Why is an ICHRA more tax-efficient than a raise?

A raise is taxable wages (income and payroll tax); an ICHRA reimbursement is free of both for the employee and the employer.

Can I give both a raise and an ICHRA?

Yes — many employers use raises for pay and an ICHRA for health benefits, capturing the tax efficiency where it matters.

Is an ICHRA better than giving a raise?

For health benefits specifically, an ICHRA is more tax-efficient because the money is tax-free rather than taxable wages. But a raise is unrestricted cash the employee can use for anything. The best choice depends on whether your goal is benefits or general compensation.

Do employees prefer a raise or health benefits?

It varies by person, but a tax-free health benefit often delivers more usable value than the same amount as a taxable raise. Many employers offer a blend — a modest raise plus an ICHRA — to get the best of both.

ICHRA vs a Raise: Which Is Better for Employees?

June 26, 2026 · 4 min read

When you want to do more for your team, the instinct is to give a raise. But for health costs specifically, an ICHRA often delivers more value — because it''s tax-free. Here''s the comparison.

The tax difference

A raise is additional wages, taxed at the employee''s income and payroll tax rates — and you owe employer payroll tax on top. An ICHRA reimbursement is tax-free for both sides. So the same dollar goes further as an ICHRA allowance than as a raise, when the goal is funding health coverage.

A simple comparison

Give a $400/month raise and the employee might keep roughly $300 after taxes, with you also paying payroll tax. Put that same $400 into an ICHRA allowance and the employee gets the full $400 tax-free toward their health plan. For health costs, the ICHRA is simply more efficient.

When a raise is still better

The employee wants flexibility to spend the money on anything, not just coverage.
They already have great coverage and don''t need help with premiums.
You want to reward performance broadly rather than fund health benefits.

You can do both

These aren''t mutually exclusive. Many employers use raises for compensation and an ICHRA for health benefits — getting the tax efficiency where it matters while still rewarding people. A broker can show the after-tax comparison for your team.

Why the same dollar goes further as an ICHRA

A raise is taxable wages, so income and payroll taxes take a bite before the employee can spend it on insurance — and you owe employer payroll tax on top. An ICHRA reimbursement is tax-free on both sides, so the full amount reaches coverage. Dollar for dollar, the ICHRA stretches further when the goal is health benefits.

What a raise does that an ICHRA can't

A raise is unrestricted — the employee can use it for rent, savings, or anything else, and it boosts wages for raises, overtime, and retirement contributions calculated on salary. An ICHRA can only be used for qualifying health coverage. If flexibility is the point, a raise wins.

A blended approach

It is not either-or. Some employers give a modest raise for general compensation and add an ICHRA for health benefits, capturing the tax efficiency of the reimbursement while still lifting take-home pay. A broker can help you split the budget sensibly.

Frequently asked questions

For funding health coverage, usually yes — an ICHRA is tax-free, so more value reaches the employee than a taxable raise. For general compensation, a raise gives flexibility.

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