works for a 28-year-old engineer in Austin and a 42-year-old parent of three in Chicago. So they reimburse informally and move on.

That approach is well-intentioned and non-compliant. The penalty clock is running.

What is an ICHRA?

An ICHRA is an IRS-approved employer plan that allows you to reimburse employees tax-free for individual health insurance premiums, and in many cases, out-of-pocket medical expenses too, without triggering ACA penalties.

The mechanics are straightforward:

• The company sets a monthly reimbursement budget - no contribution limits, no minimum

• Employees purchase their own individual health insurance on the open market or exchange

• Employees submit proof of coverage and expenses

• Reimbursements come back to them tax-free

That's it. No carrier negotiations. No annual plan selection. No employees complaining that the company plan doesn't cover their preferred doctors.

Why This Model Is Better for Startups Than Traditional Group Plans

The traditional group health insurance model was designed for a different era of work — a stable workforce, single location, and relatively homogenous employee needs. It has never mapped well onto early-stage startups, and most founders who've been through an annual benefits renewal know exactly why.

You spend weeks comparing plans, picking one that satisfies roughly half your team, and then spending the rest of the year fielding complaints from the other half. Your employees in different states can't use the network. Your younger employees are overpaying for coverage they don't need. Your older employees with families aren't getting enough.

An ICHRA shifts the dynamic entirely. The company defines the budget. The employee picks the plan that works for their life. Everyone gets what they actually want, and the company is out of the plan-selection business permanently.

There's also real flexibility in how you structure it. ICHRAs allow you to set different reimbursement amounts for different classes of employees — full-time vs. part-time, salaried vs. hourly, employees in different geographic regions. You're not locked into a one-number-fits-all approach.

The Historical Parallel Worth Understanding

This transition isn't without precedent. Fifty years ago, companies provided Defined Benefit pension plans — the employer promised a specific monthly payment in retirement, managed the investment portfolio, and bore all the risk. Then came 401(k)s: Defined Contribution plans where the employer sets a contribution amount and employees make their own investment decisions.

The shift from group health plans to ICHRAs follows the same logic. Move from the employer defining the benefit to the employer defining the contribution. Less administrative burden, more employee autonomy, better alignment with a distributed and diverse workforce.

Healthcare is going through the same transition that retirement went through in the 1980s. ICHRAs are the 401(k) moment for health benefits.

What About PEOs?

A lot of startups end up on TriNet, Justworks, Rippling, or a similar Professional Employer Organization partly for health benefits. PEOs can make sense for certain things — payroll, HR compliance, multi-state complexity — but the health benefits component carries a significant premium for what you're getting. You're essentially paying the PEO margin to administer a group plan on your behalf.

For most early-stage startups, an ICHRA delivers better employee outcomes at lower total cost, without the PEO dependency. If you're on a PEO primarily for health benefits, it's worth doing the math.

How to Get Set Up

Platforms like Thatch have made ICHRA setup straightforward and genuinely fast. You define your reimbursement amounts by employee class, employees get onboarded, and the platform handles the verification and reimbursement workflow. The IRS compliance infrastructure is built in.

The setup requirement: employees need to be enrolled in qualifying individual health coverage - an ACA-compliant plan purchased on the open market or through healthcare.gov. They can't participate in an ICHRA if they're also covered by a family member's group plan, though there are workarounds depending on the situation.

One timing note: ICHRAs require a formal plan document and a notice to employees at least 90 days before the plan year begins. If you're mid-year and out of compliance, talk to your accountant or benefits advisor about the fastest path to a compliant structure.

The Bottom Line

For most startups, especially distributed teams, early-stage companies, and anyone who has been informally reimbursing employees, there is no good reason to set up a traditional group health plan. An ICHRA is simpler, more flexible, more employee-friendly, and fully ACA-compliant.

If you're currently reimbursing employees for health insurance through payroll or expense reports without an ICHRA in place, stop and get compliant. The penalty is $100 per day per employee. It adds up faster than you'd expect, and it's entirely avoidable.

If you want help reviewing your current setup and getting compliant, book a call.

Anelya Grant is the founder of AG Accounting Inc., an accounting firm serving tech startups and healthcare organizations. She is also co-founder of JustPaid.ai, an AI-powered billing and contract-to-cash platform for growing companies.