Introduction to ICHRA (Individual Coverage Health Reimbursement Arrangements)

ICHRA, or Individual Coverage Health Reimbursement Arrangements, is a healthcare benefit option that has gained prominence in recent years as an alternative to traditional employer-sponsored health insurance plans. ICHRA offers flexibility for employers and employees, allowing businesses to reimburse employees for healthcare expenses while giving individuals greater choice in selecting their own health insurance coverage. In this introduction, we will explore the key features and benefits of ICHRA and how it has transformed the landscape of employer-provided healthcare benefits.

What is an ICHRA? 

Individual Coverage Health Reimbursement Arrangements (ICHRAs) were first available as an employee health benefit option in 2020. Put simply, ICHRAs allow employers to offer tax-free dollars to their employees to spend on or off the Individual Marketplace, also called the “Exchange,” as opposed to offering a traditional group plan.

The ICHRA has been gaining interest among business owners, especially owners of smaller to mid-sized companies. The ICHRA benefit model allows employers of any size to provide health insurance coverage for their employees or defined classes of employees by reimbursing them for the cost of individual health insurance premiums that employees purchase.

With an ICHRA, business owners determine a set budget to reimburse their employees for health insurance, and workers buy the plan that works best for them. Some employers also reimburse for a portion of medical expenses. Employers “design” their HRA. They can choose to divide by class, or set varied rates by family size and age. Employees submit their eligible expenses to their employer, and the employer reimburses these expenses up to the budgeted allowance. Learn more about how ICHRA’s work in our article, ICHRA 101: All about Individual Coverage HRAs.

Importance of learning the ICHRA pros and cons

 Understanding the pros and cons of Individual Coverage Health Reimbursement Arrangements (ICHRA) is crucial in today’s evolving healthcare landscape. With ICHRA gaining popularity as an alternative to traditional health insurance, individuals and employers alike must grasp the advantages and drawbacks of this innovative approach. We’ll delve into why learning about ICHRA’s pros and cons is essential for making informed decisions about healthcare coverage and benefits.

Advantages of ICHRA Plans 

When looking at the pros and cons of ICHRA, there are several features of the ICHRA that could be advantageous to employers.

Cost Control

With an ICHRA, employers can define their budget and have total control over their insurance spending, contributions, and risk. Thus, an ICHRA eliminates such issues as a high medical claim year that results in substantial rate increase and low employee participation the following year. For small business owners who have not had to offer group health coverage, but wish to do so, an ICHRA may be a low-risk means of introducing health insurance benefits.

Flexibility

Employers choose the reimbursement amount they wish to provide. There is no maximum contribution to ICHRAs. They can also choose to whom they offer ICHRA, and how much they offer based on different employee classes. There are several key requirements employers must remember:

• Employers must offer the ICHRA on the same terms to all individuals within a class of employees. Amounts offered for reimbursement can be the same amount for all employees; or it can vary by employee age or family size. An employer can structure the reimbursement amount to increase for older workers and/or for workers with more dependents.
• Employers cannot offer an ICHRA and a traditional group health plan to the same employee class; however, they can offer an ICHRA to one employee class and a group health plan to another employee class.
• Employers with 50 or more full-time workers or equivalents should figure in affordability factors to comply with the requirements of the Patient Protection and Affordable Care Act (also known as the ACA or Obamacare).

Tax Advantage

ICHRA amounts contributed by employers are not wages, and therefore are not subject to employer matching payroll taxes. In fact, employers’ contributions to ICHRA amounts constitute contributions to a health and welfare plan, and therefore qualify as a business expense.

Attracting and Retaining Talent

Offering an ICHRA benefit to fulltime, part time, or seasonal employees may provide employers a competitive edge in attracting and retaining a dedicated workforce. This may be especially true in the service industry, retail, and restaurant business, which have often struggled to hire and retain qualified workers in this post-pandemic era.

Also, an ICHRA may be an attractive benefit to employees for other reasons.

• A significant number of employees may prefer to choose their own health plan. In this case, they can select the plan that best meets their personal and family health insurance needs.
• ICHRA is a tax-free benefit. Employer contributions to the ICHRA are not wages and therefore do not add to an employee’s gross income.
• An employee’s health insurance plan can move with them; however, the ICHRA and employer contributions cease when the individual’s employment ends.

Potential Disadvantages of ICHRA Plans

While Individual Coverage Health Reimbursement Arrangements (ICHRA) offer several advantages, it’s equally important to consider the potential disadvantages associated with these plans. In this discussion, we will explore some of the drawbacks and limitations that individuals and employers should be aware of when considering ICHRA as a healthcare benefit option.

Complexity

Because ICHRAs are a relatively novel benefit model, employers are likely to encounter an overall complexity in their implementation. They will need to invest time and resources to grasp the intricacies of ICHRA operation, evaluate whether to handle administration internally or outsource it, assess individual employee health coverage needs, determine whether the ICHRA is extended to all employees or specific classes, establish a financial budget, and provide clear explanations of how ICHRA functions to their workforce. This complexity can potentially lead to confusion among employees and present administrative challenges for employers, making it crucial to carefully navigate the adoption of ICHRAs within an organization.

An ICHRA plan may be complicated to employees who are eligible for a premium tax credit if they purchase ACA-compliant health insurance through the Marketplace or State exchange. Employees can choose whether to opt-out of the ICHRA and use their premium tax credit or waive their credit and participate in the ICHRA. They can’t claim both. If your ICHRA is considered affordable according to ACA rules, employees lose the premium tax credit if they opt-out of the ICHRA. If your ICHRA is considered unaffordable under ACA rules, they can claim the premium tax credit and waive their right to the ICHRA.

Restrictions on employee eligibility

ICHRA places restrictions on employee eligibility. Specifically, ICHRA plans require employees to purchase an individual health plan. They may not be enrolled in a spouse’s employer group health plan, or a health-sharing or ministry plan to participate in an ICHRA. They may be eligible for ICHRA if they have Medicare Part A, Part B, or Part C (Medicare Advantage).

Risk of inadequate coverage

When implementing Individual Coverage Health Reimbursement Arrangements (ICHRAs), there are inherent risks related to inadequate coverage that both employers and employees should be aware of:

1. Possibility of Employees Choosing Insufficient Plans: Employees participating in ICHRAs have the flexibility to select their own health insurance plans. While this autonomy empowers them to tailor coverage to their needs, it also presents the risk that some employees may choose plans with inadequate coverage. They might opt for lower-cost plans that do not provide comprehensive protection, potentially leaving them vulnerable to high out-of-pocket expenses in the event of unexpected medical issues.
2. Lack of Minimum Essential Coverage Requirements: ICHRAs do not mandate that employees select plans that meet the minimum essential coverage requirements set forth by the Affordable Care Act (ACA). This means that some employees may inadvertently choose plans that do not cover essential healthcare services such as preventive care, prescription drugs, and maternity care. Consequently, they may not meet the ACA’s individual mandate (which was effectively eliminated after the 2019 tax year) and could still be subject to penalties or face inadequate protection.

Limited predictability

The implementation of Individual Coverage Health Reimbursement Arrangements (ICHRAs) introduces certain challenges related to limited predictability, impacting both employers and employees:

1. Variability in Employer Healthcare Expenses: ICHRAs are designed to provide employees with fixed allowances for healthcare expenses, but the actual costs incurred by employees can vary widely. This introduces a level of unpredictability for employers who may find it challenging to estimate their healthcare expenditure accurately. Factors such as employees’ healthcare utilization, changes in insurance premiums, and unexpected medical events can all contribute to fluctuations in employer healthcare expenses.
2. Unforeseen Challenges in Budgeting: Employers need to establish budgets for ICHRAs, but unforeseen healthcare events or fluctuations in the healthcare market can make it difficult to predict future costs accurately. Sudden increases in insurance premiums, changes in healthcare regulations, or unexpected healthcare needs among employees can strain an employer’s budget and create financial uncertainties.

Addressing these challenges requires employers to maintain flexibility in their budgeting processes and regularly review their ICHRA offerings to adapt to changing circumstances. Additionally, employees should be encouraged to carefully manage their healthcare expenses to ensure that their allocated reimbursements cover their needs while minimizing the risk of exceeding their budgeted allowances.

Compliance and legal issues 

Implementing Individual Coverage Health Reimbursement Arrangements (ICHRAs) involves navigating complex regulatory requirements and ensuring strict adherence to non-discrimination rules. In this discussion, we will explore the challenges and considerations surrounding these compliance and legal aspects of ICHRAs, shedding light on the importance of staying within the bounds of healthcare regulations and promoting fairness in benefit distribution among employees.

Considerations for implementation

The decision to implement an Individual Coverage Health Reimbursement Arrangement (ICHRA) is a significant one for both employers and employees. It requires careful consideration, not only during the initial decision-making process but also throughout the implementation phase. Let’s explore key considerations when opting for ICHRA, emphasizing the critical role of effective communication with employees and the importance of finding the right resources to ensure a successful transition to this innovative healthcare benefit model.

Types of businesses that ICHRA plans work well for

ICHRAs tend to work well for businesses of any size that are characterized by

• high employee turn-over
• a substantial number of lower paid workers
• a mix of salaried and hourly workers
• a mix of employees at the company site and remote workers in other regions.

Industries that could be a good fit for ICHRA plans include: restaurants, hospitality, professional services, healthcare, landscaping, construction, and manufacturing.

Integration of ICHRA with other employee benefits

Integrating an Individual Coverage Health Reimbursement Arrangement (ICHRA) with other employee benefits is a strategic imperative for employers seeking to provide a holistic approach to healthcare coverage. It entails the careful coordination of ICHRA with existing benefit programs to create a seamless experience for employees. This means aligning ICHRA with traditional health insurance offerings, retirement plans, and other perks to optimize the overall benefits package. Additionally, employers must ensure that the integration fosters a comprehensive healthcare strategy that addresses not only immediate medical needs but also long-term wellness, empowering employees to make informed decisions about their health and financial well-being. By harmonizing ICHRA with existing benefits and adopting a holistic approach, organizations can enhance employee satisfaction, attract top talent, and promote overall workforce health and financial security.

Alternatives to ICHRA for employers

Employers have a variety of options for providing health benefits to their employees, including different types of HRAs, Health Savings Accounts (HSAs), and employer-sponsored group health plans. Group health plans are the predominant choice among employers and may be offered in coordination with other options, such as an HSA. Most group health plans are designed around a specific network of participating providers and conform to a PPO (preferred provider organization), HMO (health maintenance organization), or EPO (exclusive provider organization). Group health plans can be fully insured or self-funded to a specified spending after which the risk is transferred to a reinsurance company.

Learn more about your employee health plan options by visiting our small business health insurance page. Our licensed insurance agents are ready to help you decide whether an ICHRA or another option is the best fit for your business needs and your employees’ health coverage.